[Federal Register Volume 66, Number 98 (Monday, May 21, 2001)]
[Rules and Regulations]
[Pages 27859-27861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12696]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Foreign Futures and Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is granting an exemption to firms designated by the Winnipeg 
Commodity Exchange (``WCE'') from the application of certain of the 
Commission's foreign futures and option rules based on substituted 
compliance with certain comparable regulatory and self-regulatory 
requirements of a foreign regulatory authority consistent with 
conditions specified by the Commission, as set forth herein. This Order 
is issued pursuant to Commission Rule 30.10, which permits specified 
persons to file a petition with the Commission for exemption from the 
application of certain of the rules set forth in Part 30 and authorizes 
the Commission to grant such an exemption if such action would not be 
otherwise contrary to the public interest or to the purposes of the 
provision from which exemption is sought.

EFFECTIVE DATE: May 21, 2001.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Associate 
Chief Counsel, Susan A. Elliott, Esq., Staff Attorney, or Andrew V. 
Chapin, Esq., 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 Commission has issued the following 
Order:

    Order Under CFTC Rule 30.10 Exempting Firms Designated by the 
Winnipeg Commodity Exchange From the Application of Certain of the 
Foreign Futures and Option Rules the Later of the Date of 
Publication of the Order Herein in the Federal Register or After 
Filing of Consents by Such Firms and the Regulatory or Self-
Regulatory Organization, as Appropriate, to the Terms and Conditions 
of the Order Herein.

    Commission rules governing the offer and sale of commodity futures 
and option contracts traded on or subject to the rules of a foreign 
board of trade to customers located in the U.S. are contained in Part 
30 of the Commission's rules.\1\ These rules include requirements for 
intermediaries with respect to registration, disclosure, capital 
adequacy, protection of customer funds, recordkeeping and reporting, 
and sales practice and compliance procedures, that are generally 
comparable to those applicable to transactions on U.S. markets.
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    \1\ Commission rules referred to herein are found at 17 CFR Ch. 
I (2000).
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    In formulating a regulatory program to govern the offer and sale of 
foreign futures and option products to customers located in the U.S., 
the Commission, among other things, considered the desirability of 
ameliorating the potential extraterritorial impact of such a program 
and avoiding duplicative regulation of firms engaged in international 
business. Based upon these considerations, the Commission determined to 
permit persons located outside the U.S. and subject to a comparable 
regulatory structure in the jurisdiction in which they were located to 
seek an exemption from certain of the requirements under Part 30 of the 
Commission's rules based upon substituted compliance with the 
comparable regulatory requirements of the foreign jurisdiction.
    Appendix A to Part 30, ``Interpretative Statement With Respect to 
the Commission's Exemptive Authority Under 30.10 of Its Rules' 
(``Appendix A''), generally sets forth the elements the Commission will 
evaluate in determining whether a particular regulatory program may be 
found to be comparable for purposes of exemptive relief pursuant to 
Rule 30.10.\2\ These elements include: (1) Registration, authorization 
or other form of licensing, fitness review or qualification of persons 
through whom customer orders are solicited and accepted; (2) minimum 
financial requirements for those persons who accept customer funds; (3) 
protection of customer funds from misapplication; (4) recordkeeping and 
reporting requirements; (5) sales practice standards; (6) procedures to 
audit for compliance with, and to take action against those persons who 
violate, the requirements of the program; and (7) information sharing 
arrangements between the Commission and the appropriate governmental 
and/or self-regulatory organization to ensure Commission access on an 
``as needed'' basis to information essential to maintaining standards 
of customer and market protection within the U.S.
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    \2\ 52 FR 28990, 29001 (August 5, 1987).
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    Moreover, the Commission specifically stated in adopting Rule 30.10 
that no exemption of a general nature would be granted unless the 
persons to whom the exemption is to be applied: (1) consensually submit 
to jurisdiction in the U.S. by designating an agent for service of 
process in the

[[Page 27860]]

U.S. with respect to transactions subject to Part 30 and filing a copy 
of the agency agreement with the National Futures Association 
(``NFA''); (2) agree to provide access to their books and records in 
the U.S. to Commission and Department of Justice representatives; and 
(3) notify NFA of the commencement of business in the U.S.\3\
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    \3\ 52 FR 28980, 28981 and 29002.
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    By letter dated June 29, 2000 and subsequent correspondence through 
September 26, 2000, the WCE petitioned the Commission on behalf of 
certain firms located and doing business in Manitoba for an exemption 
from the application of the Commission's Part 30 rules to those firms. 
In support of its petition, the WCE states that granting such an 
exemption with respect to firms that it has authorized to conduct 
foreign futures and options transactions on behalf of customers located 
in the U.S. would not be contrary to the public interest or to the 
purposes of the provisions from which the exemption is sought because 
such firms are subject to a regulatory framework comparable to that 
imposed by the Commodity Exchange Act (``Act'') and the rules 
thereunder.
    Based upon a review of the petition, supporting materials filed by 
the WCE and the recommendation of the Commission's staff, the 
Commission has concluded that the standards for relief set forth in 
Rule 30.10 and, in particular, Appendix A thereof, have generally been 
satisfied and that compliance with applicable Manitoba and Canadian law 
and WCE rules may be substituted for compliance with those sections of 
the Act and rules thereunder more particularly set forth herein.
    By this Order, the Commission hereby exempts, subject to specified 
conditions, those firms identified to the Commission by the WCE as 
eligible for the relief granted herein from:

--Registration with the Commission for firms and for firm 
representatives;
--The requirement in Commission Rule 30.6(a) and (d), 17 CFR 30.6(a) 
and (d), that firms provide customers located in the U.S. with the 
risk disclosure statements in Commission Rule 1.55(b), 17 CFR 
1.55(b) and Commission Rule 33.7, 17 CFR 33.7, or as otherwise 
approved under Commission Rule 1.55(c), 17 C.F.R. Sec. 1.55(c);
--Those sections of Part 1 of the Commission's financial rules that 
apply to foreign futures and options sold in the U.S. as set forth 
in Part 30; and
--Those sections of Part 1 of the Commission's rules relating to 
books and records which apply to transactions subject to Part 30,
based upon substituted compliance by such persons with the 
applicable statutes and regulations in effect in the province of 
Manitoba.

    This determination to permit substituted compliance is based on, 
among other things, the Commission's finding that the regulatory scheme 
governing persons in Manitoba who would be exempted hereunder provides:

    (1) A system of qualification or authorization of firms who deal 
in transactions subject to regulation under Part 30 that includes, 
for example, criteria and procedures for granting, monitoring, 
suspending and revoking licenses, and provisions for requiring and 
obtaining access to information about authorized firms and persons 
who act on behalf of such firms;
    (2) Financial requirements for firms including, without 
limitation, a requirement that all firms immediately notify WCE if 
the firms' adjusted net capital falls below a specified level and 
daily mark-to-market settlement and/or accounting procedures;
    (3) A system for the protection of customer assets that is 
designed to preclude the use of customer assets to satisfy house 
obligations and requires separate accounting for such assets, 
augmented by a compensation scheme designed to compensate customers 
whose assets are segregated and who have suffered a loss as a result 
of fraud and/or insolvency of a firm;
    (4) Recordkeeping and reporting requirements pertaining to 
financial and trade information including, without limitation, order 
tickets, trade confirmations, monthly customer account statements, 
customers' segregation records, accounting records for customer and 
proprietary trades and discretionary account documentation;
    (5) Sales practice standards for authorized firms and persons 
acting on their behalf that include, for example, a requirement that 
authorized persons know their customers, required disclosures to 
prospective customers and prohibitions on misleading advertising and 
improper trading activities;
    (6) Procedures to audit for compliance with, and to redress 
violations of, customer protection and sales practice requirements 
including, without limitation, an affirmative surveillance program 
designed to detect trading activities that take advantage of 
customers, and the existence of broad powers of investigation 
relating to sales practice abuses; and
    (7) Mechanisms for sharing of information between the 
Commission, the WCE, and the MSC on an ``as needed'' basis 
including, without limitation, confirmation data, data necessary to 
trace funds related to trading futures products subject to 
regulation in Manitoba, position data, and data on firms' standing 
to do business and financial condition.

    This Order does not provide an exemption from any provision of the 
Act or rules thereunder not specified herein, for example, without 
limitation, the antifraud provision in Rule 30.9. Moreover, the relief 
granted is limited to brokerage activities undertaken on behalf of 
customers located in the U.S. with respect to transactions on or 
subject to the rules of the WCE for products that customers located in 
the U.S. may trade.\4\ The relief does not extend to rules relating to 
trading, directly or indirectly, on U.S. exchanges. For example, a firm 
trading in U.S. markets for its own account would be subject to the 
Commission's large trader reporting requirements.\5\ Similarly, if such 
a firm were carrying a position on a U.S. exchange on behalf of foreign 
clients, it would be subject to the reporting requirements applicable 
to foreign brokers.\6\ The relief herein is inapplicable where the firm 
solicits or accepts orders from customers located in the U.S. for 
transactions on U.S. markets. In that case, the firm must comply with 
all applicable U.S. laws and regulations, including the requirement to 
register in the appropriate capacity.
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    \4\ See, e.g., Sections 2(a)(1)(C) and (D) of the Commodity 
Exchange Act.
    \5\ See, e.g., 17 CFR Part 18 (2000).
    \6\ See, e.g., 17 CFR Parts 17 and 21 (2000).
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    The relief also does not extend to trading, directly or indirectly, 
on any other non-U.S. exchanges. Should the WCE seek to extend the Rule 
30.10 relief set forth herein to permit designated members to solicit 
and accept orders from customers located in the U.S. for otherwise 
permitted transactions on any other non-U.S. exchange, it must apply 
for and receive prior approval from the Commission. In a petition to 
extend the relief set forth herein to other non-U.S. exchanges, the WCE 
must: (1) Represent that local law prohibits its members from 
intermediating otherwise permitted transactions for customers located 
in the U.S. on unapproved foreign exchanges as set forth therein, and 
must specify which exchanges are authorized by local law; (2) represent 
that member firms with customers located in the U.S. will comply with 
all the terms and conditions of this Order with respect to transactions 
entered into on or subject to the rules of a foreign exchange located 
outside its jurisdiction; and (3) confirm that it has the authority and 
the ability to enforce its laws, rules and/or regulations with respect 
to those transactions to the same extent that it conducts such 
activities on an exchange located within its jurisdiction.\7\
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    \7\ See 64 FR 50248, 50251 (September 16, 1999)(permitting 
designated members of the Singapore Exchange Derivatives Trading 
Limited to solicit and accept orders from customers located in the 
U.S. for otherwise permitted transactions on Eurex Deutschland).

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[[Page 27861]]

    The eligibility of any firm to seek relief under this exemptive 
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Order is subject to the following conditions:

    (1) The regulatory or self-regulatory organization responsible 
for monitoring the compliance of such firms with the regulatory 
requirements described in the Rule 30.10 petition must represent in 
writing to the CFTC that:
    (a) Each firm for which relief is sought is registered, licensed 
or authorized, as appropriate, and is otherwise in good standing 
under the standards in place in Manitoba; such firm is engaged in 
business with customers in Manitoba as well as in the U.S.; and such 
firm and its principals and employees who engage in activities 
subject to Part 30 would not be statutorily disqualified from 
registration under Section 8a(2) of the Act, 7 U.S.C. Sec. 12(a)(2);
    (b) It will monitor firms to which relief is granted for 
compliance with the regulatory requirements for which substituted 
compliance is accepted and will promptly notify the Commission or 
NFA of any change in status of a firm that would affect its 
continued eligibility for the exemption granted hereunder, including 
the termination of its activities in the U.S.;
    (c) All transactions with respect to customers made in the U.S. 
will be made on or subject to the rules of WCE and the Commission 
will receive prompt notice of all material changes to the relevant 
laws in Manitoba, any rules promulgated thereunder and WCE rules;
    (d) Customers located in the U.S. will be provided no less 
stringent regulatory protection than Canadian customers under all 
relevant provisions of Manitoba law; and
    (e) It will cooperate with the Commission with respect to any 
inquiries concerning any activity subject to regulation under the 
Part 30 rules, including sharing the information specified in 
Appendix A on an ``as needed'' basis and will use its best efforts 
to notify the Commission if it becomes aware of any information that 
in its judgment affects the financial or operational viability of a 
member firm doing business in the U.S. under the exemption granted 
by this Order.

    (2) Each firm seeking relief hereunder must represent in writing 
that it:

    (a) Is located outside the U.S., its territories and 
possessions, and where applicable, has subsidiaries or affiliates 
domiciled in the U.S. with a related business (e.g., banks and 
broker/dealer affiliates) along with a brief description of each 
subsidiary's or affiliate's identity and principal business in the 
U.S.;
    (b) Consents to jurisdiction in the U.S. under the Act by filing 
a valid and binding appointment of an agent in the U.S. for service 
of process in accordance with the requirements set forth in Rule 
30.5;
    (c) Agrees to provide access to its books and records related to 
transactions under Part 30 required to be maintained under the 
applicable statutes and regulations in effect in Manitoba upon the 
request of any representative of the Commission or U.S. Department 
of Justice at the place in the U.S. designated by such 
representative, within 72 hours, or such lesser period of time as 
specified by that representative as may be reasonable under the 
circumstances after notice of the request;
    (d) Has no principal, or employee who solicits or accepts orders 
from customers located in the U.S., who would be disqualified from 
directly applying to do business in the U.S. under Section 8a(2) of 
the Act, 7 U.S.C. Sec. 12(a)(2), and will notify the Commission 
promptly of any change in that representation based on a change in 
control as generally defined in Rule 3.32;
    (e) Consents to participate in any NFA arbitration program that 
offers a procedure for resolving customer disputes on the papers 
where such disputes involve representations or activities with 
respect to transactions under Part 30, even in circumstances where 
the claim involves a matter arising primarily out of delivery, 
clearing, settlement or floor practices, and consents to notify 
customers located in the U.S. of the availability of such a program;
    (f) Agrees to maintain, on behalf of customers located in the 
U.S., funds equivalent to the ``foreign futures and foreign options 
secured amount'' described in Rule 1.3(rr), in a separate account as 
set forth in Rule 30.7, and to treat those funds in the manner 
described by that rule; and
    (g) Undertakes to comply with the applicable provisions of 
Manitoba laws and WCE rules that form the basis upon which this 
exemption from certain provisions of the Act and rules thereunder is 
granted.

    As set forth in the Commission's September 11, 1997 Order 
delegating to NFA certain responsibilities, the written representations 
set forth in paragraph (2) shall be filed with NFA.\8\ Each firm 
seeking relief hereunder has an ongoing obligation to notify NFA should 
there be a material change to any of the representations required in 
the firm's application for relief.
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    \8\ 62 FR 47792, 47793 (September 11, 1999). Among other duties, 
the Commission authorized NFA to receive requests for confirmation 
of Rule 30.10 relief on behalf of particular firms, to verify such 
firms' fitness and compliance with the conditions of the appropriate 
Rule 30.10 Order and to grant exemptive relief from registration to 
qualifying firms.
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    This Order will become effective as to any designated WCE member 
firm the later of the date of publication of the Order in the Federal 
Register or the filing of the consents set forth in paragraph (2). Upon 
filing of the notice required under paragraph (1)(b) as to any such 
firm, the relief granted by this Order may be suspended immediately as 
to that firm. That suspension will remain in effect pending further 
notice by the Commission, or the Commission's designee, to the firm and 
WCE.
    This Order is issued pursuant to Rule 30.10 based on the 
comparability representations made and supporting material provided to 
the Commission and the recommendation of the staff, and is made 
effective as to any firm granted relief hereunder based upon the 
filings and representations of such firms required hereunder. Any 
material changes or omissions in the facts and circumstances pursuant 
to which this Order is granted might require the Commission to 
reconsider its finding that the standards for relief set forth in Rule 
30.10 and, in particular, Appendix A, have generally been satisfied. 
Further, if experience demonstrates that the continued effectiveness of 
this Order in general, or with respect to a particular firm, would be 
contrary to public policy or the public interest, or that the systems 
in place for the exchange of information or other circumstances do not 
warrant continuation of the exemptive relief granted herein, the 
Commission may condition, modify, suspend, terminate, withhold as to a 
specific firm, or otherwise restrict the exemptive relief granted in 
this Order, as appropriate, on its own motion.
    The Commission will continue to monitor the implementation of its 
program to exempt firms located in jurisdictions generally deemed to 
have a comparable regulatory program from the application of certain of 
the foreign futures and option rules and will make necessary 
adjustments if appropriate.

    Issued in Washington, DC on May 15, 2001.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-12696 Filed 5-18-01; 8:45 am]
BILLING CODE 6351-01-P