[Federal Register Volume 68, Number 126 (Tuesday, July 1, 2003)]
[Rules and Regulations]
[Pages 39006-39009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16516]


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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 ASX 
Futures Exchange Party Limited (``ASXF'') 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 
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 1, 2003.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Deputy 
Director, Susan A. Elliott, Esq., Staff Attorney, or Andrew V. Chapin, 
Esq., Staff Attorney, Division of Clearing and Intermediary Oversight, 
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 
ASX Futures Exchange Party Limited (``ASXF'') 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; and Granting Expanded Relief for Otherwise 
Permitted Transactions on all non-U.S. exchanges where ASXF Firms 
are authorized by Exchange Regulations to Conduct Futures Business 
for Customers, Subject to Certain Conditions.

    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 (2002).
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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 
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 
that solicit and accept customer orders; (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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[[Page 39007]]

    By letter dated March 6, 2002, ASXF petitioned the Commission on 
behalf of its Participants (``firms''), located and doing business in 
Australia, for an exemption from the application of the Commission's 
part 30 rules to those firms. In support of its petition, ASXF 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 
ASXF 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 Australian law and ASXF 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 ASXF 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 Australia.
    This determination to permit substituted compliance is based on, 
among other things, the Commission's finding that the regulatory scheme 
governing persons in Australia 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, the customer protection and sales practice 
requirements referred to above, 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, ASXF, and the Australian 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 Australia, 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, such as 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 ASXF 
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 Act.
    \5\ See, e.g., 17 CFR Part 18 (2002).
    \6\ See, e.g., 17 CFR Parts 17 and 21 (2002).
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    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 \7\ that:
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    \7\ As described below, these representations are to be filed 
with NFA.
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    (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 Australia; such firm is engaged in 
business with customers in Australia 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. 12a(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 resident in the 
U.S. will be made on or subject to the rules of ASXF and the 
Commission will receive prompt notice of all material changes to the 
relevant laws in Australia, any rules promulgated thereunder and 
ASXF rules;
    (d) Customers located in the U.S. will be provided no less 
stringent regulatory protection than Australian customers under all 
relevant provisions of Australian 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.\8\
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    \8\ ASIC represented to the Commission that the existing 
Memorandum of Understanding governing the sharing of information 
between ASIC and the Commission ``will extend to activities of the 
ASXF and its members.'' See Letter from Greg Tanzer, Executive 
Director, Regional Coordination & International Relations for ASXF, 
to Jane Kang Thorpe, Director for the Division of Clearing and 
Intermediary Oversight, dated May 16, 2003.
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    (2) Each firm seeking relief hereunder must represent in writing 
that it:

[[Page 39008]]

    (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 Australia 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. 12a(2), from doing 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, 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 
Australian laws and ASXF rules that form the basis upon which this 
exemption from certain provisions of the Act and rules thereunder is 
granted; and
    (g) Maintains the greater of regulatory capital as required by 
ASXF or four percent of funds segregated on behalf of customers 
resident in the United States.

    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.\9\ 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. 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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    \9\ 62 FR 47792, 47793 (September 11, 1999).
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Expanded Relief

    As requested in the ASXF Petition,\10\ this order also grants 
expanded relief to permit ASXF firms to trade on other non-U.S. 
exchanges where such firms are authorized by the Australian 
Corporations Law (CL) to conduct futures business for customers, 
contingent upon compliance with the prior provisions of this Order and 
with these conditions, to the extent they impose duties additional to 
those already specified:\11\
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    \10\ ASXF ``is essentially seeking the same level of relief as 
that afforded participants on the SFE Corporation Limited (``SFE'') 
(formerly Sydney Futures Exchange Limited) market. This is 
particularly relevant given many of the participants who would seek 
to solicit and accept orders from U.S. customers are participants on 
both the SFE and the ASXF market.'' ASXF Petition at p. 1. SFE was 
given expanded relief by Orders of April 13, 1993 (58 FR 19209), 
March 1, 1997 (62 FR 10445) and October 11, 2000 (65 FR 60560, 
60562).
    \11\ These conditions are the same as those specified in the SFE 
original expanded relief order of April 13, 1993, 58 FR 19209.

    (1) ASXF will carry out its compliance, surveillance and rule 
enforcement activities with respect to solicitations and acceptance 
of orders by designated ASXF members of U.S. customers for futures 
business on Recognized Futures Exchanges, as defined in section 9(b) 
of the CL,\12\ other than a contract market designated as such 
pursuant to section 5 of the Act or a derivatives transaction 
execution facility registered as such pursuant to section 5a of the 
Act, to the same extent that it conducts such activities in regard 
to ASXF business;
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    \12\ The term ``recognised futures exchange'' or ``RFE'' is 
defined in section 9(b) of the Corporations Law to mean a body 
corporate that conducts a futures market outside Australia. Schedule 
11 of the CL contains the list of RFEs, which currently includes 
over 40 U.S. and non-U.S. futures exchanges. For an exchange to be 
included on the Schedule 11 list of RFEs, the relevant lead 
regulator must have an information sharing arrangement with ASIC and 
the applicable regulatory program must provide a comparative level 
of regulation, similar to the requirements for an exemption under 
Commission Rule 30.10.

    (2) ASXF will cooperate with the Commission with respect to any 
inquiries concerning any activity that relates to expanded relief, 
including sharing the information specified in Appendix A to the 
part 30 rules on an ``as needed'' basis, on the same basis as set 
forth in the part 30 relief conditions of this Order; and
    (3) Each ASXF member firm confirmed for rule 30.10 relief 
seeking to engage in activities that are the subject of this Order 
must agree to provide the books and records related to such 
transactions required to be maintained under the applicable 
statutes, regulations, and Exchange rules in effect in Australia, on 
the same basis as set forth in the part 30 relief conditions of this 
Order.

    With respect to transactions effected on behalf of U.S. customers 
on any non-U.S. futures and options exchange other than SFE and ASXF, 
whether by the ASXF firm directly as a clearing member of such other 
exchange or through the intermediation of one or more intermediaries, 
each ASXF firm must use the following procedures, consistent with the 
requirements applicable to Commission registered FCMs concerning the 
protection of customer funds under the provisions of Commission rule 
30.7:\13\
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    \13\ These are the conditions imposed in the 1997 SFE Expanded 
Relief Order of March 1, 1997 (62 FR 10445) as amended by the Order 
of October 11, 2000 (65 FR 60560, 60562).

    (a) Comply with the terms and procedures of Commission rule 
30.7, with the amount required to be segregated under ASXF rules and 
Australian laws to be substituted for the secured amount requirement 
as set forth in such paragraphs.
     OR
    (b)(1) Maintain in a separate account or accounts money, 
securities and property in an amount denominated as the foreign 
futures or foreign options secured amount in an amount sufficient to 
satisfy all of its current obligations to U.S. customers;
    (2) Not commingle such money, securities and property with the 
money, securities or property of the member, or with any proprietary 
account of such member and not use such money, securities and 
property to secure or guarantee the obligations of, or extend credit 
to, the member or any proprietary account of the member;
    (3) Deposit, if it wishes, together with the secured amount 
required to be on deposit in the separate account or accounts 
referred to in paragraph (b)(1) above money, securities or property 
held for or on behalf of non-U.S. customers of the member for the 
purpose of entering into foreign futures and options transactions. 
If the firm chooses to do so, the amount that must be deposited in 
such separate account or accounts must be no less than the greater 
of (i) the foreign futures and foreign options secured amount 
required by paragraph (b)(1) above plus the amount that would be 
required to be on deposit if all such customers (including non-U.S. 
customers) were subject to such requirement, or (ii) the foreign 
futures and foreign options secured amount required by paragraph 
(b)(1) above plus the amount required to be held in a separate 
account or accounts for or on behalf of such non-U.S. customers 
pursuant to any applicable law, rule, regulation or order, or any 
rule of any self-regulatory organization;
    (4) Maintain the separate account or accounts referred to in 
paragraph (b)(1) above under an account name that clearly identifies 
them as such, with any of the following depositories:
    (i) Another person registered with the Commission as an FCM or a 
firm exempted from FCM registration pursuant to CFTC rule 30.10;
    (ii) The clearing organization of any foreign board of trade;
    (iii) Any member and/or clearing member of such foreign board of 
trade; or
    (iv) A bank or trust company which any of the depositories 
identified in (i)-(iii) above may use consistent with the applicable 
laws and rules of the jurisdiction in which the depository is 
located;
    (5) Obtain and retain in its files for the period required by 
applicable law and Exchange rules an acknowledgment from a

[[Page 39009]]

depository identified in paragraph b(4)(i)-(iv) above 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 provision of 
these regulations; and
    (6) Provide each foreign futures and foreign options customer 
with one of the written disclosure statements in (A), (B), or (C) 
below:
    (A) 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 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 in which the 
transaction occurs. For these reasons, customers who trade on 
foreign exchanges may not be afforded certain of the protections 
that apply to domestic transactions, including the right to use 
alternative dispute resolution. 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 that will apply to your 
particular transaction.
     OR
    (B) You should familiarize yourself with the protections 
accorded money or 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 specified legislation or local rules. In 
some jurisdictions, property that 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.
    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 that 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 the 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.
     OR
    (C) A comparable disclosure statement prescribed by ASXF.

    This Order will become effective as to any designated ASXF firm the 
later of the date of publication of the Order in the Federal Register 
or the filing of the representations and consents set forth in 
paragraphs (2)(a)-(g), as verified by NFA. 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 ASXF.
    This Order is issued pursuant to Rule 30.10 based on the 
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 and expanded relief granted herein, the 
Commission may condition, modify, suspend, terminate, withhold as to a 
specific firm, or otherwise restrict the exemptive or expanded 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, D.C. on June 25, 2003.
Jean A. Webb
Secretary of the Commission.
[FR Doc. 03-16516 Filed 6-30-03; 8:45 am]
BILLING CODE 6351-01-P