[Federal Register Volume 67, Number 130 (Monday, July 8, 2002)]
[Rules and Regulations]
[Pages 45056-45059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16911]


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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 Brazilian 
Bolsa de Mercadorias & Futuros (``BM&F'') 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: July 8, 2002.

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 
Bolsa de Mercadorias & Futuros (``BM&F'') 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 (2001).

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[[Page 45057]]

    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 
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) Submit to 
jurisdiction in the U.S. by designating an agent for service of process 
in the 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 May 24, 2001 and subsequent correspondence through 
November 14, 2001, BM&F petitioned the Commission on behalf of members 
of the Exchange who are Clearing Members or Commodities Brokerage 
Houses, located and doing business in Brazil, for an exemption from the 
application of the Commission's Part 30 rules to those firms. In 
support of its petition, BM&F states that granting such an exemption 
with respect to such 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 
BM&F 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 been met and that 
compliance with applicable Brazilian law and BM&F 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 BM&F 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 CFR 1.55(c);
--The separate account requirement contained in Commission Rule 
30.7, 17 CFR 30.7;
--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 Brazil.
    This determination to permit substituted compliance is based on, 
among other things, the Commission's finding that the regulatory scheme 
governing persons in Brazil 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 for a minimum level of working capital 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;
    (4) Recordkeeping and reporting requirements pertaining to 
financial and trade information;
    (5) Sales practice standards for authorized firms and persons 
acting on their behalf that include, for example, required 
disclosures to prospective customers and prohibitions on improper 
trading advice;
    (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, BM&F, and the Brazilian regulatory authorities on an 
``as needed'' basis including, without limitation, confirmation 
data, data necessary to trace funds related to trading futures 
products subject to regulation in Brazil, 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 BM&F for products that customers located in the 
U.S. may trade.\4\ The relief does not

[[Page 45058]]

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\ This Order granting exemptive relief does not authorize the 
offer or sale of any contract beyond the scope of the Part 30 rules 
or otherwise inconsistent with the CEA. Thus, for example, BM&F 
members may not offer or sell to U.S. customers any security futures 
product. See, e.g., Sections 2(a)(1)(c) and (d) of the Commodity 
Exchange Act.
    \5\ See, e.g., 17 CFR part 18 (2001).
    \6\ See, e.g., 17 CFR parts 17 and 21 (2001).
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    The relief also does not extend to trading, directly or indirectly, 
on any other non-U.S. exchanges. Should BM&F 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.
    The eligibility of any firm to seek relief under this exemptive 
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 Brazil; such firm is engaged in 
business with customers in Brazil 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. 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 BM&F and the Commission 
will receive prompt notice of all material changes to the relevant 
laws in Brazil, any rules promulgated thereunder and BM&F rules;
    (d) Customers located in the U.S. will be provided no less 
stringent regulatory protection than Brazilian customers under all 
relevant provisions of Brazilian 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 Brazil 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 under 
Section 8a(2) of the Act, 7 U.S.C. 12(a)(2), from directly applying 
to do business in the U.S.;
    (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) Undertakes to comply with the applicable provisions of 
Brazilian laws and BM&F rules that form the basis upon which this 
exemption from certain provisions of the Act and rules thereunder is 
granted; and
    (g) Consents that all futures transactions for customers located 
in the U.S. will be undertaken from a location in Brazil (except as 
otherwise permitted by the Commission) solely with respect to 
transactions on or subject to the rules of BM&F, and which U.S. 
customers may trade.

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.\7\ 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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    \7\ 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 BM&F 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 
BM&F.
    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 been met. 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.


[[Page 45059]]


    Issued in Washington, DC on June 28, 2002.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-16911 Filed 7-5-02; 8:45 am]
BILLING CODE 6351-01-P