[Federal Register Volume 65, Number 173 (Wednesday, September 6, 2000)]
[Proposed Rules]
[Pages 53946-53948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22775]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Foreign Futures and Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed Rule; Interpretative Statement.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to clarify its interpretation of the foreign 
futures or foreign options secured amount requirement set forth in 
Commission Rule 30.7 (``secured amount requirement'').\1\ The 
Commission previously interpreted Rule 30.7 to require futures 
commission merchants

[[Page 53947]]

(``FCMs'') and certain firms exempt from such registration to perform 
an inquiry with respect to the treatment of the foreign futures or 
foreign options secured amount by any depository handling those funds. 
Under that interpretation, if a firm determines that any depository, 
including those beyond the initial depository, would not hold the funds 
set aside to cover the secured amount in a manner consistent with the 
provisions of the rule, then the firm must set aside funds with an 
acceptable depository in order to include such funds in the daily 
computation of the secured amount. As part of the Commission's ongoing 
program of regulatory reform, the Commission is proposing to revise its 
interpretation of Rule 30.7 to clarify the obligations of an FCM or a 
firm exempt from FCM registration in accordance with Rule 30.10 
concerning the treatment of funds of foreign futures or foreign options 
customers under Rule 30.7. The Commission's proposed interpretation set 
forth herein would become the new Appendix B to Part 30.
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    \1\ Commission rules referred to herein are found at 17 CFR Ch. 
I (2000).

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DATES: Comments must be received by September 21, 2000.

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 Rule 30.7.''

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: The current Appendix B to Part 30 sets forth 
option contracts permitted to be offered or sold in the U.S. pursuant 
to Rule 30.3(a). The Commission previously amended Rule 30.3(a) to 
eliminate the requirement that the Commission authorize the offer and 
sale of a particular foreign exchange-traded commodity option before it 
can be offered or sold in the U.S., except for those involving stock 
indices or foreign government debt futures.\2\ That action rendered 
existing Appendix B to Part 30 generally irrelevant. Accordingly, the 
Commission proposes to remove the current Appendix B and replace it 
with the Interpretative Statement to Rule 30.7 contained herein. 
Persons concerned with what options on foreign stock index or 
government debt futures can be lawfully offered or sold to customers 
located in the U.S. may consult the foreign instruments approval 
backgrounder on the Commission's website at http://www.cftc.gov/opa/backgrounder/part30.htm.
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    \2\ 61 FR 10891 (March 1996).
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List of Subjects in 17 CFR Part 30

    Consumer Protection, Definitions, Foreign futures, Foreign options, 
Treatment of foreign futures or foreign options secured amount.
    Accordingly, the Commission proposes to amend Chapter I of Title 17 
of the Code of Federal Regulations as follows:

PART 30--FOREIGN FUTURES AND FOREIGN 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. Appendix B is proposed to be revised to read as follows:

Appendix B--Interpretative Statement With Respect to the Secured Amount 
Requirement Set Forth in Sec. 30.7.

    1. Rule 30.7 requires FCMs who accept money, securities or 
property from foreign futures and foreign options customers to 
maintain in a separate account or accounts such money, securities 
and property in an amount at least sufficient to cover or satisfy 
all of its current obligations to those customers.\1\ This amount is 
denominated as the ``foreign futures or foreign options secured 
amount'' and that term is defined in Rule 1.3(rr). The separate 
accounts must be maintained under an account name that clearly 
identifies the funds as belonging to foreign futures and foreign 
options customers at a depository that meets the requirements of 
Rule 30.7(c). Further, each FCM must obtain and retain in its files 
for the period provided in Rule 1.31 an acknowledgment from the 
depository that the depository was informed that such money, 
securities or property are held for or on behalf of foreign futures 
and foreign options customers and are being held in accordance with 
the provisions of these regulations.
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    \1\ ``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 1.3] shall not be deemed to be a foreign futures or foreign 
options customer within the meaning of [Rules 30.6 and 30.7].'' Rule 
30.1(c). ``Foreign futures`` means ``any contract for the purchase 
or sale of any commodity for future delivery delivery made, or to be 
made, on or subject to the rules of any foreign board of trade.'' 
Rule 30.1(a). ``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', 
`indeminity', '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.''
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    2. In a series of orders issued to pursuant to Rule 30.10, the 
Commission required that certain foreign firms exempt from 
registration as FCMs essentially comply with the standards of Rule 
30.7.\2\ Specifically, the Commission stated that ``[the secured 
amount] requirement is intended to ensure that funds provided by 
U.S. customers for foreign futures and options transactions, whether 
held at a U.S. FCM under Rule 30.7(c) or a firm exempted from 
registration as an FCM under CFTC Rule 30.10, will receive 
equivalent protection at all intermediaries and exchange clearing 
organizations.'' \3\ The Commission further interpreted Rule 30.7 to 
require each FCM and Rule 30.10 firm to take appropriate action 
(i.e., set aside funds in a ``mirror'' account) in the event that it 
becomes aware of facts leading it to conclude that foreign futures 
and foreign options customer funds are not being handled consistent 
with the requirements of Commission rules or relevant order for 
relief by any subsequent intermediary or exchange clearing 
organization.
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    \2\ Under Rule 30.10, the Commission may exempt a foreign firm 
acting in the capacity of an FCM from registration under the 
Commodity Exchange Act (``Act'') and compliance with certain 
Commission rules based upon the firm's compliance with comparable 
regulatory requirements imposed by the firm's home-country regulator 
or self-regulatory organization (``SRO''). Once the Commission 
determines that the foreign jurisdiction's regulatory structure 
offers comparable regulatory oversight, the Commission may issue an 
Order granting general relief subject to certain conditions. Firms 
seeking confirmation of relief (referred to herein as ``Rule 30.10 
firms'') 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 list of those foreign regulators and SROs that have 
been issued a Rule 30.10 order, see Appendix C to Part 30.
    In certain cases, where a foreign regulator or SRO has requested 
that firms subject to its jurisdiction be granted broader relief to 
engage in transactions on exchanges other than in its home 
jurisdiction (referred to herein as ``expanded relief''), the relief 
has been granted where the relevant authority has represented that 
it will monitor its firms for compliance with the terms of the order 
in connection with such offshore transactions. Although Rule 30.10 
orders generally exempt foreign intermediaries from compliance with 
the secured amount requirement under Rule 30.7, firms seeking 
confirmation of the expanded relief must represent that, with 
respect to transactions entered into on behalf of U.S. customers on 
any non-U.S. exchange located outside their home country, they will 
treat U.S. customer funds in a manner consistent with the provisions 
of Rule 30.7. For the most recent order granting expanded relief, 
see 64 FR 50248 (September 16, 1999) (Singapore Exchange Derivatives 
Trading Limited).
    \3\ 64 FR 50248, 50251, n.19 (emphasis added).
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    3. Upon further analysis and reconsideration of this matter, the 
Commission has determined to revise its prior interpretation of the 
Rule 30.7 secured amount requirement. The Commission notes that the 
initial depository's ability to identify customer funds affords 
foreign futures and foreign options customers a measure of

[[Page 53948]]

protection in the event that the intermediating FCM or foreign firm 
becomes insolvent. Moreover, Rule 30.6(a) requires that foreign 
futures and foreign options customers receive a Rule 1.55 written 
disclosure explaining that the treatment of customer funds outside 
the U.S. may not afford the same level of protection offered in the 
U.S. These protections exist whether the intermediating firm is a 
U.S. FCM or a firm exempt from such registration under Rule 
30.10.\4\
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    \4\ Although orders for expanded relief exempt foreign firms 
from compliance with Rule 1.55, sales practice standards and the 
treatment of customer funds constitute two of the specific elements 
examined in evaluating whether the particular foreign regulatory 
program provides a basis for permitting substituted compliance for 
purposes of exemptive relief pursuant to Rule 30.10. Appendix A to 
Part 30 .
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    4. The Commission further notes, however, that, in February 
1998, Rule 30.6 was amended to permit an FCM to open a commodity 
account for a foreign futures or foreign options customer without 
providing the Rule 1.55 risk disclosure statement or obtaining an 
acknowledgment of receipt of such statement, provided that the 
customer is, at the time at which the account is opened, one of 
several types of sophisticated customers enumerated in Rule 1.55(f) 
(``Rule 1.55(f) customers'').\5\ While the amendment to Rule 30.6(a) 
extinguished the obligation to provide a standardized risk 
disclosure statement to Rule 1.55(f) customers at the time of the 
account opening, the Commission stated that FCMs have obligations to 
these customers independent of such a duty that would be material in 
the circumstances of a given transaction.\6\
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    \5\ 63 FR 8566 (February 20, 1998). The list of sophisticated 
customers referenced in Rule 1.55(f) closely tracks, with one 
exception, the list of ``eligible swap participants'' in Rule 35.1.
    \6\ Id. at 8569.
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    5. After careful consideration of the issue, the Commission has 
determined that intermediaries should advise all customers 
(regardless of their level of sophistication) to consider making 
appropriate inquiries relating to the treatment of customer funds by 
depositories located outside the jurisdiction of the intermediating 
firm. Accordingly, the Commission has determined that an FCM, at a 
minimum, must provide each foreign futures or foreign option 
customer with a written disclosure tracking the language in either: 
(1) Rule 1.55(b)(7); \7\ or (2) Paragraphs 6 and 8 of Appendix A to 
Rule 1.55(c).\8\ Rule 30.10 firms must provide each foreign futures 
or foreign options customer with a written disclosure tracking the 
language in either Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix 
A to Rule 1.55(c), or a comparable disclosure statement prescribed 
by the firm's home country regulator. The Commission further 
encourages all firms, whether domestic or foreign, to provide a Rule 
1.55 written risk disclosure to all customers, regardless of each 
customer's respective level of experience. The Commission notes 
that, in any instance where a firm provides a Rule 1.55(f) customer 
with a written disclosure, it is not necessary for the firm to 
obtain an acknowledgment of receipt. In addition, those FCMs that 
already have provided customers with a disclosure tracking either 
Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix A to Rule 1.55(c) 
(or in the case of Rule 30.10 firm, a comparable disclosure 
statement prescribed by its home country regulator) need not provide 
those same customers with an additional written disclosure.
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    \7\ Rule 1.55(b)(7) reads as follows:
    Foreign futures transactions involve executing and clearing 
trades on a foreign exchange. This is the case even if the foreign 
exchange is formally ``linked'' to a domestic exchange whereby a 
trade executed on one exchange liquidates or establishes a position 
on the other exchange. No domestic organization regulates the 
activities of a foreign exchange, including the execution, delivery 
and clearing of transactions on such an exchange, and no domestic 
regulator has the power to compel enforcement of the rules of the 
foreign exchange or the laws of the foreign country. Moreover, such 
laws or regulations will vary depending on the foreign country in 
which the transaction occurs. For these reasons, customers who trade 
on foreign exchanges may not be afforded certain of the protections 
which apply to domestic transactions, including the right to use 
domestic alternative dispute resolution procedures. 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.
    \8\ Appendix A to Rule 1.55(c) is the Generic Risk Disclosure 
Statement, which FCMs may use as an alternative to the Risk 
Disclosure Statement prescribed in Rule 1.55(b). The Commission 
understands that most FCMs, in particular those that are most active 
in international markets, use the Generic Risk Disclosure Statement.
    Paragraphs 6 and 8 of Appendix A to Rule 1.55(c) read as 
follows:
    6. Deposited cash and property.
    You should familiarize yourself with the protections accorded 
money or other property you deposit for domestic and foreign 
transactions, particularly in the event of a firm insolvency or 
bankruptcy. The extent to which you may recover your money or 
property may be governed by specific legislation or local rules. In 
some jurisdictions, property which has been specifically 
identifiable as your own will be pro-rated in the same manner as 
cash for purposes of distribution in the event of a shortfall.
    8. Transactions in other jurisdictions.
    Transactions on markets in other jurisdictions, including 
markets formally linked to a domestic market, may expose you to 
additional risk. Such markets may be subject to regulation which may 
offer different or diminished investor protection. Before you trade 
you should enquire about any rules relevant to your particular 
transactions. Your local regulatory authority will be unable to 
compel the enforcement of the rules of regulatory authorities or 
markets in other jurisdictions where your transactions have been 
effected. You should ask the firm with which you deal for details 
about the types of redress available in both your home jurisdiction 
and other relevant jurisdictions before you start to trade.
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    6. For the reasons set forth above, the Commission is revising 
its interpretation of the secured amount requirement set forth in 
Rule 30.7. The Commission believes that the Rule 30.7 acknowledgment 
required of FCMs, or other appropriate acknowledgment required by 
Rule 30.10 firms, only applies to the maintenance of the account or 
accounts containing foreign futures and foreign options customer 
funds by the initial depository, and not to the manner in which any 
subsequent depository holds or subsequently transmits those funds. 
If an FCM receives from the initial depository the acknowledgment 
described in Rule 30.7, furnishes to each foreign futures or foreign 
options customer a written disclosure statement tracking the 
language set forth in Rule 1.55(b)(7) or paragraphs 6 and 8 of 
Appendix A to Rule 1.55(c) and otherwise complies with the 
provisions of Rule 30.7, then it may include all funds maintained in 
the separate account or accounts in calculating its secured amount 
requirement. A Rule 30.10 firm must satisfy the same requirements, 
except that it may provide each foreign futures or foreign options 
customer with a comparable disclosure statement prescribed by its 
home regulator.
    7. If an FCM or Rule 30.10 firm fails to receive the required 
acknowledgment from the initial depository or provide the above 
written disclosure statement (and in certain circumstances, receive 
from customers an acknowledgment of receipt), then it must set aside 
funds with an acceptable depository and receive from such depository 
the required acknowledgment.
    8. The Commission's interpretation of the Rule 30.7 secured 
amount requirement will apply to all regulated activities with all 
new and existing foreign futures and foreign options customers as of 
the effective date of this interpretation. The Commission's 
interpretation does not alter any other requirement set forth in 
Rule 30.7 or any other section of Part 30.

    Issued in Washington, D.C. on August 29, 2000.
Jean A. Webb,
Secretary of the Commission.

[FR Doc. 00-22775 Filed 9-5-00; 8:45 am]
BILLING CODE 6351-01-P