[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Rules and Regulations]
[Pages 47275-47281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19444]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30

RIN 3038-AB46


Exemption From Registration for Certain Foreign FCMs and IBs

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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[[Page 47276]]

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
adopting amendments to Part 30 of the Commission's rules to include new 
Rule 30.12.\1\ The new rule permits certain foreign firms acting in the 
capacity of FCMs and IBs to accept and to execute foreign futures and 
options orders directly from certain U.S. customers without having to 
register with the Commission. The Commission also is amending Rule 30.1 
to include definitions of ``foreign futures and options customer 
omnibus account'' and ``foreign futures and options broker.''
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    \1\ Commission rules referred to herein are found at 17 CFR Ch. 
I (2000).

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EFFECTIVE DATE: September 1, 2000.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or Andrew V. 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. Proposed Rules

    On August 26, 1999, the Commission published proposed amendments to 
Part 30 of its rules.\2\ Part 30 sets forth rules governing the offer 
and sale of foreign futures \3\ and foreign option \4\ contracts. For 
example, with respect to foreign futures or foreign options 
customers,\5\ Rule 30.4 requires any person engaged in the activities 
of a futures commission merchant (``FCM'') or introducing broker 
(``IB''), as those activities are defined within the rule, to register 
with the Commission unless such person claims relief from registration 
under Part 30. The activities that are subject to regulation and that 
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\ Rule 30.10 allows the Commission to exempt a firm from 
compliance with any or all of the requirements of Part 30.\7\
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    \2\ 64 FR 46613 (August 26, 1999); 64 FR 46618 (August 26, 
1999).
    \3\ ``Foreign futures'' 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.'' Rule 30.1(a).
    \4\ ``Foreign option'' 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.'' Rule 30.1(b).
    \5\ ``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 [Rule 1.31] shall not be deemed to be a foreign futures or 
foreign options customer within the meaning of [Rules 30.6 and 30.7] 
of this part.'' Rule 30.1(c).
    \6\ See Rule 30.4.
    \7\ In particular, the Commission may exempt a foreign firm 
acting in the capacity of an FCM from registration under the Act and 
compliance with certain provisions of Part 30 based upon the firm's 
compliance with comparable regulatory requirements imposed by the 
firm's home-country regulator (referred to herein as ``Rule 30.10 
relief'').
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    In response to requests from industry representatives, the 
Commission proposed to adopt Rule 30.12 to permit certain foreign firms 
acting in the capacity of FCMs and IBs (referred to herein as foreign 
futures and options brokers (``FFOBs'')) \8\ to accept and to execute 
foreign futures and options orders directly from certain, sophisticated 
U.S. customers without having to register with the Commission.\9\ Prior 
to the amendment to Part 30 adopted herein, only those FFOBs that were 
foreign affiliates of U.S. FCMs were permitted, subject to certain 
terms and conditions set forth in advisories issued by the Division of 
Trading and Markets (``T&M''), to accept and to execute orders from 
certain sophisticated U.S. customers, known as ``authorized 
customers,'' through the FCM's foreign futures and options customer 
omnibus account.\10\ As set forth in the final rule, any unregistered 
FFOB may accept orders directly from authorized customers for execution 
for or on behalf of such customers to be carried in the FCM's foreign 
futures and options customer omnibus account at the FFOB, or to be 
given up to another unregistered FFOB carrying the FCM's customer 
omnibus account. The Commission believes that permitting greater 
flexibility with respect to the direct foreign order transmittal 
process will provide authorized customers with more efficient access to 
international futures markets without requiring these customers to 
forfeit the operational and economic efficiencies that are the natural 
consequence of having all futures and options transactions carried by a 
well-capitalized U.S. FCM. The Commission also notes that such an 
arrangement affords the FCM a more complete picture of aggregate risk 
that the customer, and hence the FCM, is incurring.
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    \8\ As defined in amended Rule 30.1(e), ``foreign futures and 
options broker'' means any person located outside the United States, 
its territories or possessions that is a member of a foreign board 
of trade, as defined in Rule 1.3(ss), and is licensed, authorized or 
otherwise subject to regulation in the jurisdiction in which the 
foreign board of trade is located; or a foreign affiliate of U.S. 
futures commission merchant licensed, authorized or otherwise 
subject to regulation in the jurisdiction in which the affiliate is 
located.
    \9\ 64 FR 46618 (August 26, 1999).
    \10\ See CFTC Advisory No. 93-115, Comm. Fut. L. Rep. (CCH) 
para. 25,932 at 41,047 (T&M December 23, 1993)(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 
customer omnibus account, provided that the affiliate had obtained 
confirmation of Rule 30.10 relief); CFTC Advisory No. 95-08, Comm. 
Fut. L. Rep. (CCH) para. 26,300 at 42,489 (T&M January 25, 
1995)(extending the relief in Advisory No. 93-115 to unregistered 
foreign affiliates who had not received confirmation of Rule 30.10 
relief). For a list of ``authorized customers,'' see CFTC Advisory 
No. 93-115, para. 25,932 at 41,052-053. For a list of the terms and 
conditions governing the direct foreign order transmittal process 
under CFTC Advisories Nos. 93-115 and 95-08, see para. 25,932 at 
41,053-054; para. 26,300 at 42,490-491, respectively.
    As defined in amended Rule 30.1(d), ``foreign futures and 
options customer omnibus account'' means an account in which the 
transactions of one or more foreign futures or foreign options 
customers are combined and carried in the name of the originating 
futures commission merchant rather than in the name of each 
individual foreign futures or foreign options customer. The 
Commission notes that a foreign futures and options customer omnibus 
account may contain one or more accounts of persons located outside 
the U.S. (i.e., persons excluded from the definition of ``foreign 
futures or foreign options customer''), provided that all customer 
funds are treated in a manner consistent with Commission rules.
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II. Final Rule 30.12

    The Commission received seven comment letters on the proposed 
rulemaking: One from a U.S. commodity exchange; one from the National 
Futures Association; two from futures industry professional 
associations; two from U.S. FCMs; and one from a global investment 
banking firm. The commenters generally supported the relief provided by 
proposed Rule 30.12, but suggested that the relief did not go far 
enough with respect to the participants in the direct foreign order 
transmittal process and the means by which orders may be transmitted. A 
discussion of the comments follows.

A. Authorized Customers

    Proposed Rule 30.12 restricted the direct foreign order transmittal 
process to certain sophisticated U.S. customers, known as ``authorized 
customers.'' The Commission derived its definition of ``authorized 
customers'' from the list of ``eligible swap participants'' (``ESPs'') 
in Part 35 of the Commission's rules and the list of customers eligible 
to participate in the limited foreign order transmittal process set 
forth in prior advisories issued by T&M. As requested by industry 
representatives, the Commission also included in its definition certain 
commodity trading

[[Page 47277]]

advisors (``CTAs'') and those foreign persons performing a similar 
function.
    Commenters on the proposed rulemaking recommended that the 
Commission's definition of ``authorized customer'' be modified in two 
ways. First, the commenters sought uniformity in defining the class of 
sophisticated U.S. customers to which less regulatory protections 
apply. Currently, there exist within Commission rules six definitions 
of sophisticated U.S. customers: qualified eligible participants, 
qualified eligible clients, ESPs, eligible participants for exchange 
transactions under Sec. 4(c) of the Commodity Exchange Act (``Act''), 
eligible customers for post-execution allocation, and customers for 
which FCMs and IBs are not required to provide the Rule 1.55 risk 
disclosure statement. One commenter stated, ``[t]his new definition [of 
``authorized customer''], along with the others, subjects firms to 
unnecessary compliance burdens without adding any real regulatory 
benefit.'' Second, the commenters specifically questioned why the 
category of persons who are eligible to engage in direct foreign order 
transmittal should be any more restrictive than the category of persons 
who are eligible to engage in complex, over-the-counter swap 
transactions addressed in Part 35.\11\
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    \11\ From the list of ESPs, the definition of ``authorized 
customers'' in proposed Rule 30.12 excluded: floor brokers, floor 
traders, employee benefit plans, individuals with net worth in 
excess of $10,000,000, state and local governments, and non-U.S. 
persons trading on their own behalf (the latter do not come within 
the definition of foreign futures or foreign options customer in 
Rule 30.1(c)).
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    Upon review of these comments and its own reconsideration of the 
issue, the Commission has determined to revise the definition of 
``authorized customer'' in the final rule to incorporate those changes 
recommended by the commenters. The Commission notes, however, that 
certain characteristics unique to the direct foreign order transmittal 
process prevent the Commission from merely cross-referencing the 
definition of an ESP (or any other current class of sophisticated 
customer) in the definition for ``authorized customer.'' For example, 
Part 30 generally does not govern the offer and sale of foreign futures 
and foreign options contracts to persons located outside the U.S.\12\ 
As such, rules regulating the conduct of an FCM (or any firm exempt 
from such registration) are generally limited to the firm's interaction 
with U.S. customers or to customers engaged in transactions on U.S. 
markets. In light of the obligations, discussed below, that will be 
required of an FCM (or a firm exempt from such registration) flowing 
from a customer's classification as an ``authorized customer,'' the 
definition of ``authorized customer'' does not include persons located 
outside the U.S. Additionally, at the request of futures industry 
representatives, Rule 30.12, unlike Part 35, will 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. As 
such, Rule 30.12 will permit certain domestic and foreign trading 
advisors to place orders directly for foreign futures and foreign 
options contracts for customers that do not otherwise qualify as ESPs. 
The inclusion of advisors in this context thus provides for greater 
participation in direct foreign order transmittal than is permitted in 
swaps.\13\
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    \12\ But see, e.g., Rule 30.9(a)(``It shall be unlawful for any 
person * * * in or in connection with any account, agreement or 
transaction involving any foreign futures contract or foreign 
options transaction: (a) To cheat or defraud or attempt to cheat or 
defraud any other person.'' (emphasis added)); In re Sogemin Metals, 
CFTC Docket No. 00-04 (February 7, 2000) (Commission order 
instituting administrative proceedings against and accepting an 
offer of settlement from respondent located in the U.S. dealing with 
non-U.S. customers for trading on a non-U.S. exchange).
    \13\ See Rule 35.1(b)(2).
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    As previously stated, Rule 30.12 defines an authorized customer, in 
part, as a foreign futures or foreign options customer that the 
carrying FCM has authorized to place orders for the account of the 
FCM's foreign futures and foreign options customer omnibus account. 
Since non-U.S. persons cannot, by definition, be foreign futures or 
foreign options customers, Rule 30.12 does not regulate the manner in 
which they execute foreign futures and option transactions through an 
FCM's foreign futures and options customer omnibus account. Non-U.S. 
persons, however, may act on behalf of authorized customers, provided 
that the non-U.S. persons independently qualify as an eligible direct 
foreign order transmittal participant. To clarify that non-U.S. persons 
may act on behalf of authorized customers, the Commission has 
determined to define ``authorized customer'' as ``[a]ny foreign futures 
or foreign options customer, as defined in paragraph (c) of Sec. 30.1, 
or its designated representative,'' that the FCM has authorized to 
place orders for the account of the FCM's foreign futures and options 
customer omnibus account.
    As noted, the Commission also is incorporating the request from 
industry representatives to focus on the financial sophistication of 
the person managing the assets and not on the sophistication of the 
individual contributors to the clients of a CTA. The Commission is 
adopting Rule 30.12 to include in the definition of ``authorized 
customer'' any person whose investment decisions with respect to 
foreign futures and foreign option transactions are made by a CTA, 
including any investment adviser registered as such with the Securities 
and Exchange Commission that is exempt from regulation as a CTA under 
the Act or Commission regulations, or a foreign person performing a 
similar role or function subject as such to foreign regulation, 
provided that the CTA has total assets under management exceeding 
$50,000,000 and that the CTA places the foreign futures or foreign 
options order. The Commission recognizes that, under this scenario, the 
contact with the unregistered FFOB is limited to contact with the 
individual with the demonstrated financial sophistication, i.e., the 
CTA. For the sake of consistency, the $50,000,000 asset under 
management test will apply to those CTAs providing the investment 
decisions for employee benefit plans subject to the Employee Retirement 
Income Security Act of 1974 that do not independently have total assets 
exceeding $5,000,000.

B. Carrying FCMs

1. Capital Requirements
    In the proposed rulemaking, the Commission proposed to limit direct 
foreign order transmittal to authorized customers of FCMs whose 
adjusted net capital exceeds certain minimum requirements. As discussed 
in the rule proposal, a participating FCM may not be able to prevent an 
authorized customer from placing orders in excess of its trading limits 
with an unaffiliated FFOB.\14\ 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 thereby mitigate the 
increased systemic risk.\15\ Accordingly, as set forth in paragraph 
(b)(1) of the proposed rule, the Commission proposed to require FCMs 
whose authorized customers use

[[Page 47278]]

direct foreign order transmittal to maintain either $50,000,000 in 
adjusted net capital as defined by Rule 1.17(c)(5), or three times the 
amount of adjusted net capital required by Rule 1.17(a)(1)(i)(B).\16\ 
In the alternative, the proposed rule stated that any FCM not 
satisfying either standard could seek relief from the capital 
requirement in accordance with the petition process described in Rule 
140.99.
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    \14\ 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 rules of the exchange or 
clearing organization governing such a transaction.
    \15\ 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 
floor traders, are either clearing members of that exchange or 
guaranteed by clearing members. Not all foreign exchanges have 
similar requirements.
    \16\ 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 defined amounts, including:
    (A) $250,000, or
    (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.
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    Three of the seven commenters addressed the capital requirements 
for carrying FCMs. One commenter agreed with the Commission that 
capital requirements are a necessary element of direct foreign order 
transmittal, but suggested that the standard for adjusted net capital 
be $50,000,000, or the greater of three times the FCM's capital 
requirement under Rule 1.17(a)(1)(i)(A) or three times the FCM's 
capital requirement under Rule 1.17(a)(i)(B) (and not just paragraph 
(a)(1)(i)(B)). The commenter noted that, under certain circumstances, 
an FCM possessing adjusted net capital of three times the amount set 
forth in paragraph (a)(1)(i)(B), i.e., three times four percent of the 
required segregated and secured amounts, but not (a)(1)(i)(A), i.e., 
three times $250,000, or $750,000, may not possess sufficient capital 
to provide the necessary cushion in the event of a systemic failure. 
The second commenter requested that the Commission more specifically 
describe the type of showing an FCM would be required to make in order 
to obtain relief from the capital requirement and recommended that the 
petition for relief from the capital requirement be made in accordance 
with Rule 30.10, instead of Rule 140.99. The third commenter questioned 
whether ``less onerous [capital] requirements'' for FCMs that cannot 
satisfy either capital standard are justified.
    The Commission has determined to adopt Rule 30.12 by incorporating 
certain comments regarding the capital requirement for carrying FCMs. 
As adopted, Rule 30.12 will require that FCMs maintain adjusted net 
capital of $20,000,000, or the greater of three times the FCM's capital 
requirement under Rule 1.17(a)(1)(i)(A) or three times the FCM's 
capital requirement under Rule 1.17(a)(i)(B). After careful 
consideration, the Commission has determined that $20,000,000 in 
adjusted net capital provides sufficient cushion to protect against the 
risk of defaulting authorized customers. Accordingly, the Commission is 
adopting, for those FCMs who do not meet the requirement to maintain at 
least triple their minimum capital requirement under Rule 1.17, a 
$20,000,000 minimum adjusted net capital figure rather than the 
proposed $50,000,000. The decrease in the minimum capital requirement 
is consistent with the Commission's recent proposal to permit FCMs with 
at least $20,000,000 in adjusted net capital to act as intermediaries 
for non-institutional customers on derivatives transaction 
facilities.\17\
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    \17\ 65 FR 39008 (June 22, 2000).
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    The Commission believes that the decrease in the required minimum 
capital for FCMs under Rule 30.12 as amended as compared to proposed 
Rule 30.12 should reduce the need for relief from this requirement. The 
Commission further believes that any request for relief from this 
capital requirement must be addressed on a case-by-case basis and 
believes that a petition for relief from this requirement should be 
made in accordance with Rule 140.99. The Commission expects that any 
FCM seeking relief from the Rule 30.12 capital requirement shall be 
required to likewise demonstrate its ability to mitigate the risk 
associated with the activities of its authorized customers, including, 
but not limited to, the use of internal controls to evaluate on an 
ongoing basis the risk of default for any given authorized customer.
2. Internal Controls
    The proposed rulemaking also required carrying FCMs to institute 
internal controls designed to regulate the direct foreign order 
transactions entered into by authorized customers (or their designated 
representatives), including procedures to determine which customers 
qualify as authorized customers and to monitor the FCM's risk relative 
to its authorized customers' risk aggregated across all markets. The 
Commission did not receive any comments dealing with these aspects of 
the proposed rule.
3. Disclosure
    The Commission received one comment regarding the requirement that 
carrying FCMs furnish a written disclosure to each authorized customer 
advising the customer of the additional risks the customer may be 
assuming in placing orders directly with an FFOB. The commenter 
inquired whether the FCM may provide the disclosure as a separate 
document or as additional text in the customer account agreement. 
Either method will be acceptable. The Commission also has determined to 
eliminate from the final rule the requirement that the written 
disclosure be ``in a form acceptable to the Commission.'' In light of 
the existing requirement for written disclosures to track the language 
set forth in the rule, the requirement as to form is superfluous. 
Accordingly, paragraphs (b)(3)(i) and (ii) have been combined into one 
paragraph for the final rule.

C. Eligibility Requirements for Foreign Futures and Options Brokers

    Proposed Rule 30.12 would have required participating foreign 
brokers to be FFOBs, as defined in Amended Rule 30.1(e), and either a 
clearing member of the foreign exchange on which the trade is executed, 
a majority-owned affiliate of such a clearing member, or an affiliate 
of the FCM carrying the authorized customer's account. Amended Rule 
30.1(e) defines FFOB to mean a non-U.S. person that is a member of a 
foreign board of trade, as defined in Rule 1.3(ss), licensed, 
authorized or otherwise subject to regulation in the jurisdiction where 
the foreign board of trade is located, or a foreign affiliate of a U.S. 
FCM, licensed, authorized or otherwise subject to regulation in the 
jurisdiction where the affiliate is located.
    Two commenters addressed the eligibility requirements for foreign 
brokers. While one commenter recommended that Rule 30.12 require a 
participating foreign broker to be an FFOB and either a clearing member 
on any foreign exchange (or its majority-owned affiliate) or an 
affiliate of any FCM, another commenter stated that any FFOB should be 
eligible to participate in the direct foreign order transmittal 
process.
    In light of these comments and the foreign order transmittal-
specific risk disclosure to be distributed by each authorized 
customer's FCM, combined with the sophisticated nature of the 
participating customers and the required internal controls for FCMs, 
the Commission has determined that the additional layer of protection 
set forth in the eligibility requirements for foreign brokers is not 
necessary. Accordingly, the adopted rule only will require 
participating foreign brokers to

[[Page 47279]]

be FFOBs, as defined in Amended Rule 30.1(e).
    Commenters also requested that the Commission clarify the 
application of Rule 30.12 with respect to FFOBs that carry the customer 
account for any foreign futures and options customer directly rather 
than on an omnibus basis. The Commission confirms that an FFOB that 
directly carries the customer account for any foreign futures and 
options customer may permit that customer to place orders directly with 
another FFOB in accordance with the procedures set forth herein, 
provided that: (i) The carrying FFOB has registered as an FCM, or has 
applied for and received confirmation of Rule 30.10 relief in 
accordance with existing procedures; (ii) the carrying FFOB complies 
with the terms and conditions set forth in the rule; and (iii) the 
foreign futures and options customer qualifies as an authorized 
customer. Additionally, the Commission confirms that authorized 
customers of FCMs that maintain a customer omnibus account with a 
single foreign affiliate who, in turn, maintains customer omnibus 
accounts with clearing brokers at foreign exchanges also may 
participate in the direct foreign order transmittal process described 
in Rule 30.12.

D. Automated Order Routing Systems

    Proposed Rule 30.12 permitted qualifying FFOBs to accept orders 
directly from authorized customers only via telephone, facsimile and 
email. The relief from registration under proposed Rule 30.12 did not 
extend to orders placed directly with FFOBs via automated order routing 
systems (``AORSs''). With one exception, the commenters generally 
requested that the Commission modify proposed Rule 30.12 to permit 
FFOBs to accept orders placed via AORSs.
    The Commission has determined to revise Rule 30.12 to permit 
qualifying FFOBs to accept orders directly from authorized customers 
via an AORS.\18\ The Commission notes that the requirement for each 
carrying FCM to establish control procedures governing the direct 
contacts between authorized customers and FFOBs and to have in place 
appropriate risk management procedures to monitor its own risk relative 
to its authorized customers' risk aggregated across all markets applies 
regardless of whether the authorized customer places the order via 
telephone, facsimile, e-mail or an AORS.
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    \18\ For purposes of Rule 30.12, an AORS generally means any 
system of computers, software or other devices that allows entry of 
orders through another party for transmission to a board of trade's 
computer or other automated device where trade matching or execution 
takes place.
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E. Effect of the Adopted Rule

    In the proposed rulemaking, the Commission noted that Rule 30.12, 
if adopted, would replace prior T&M advisories as the sole source of 
authorization for unregistered FFOBs to accept orders directly from 
foreign futures and options customers. The Commission invited comment 
from any party adversely affected by that determination. Having 
received no comment on this issue, the Commission hereby rescinds CFTC 
Advisories Nos. 93-115 and 95-08. Adopted Rule 30.12 will apply to all 
regulated activities with all current and new foreign futures and 
foreign options customers as of the effective date of the new rule. As 
a point of clarification, adopted Rule 30.12 will not apply to 
brokerage activities originating with non-U.S customers. Additionally, 
this rule does not amend, abrogate or otherwise alter the transactional 
relationship between any U.S. foreign futures and foreign options 
customer and any non-U.S. firm that has received confirmation of Rule 
30.10 relief. With respect to U.S. customers, a firm with Rule 30.10 
relief must continue to abide by the local laws, rules and regulations 
deemed acceptable for substituted compliance by the Commission, as well 
as the Commission laws and regulations outlined in orders issued by the 
Commission.

III. Amendments to Rule 30.1

    In the Federal Register notice issued concurrently with proposed 
Rule 30.12, the Commission proposed, among other things, to amend Rule 
30.1 to include definitions for ``foreign futures and options customer 
omnibus account'' and FFOBs.\19\ Currently, for purposes of Parts 15 
through 21 of the Act, Rule 15.00(a)(1) defines the term ``foreign 
broker'' to mean ``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.'' For the sake of 
clarity, the Commission believes that a formal definition of FFOB is 
necessary to distinguish it from the definition of ``foreign broker.'' 
Having gradually expanded the relief associated with direct foreign 
order transmittal by reference to customer omnibus accounts, it is also 
appropriate to define the term ``foreign futures and options customer 
omnibus account.'' The Commission did not receive any comments 
regarding either of the proposed definitions. Accordingly, the 
Commission is adopting the proposed definitions of ``foreign futures 
and options customer omnibus account'' and ``foreign futures and 
options brokers'' as Rules 30.1(d) and (e), respectively.
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    \19\ 64 FR 46613.
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IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in adopting 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.\20\ The Commission previously has determined that 
registered FCMs and CPOs are not small entities for the purpose of the 
RFA.\21\ 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.\22\ Due to the minimum 
requirements for the amount of money under management for eligible CTAs 
under 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 final 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 regulations will not have a significant economic impact on a 
substantial number of small entities.
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    \20\ 47 FR 18618-18621 (April 30, 1982).
    \21\ 47 FR 18619-18620.
    \22\ 47 FR 18618-18620.
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B. Paperwork Reduction Act

    When publishing final rules, 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. These rules contain information 
collection requirements. As required by the PRA, the Commission has 
submitted a copy of this rule to the Office of Management and Budget 
(OMB) for its review. (44 U.S.C. 3504(h)). In response

[[Page 47280]]

to the Commission's invitation in the proposed rulemakings to comment 
on any potential paperwork burden associated with these rules, no 
comments were received.

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 amends 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 30.1 is amended by adding paragraphs (d) and (e) to read 
as follows:


Sec. 30.1  Definitions.

* * * * *
    (d) Foreign futures and options customer omnibus account is defined 
as an account in which the transactions of one or more foreign futures 
and foreign options customers are combined and carried in the name of 
the originating futures commission merchant rather than in the name of 
each individual foreign futures or foreign options customer.
    (e) Foreign futures and options broker (FFOB) is defined as a non-
U.S. person that is a member of a foreign board of trade, as defined in 
Sec. 1.3(ss) of this chapter, licensed, authorized or otherwise subject 
to regulation in the jurisdiction in which the foreign board of trade 
is located; or a foreign affiliate of a U.S. futures commission 
merchant, licensed, authorized or otherwise subject to regulation in 
the jurisdiction in which the affiliate is located.

    3. Section 30.12 is added to read as 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 
Sec. 30.1(c), or its designated representative, that:
    (1) The futures commission merchant has authorized to place orders 
for the account of the futures commission merchant's foreign futures 
and options customer omnibus account; and
    (2)(i) Is an eligible swap participant, as defined in 
Sec. 35.1(b)(2) of this chapter, or
    (ii) Whose investment decisions with respect to foreign futures and 
foreign option transactions are made by 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 a commodity trading advisor under the Act or 
Commission regulations, or a foreign person performing a similar role 
or function subject as such to foreign regulation, provided that the 
commodity trading advisor has total assets under management exceeding 
$50,000,000 and that the commodity trading advisor places the foreign 
futures or foreign options order.
    (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 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 futures commission merchant's most recent required filing of a 
Form 1-FR-FCM with the Commission:
    (i) Possesses $20,000,000 in adjusted net capital, as defined by 
Sec. 1.17(c)(5) of this chapter; or
    (ii) Possesses the greater of three times the amount of adjusted 
net capital required by Sec. 1.17(a)(1)(i)(A) of this chapter or three 
times the amount of adjusted net capital required by 
Sec. 1.17(a)(1)(i)(B) of this chapter; 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 paragraphs (c) or (d) of this section, 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) Furnishes a written disclosure statement to each such 
authorized customer advising the customer of the additional risks the 
customer may be assuming in placing orders directly with the foreign 
broker. The disclosure statement must read as follows:

Direct Order Transmittal Client Disclosure Statement

    This statement applies to the ability of authorized customers 
\1\ of [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] foreign 
futures and options customer omnibus accounts.
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    \1\ You should contact your account executive regarding your 
eligibility to participate in the direct order transmittal process.
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    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] foreign futures and options 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 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

[[Page 47281]]

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 may 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.

    (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, 
notwithstanding that such person accepts orders for foreign futures and 
foreign options transactions from authorized customers of a registered 
futures commission merchant that meets the requirements of paragraph 
(b)(1) of this section, provided, that:
    (1) The orders are executed for or on behalf of the foreign futures 
and options customer omnibus account of a registered futures commission 
merchant;
    (2) The person 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 or secure any 
trades or contracts that result or may result therefrom; and
    (3) The person is a foreign futures and options broker, as defined 
by Sec. 30.1(e).
    (d) Exemption for foreign futures and options brokers carrying a 
foreign futures and options 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 be exempt from 
such registration, notwithstanding that such person:
    (1) Carries the foreign futures and options customer omnibus 
account of a futures commission merchant that meets the requirements of 
paragraph (b)(1) of this section;
    (2) Accepts orders for foreign futures and foreign options 
transactions from authorized customers for the execution of the trades 
for or on behalf of the foreign futures and options customer omnibus 
account of a registered futures commission merchant either directly or 
pursuant to a give-up arrangement; and
    (3) The person is a foreign futures and options broker, as defined 
by Sec. 30.1(e).

    Dated: July 27, 2000.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-19444 Filed 8-1-00; 8:45 am]
BILLING CODE 6351-01-U