[Federal Register Volume 71, Number 212 (Thursday, November 2, 2006)]
[Rules and Regulations]
[Pages 64443-64451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18513]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 140


Boards of Trade Located Outside of the United States and No-
Action Relief From the Requirement To Become a Designated Contract 
Market or Derivatives Transaction Execution Facility

AGENCY: Commodity Futures Trading Commission.

ACTION: Policy statement.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission is issuing a 
Statement of Policy that affirms the use of the no-action process to 
permit foreign boards of trade to provide direct access to their 
electronic trading systems to U.S. members or authorized participants, 
and provides additional guidance and procedural enhancements.\1\
---------------------------------------------------------------------------

    \1\ Commission Rule 140.12, 17 CFR Sec.  140.12 Disposition of 
business by seriatim Commission consideration.

---------------------------------------------------------------------------
DATES: Effective Date: November 2, 2006.

FOR FURTHER INFORMATION CONTACT: Robert Rosenfeld, Deputy Director, 
Office of International Affairs, 202-418-5423, [email protected]; 
Julian Hammar, Counsel, Office of the General Counsel, 202-418-5118, 
[email protected]; or Duane Andresen, Special Counsel, Division of 
Market Oversight, 202-418-5492, [email protected], Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Background

    Since 1996, staff of the Commodity Futures Trading Commission (CFTC 
or Commission) has issued no-action letters \2\ to foreign boards of 
trade stating, subject to compliance with certain conditions, that it 
will not recommend that the Commission take enforcement action if the 
foreign board of trade provides its members or participants in the 
United States access to its electronic trading system without seeking 
designation under the Commodity Exchange Act (CEA or Act) as a contract 
market (DCM) or registration as a derivatives transaction execution 
facility (DTEF).\3\ In 1998 the Commission imposed a moratorium on the 
issuance of such no-action letters pending the development of rules 
governing access to automated foreign boards of trade.\4\ During this 
period, the Commission received extensive comment on the proposed 
rulemaking, as well as advice from the Commission's Global Markets 
Advisory Committee and a Public Round Table. Because of the general 
lack of consensus on many of the fundamental issues surrounding access 
to foreign boards of trade, the Commission withdrew the proposed rules 
in an order that also directed the staff:
---------------------------------------------------------------------------

    \2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which 
defines the term ``no-action letter'' as a written statement issued 
by the staff of a Division of the Commission or of the Office of the 
General Counsel that it will not recommend enforcement action to the 
Commission for failure to comply with a specific provision of the 
Act or of a Commission rule, regulation or order if a proposed 
transaction is completed or a proposed activity is conducted by the 
beneficiary.
    \3\ These letters, hereinafter referred to generally as ``no-
action letters'' are published on the Commission's Web site at: 
http://www.cftc.gov/dea/deaforeignterminaltable.htm. Reference to 
DTEFs in the no-action letters was added following the establishment 
of that category by the Commodity Futures Modernization Act of 2000.
    Although the letters refer to the placement of ``terminals,'' 
the continued use of that term does not accurately reflect advances 
in technology, such as open network systems accessible through the 
Internet.
    \4\ 63 FR 39779 (July 24, 1998) (Concept Release); 64 FR 14159 
(March 24, 1999) (Proposed Rules). Under the terms of a letter dated 
June 3, 1998 to Eurex Deutschland, the Division of Trading and 
Markets modified the terms of the original 1996 no-action letter to 
the effect that Eurex members who were not already operating U.S.-
based Eurex Terminals generally were prevented from placing Eurex 
terminals in the U.S. absent written authorization from the 
Division, pending adoption of Commission rules regarding electronic 
access to foreign exchanges.

To begin immediately processing no-action requests from foreign 
boards of trade seeking to place trading terminals in the United 
States, and to issue responses where appropriate, pursuant to the 
general guidelines included in the Eurex (DTB) no-action process, or 
other guidelines established by the Commission, to be reviewed and 
applied as appropriate on a case-by-case basis.\5\
---------------------------------------------------------------------------

    \5\ Commission Order dated June 2, 1999, 64 FR 32829, 32830 
(June 18, 1999). The Eurex-DTB no-action process referred to by the 
Commission in its 1999 Order lifting the moratorium was set forth in 
a letter dated February 29, 1996 from Andrea Corcoran, Director, 
Division of Trading and Markets to Lawrence Hunt, Jr., pp. 12-13 
(the DTB no-action letter). CFTC Letter 96-28, indexed at http://www.cftc.gov/opa/summaries/opanal96.htm; [1994-1995 Transfer Binder] 
Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February 29, 
1996). On June 18, 1998, the DTB changed its name to Eurex 
Deutschland, a step toward a planned merger with the Swiss Options 
and Financial Futures Exchange. See 63 FR 39779, 39781 (July 24, 
1998) at fn. 12.


[[Page 64444]]


---------------------------------------------------------------------------

    Following the lifting of the moratorium in 1999, the relevant 
Commission operating division has issued seventeen additional no-action 
letters.\6\ The Commission generally has not observed regulatory 
problems or financial harm to participants who are accessing the 
foreign boards of trade pursuant to the staff no-action relief letters. 
Moreover, the no-action process has been resilient throughout a period 
of increasing global competition, technological advances, changing 
ownership structures and evolving business models.
---------------------------------------------------------------------------

    \6\ The Commission's Division of Market Oversight (successor to 
the market supervisory responsibilities previously performed by the 
Division of Trading and Markets) is responsible for issuance of the 
direct access no-action letters.
---------------------------------------------------------------------------

    In 2006, ICE Futures, a U.K. registered investment exchange that 
provides direct access to its U.S. members pursuant to a CFTC staff 
foreign terminal no-action letter, notified the Commission that it 
would list a contract on West Texas Intermediate light sweet crude oil 
whose settlement price would be linked to contracts traded on the New 
York Mercantile Exchange (NYMEX). ICE's notification prompted the 
Commission's Division of Market Oversight (DMO) to advise ICE Futures 
that the ``Commission will be evaluating the use of the no-action 
process in light of significant issues raised by the factual 
circumstances underlying the subject notice.'' \7\ Among other things, 
the trading of such contracts made ripe the re-examination of certain 
dormant issues respecting the Commission's statutory obligations to 
maintain the integrity of U.S. markets and to protect U.S. customers, 
particularly the Commission's market surveillance obligations. 
Accordingly, on May 3, 2006, the Commission directed its staff to 
initiate a formal process to define what constitutes a ``board of 
trade, exchange, or market located outside the United States, its 
territories or possessions'' as that phrase is used in section 4(a) of 
the CEA and in furtherance of that process scheduled a public 
hearing.\8\ The Commission also issued a related Request for Public 
Comment.\9\
---------------------------------------------------------------------------

    \7\ See letter dated January 31, 2006 from Richard A. Shilts, 
Director, Division of Market Oversight to Mark Woodward, Regulation 
and Compliance Policy Manager, ICE Futures. http://www.cftc.gov/files/dea/cftclettertoicefutures.pdf.
    \8\ See Sunshine Act Meeting Notice, 71 FR 30665 (May 30, 2006); 
corrected at 71 FR 32059 (June 2, 2006). The hearing was conducted 
on June 27, 2006, at the Commission's headquarters in Washington, 
DC.
    \9\ See 71 FR 34070 (June 13, 2006). The Commission requested 
comment on the issues related to developing an objective standard 
establishing a threshold that, if crossed by a foreign board of 
trade that permits direct access, would indicate that the board of 
trade is no longer outside the United States and, accordingly, may 
be required to become registered under the CEA.
---------------------------------------------------------------------------

Hearing and Request for Comment

    Participants at the Commission's Hearing and comments submitted in 
response to the Request for Comment (all collectively the 
``commenters''),\10\ were generally supportive of the no-action 
process, praising the process in general for its flexibility.\11\ Many 
commenters suggested that the Commission should retain in large measure 
the essential contours of the no-action process.\12\
---------------------------------------------------------------------------

    \10\ A transcript of the Commission's Hearing on what 
constitutes a board of trade located outside the United States under 
the Commodity Exchange Act section 4(a) (June 27, 2006), (``Hearing 
Tr.'') as well as all comment letters (``CL''), are located in 
comment file 06-002 to 17 FR 34070 (June 13, 2006). http://www.cftc.gov/foia/comment06/foi06-002_1.htm.
    \11\ For comments supporting the no-action letter process 
generally, see, e.g., Comments of Nicholas Weinreb, Euronext, 
Hearing Tr. at 45 (``The no-action letter regime has been an 
extraordinarily successful one.''); comments of Benn Steil, Director 
of International Economics, Council of Foreign Relations, in his 
personal capacity, Hearing Tr. at 49 (``I think it is exceptionally 
important to acknowledge just how successful the Commission's no-
action regime has been * * *''); For favorable hearing participant 
comments on the flexibility of the no-action letter process, see, 
e.g., Comments of John Foyle, Euronext Liffe, Hearing Tr. at 46; 
Comments of Richard Berliand, JP Morgan Securities, Hearing Tr. at 
61; Comments of Nicholas Weinreb, Euronext, Hearing Tr. at 174.
    \12\ See, e.g., CL 2 (New York Board of Trade) at 3; CL 3 
(Council of Foreign Relations) at 2; CL 6 (ICE Futures Exchange) at 
9-10; CL 7 (Minneapolis Grain Exchange) at 2; CL 8 (Bundesanstalt 
f[uuml]r Finanzdienstleitungsaufsicht) at 3; CL 16 (World Federation 
of Exchanges) at 1; CL 19 (Tokyo Stock Exchange) at 2; CL 22 
(Federation of European Securities Exchanges) at 4; CL 23 (Eurex 
Deutschland) at 11; CL 24 (Euronext Liffe) at 5; CL 25 (Chicago 
Board of Trade) at 1; CL 28 (Futures Industry Association) at 9; and 
CL 45 (Committee of European Securities Regulators) at 1.
---------------------------------------------------------------------------

    Commenters warned against any mechanistic approaches to determining 
whether an otherwise foreign organized exchange that permits direct 
electronic access by its U.S. members or participants is not located 
``outside'' the United States for purposes of section 4(a) of the CEA, 
particularly questioned the use of volume as a proxy for U.S. presence 
(noting that its fluctuations could result in regulatory uncertainty), 
and stressed the need to avoid rigid or ``bright line'' tests.\13\ Some 
commenters favored a totality of circumstances approach to 
location,\14\ while others urged the Commission to look to indicators 
of physical location, such as the main location of an exchange's 
infrastructure, its employees and headquarters.\15\
---------------------------------------------------------------------------

    \13\ See, e.g., CL 2 (New York Board of Trade) at 2-3; CL 6 (ICE 
Futures Exchange) at 6-7; CL 9 (Chicago Mercantile Exchange) at 6; 
CL 23 (Eurex Deutschland) at 7; CL 25 (Chicago Board of Trade) at 9-
10.
    \14\ See, e.g., CL 22 (Federation of European Securities 
Exchanges) at 3.
    \15\ See, e.g., CL 6 (ICE Futures) at 2; CL 9 (Chicago 
Mercantile Exchange) at 6.
---------------------------------------------------------------------------

    Market users stressed the need to maintain high levels of customer 
and market protections, particularly where a product might impact 
pricing in U.S. markets.\16\ Many U.S. exchanges requested that the 
Commission give greater attention to competitive issues, particularly 
when there is direct competition between a U.S. exchange and a foreign 
exchange's products. U.S. exchanges in particular stressed the need for 
``regulatory parity.'' \17\ Some commenters warned against taking 
actions that inadvertently could result in policies that may inhibit 
the ability of U.S. exchanges and firms to operate globally.\18\ Others 
stressed the need to provide regulatory certainty generally with 
respect to the applicability of the no-action process and to clarify 
the treatment of intermediated electronic access.\19\
---------------------------------------------------------------------------

    \16\ See, e.g., CL 5 (New England Fuel Institute) at 2; CL 27 
(Industrial Energy Consumers of America) at 1.
    \17\ See, e.g., CL 7 (Minneapolis Grain Exchange) at 1; CL 25 
(Chicago Board of Trade) at 5-6; and CL 43 (New York Mercantile 
Exchange) at 10.
    \18\ See, e.g., CL 2 (New York Board of Trade) at 3.
    \19\ See, e.g., CL 28 (Futures Industry Association) at 8.
---------------------------------------------------------------------------

Need for the Policy Statement

    As made clear at the Hearing and by the written comments, the 
intensity of concerns with respect to the no-action process has been 
exacerbated by the global competitive environment. In particular, these 
concerns have called into question: (1) The Commission's authority for 
the no-action process in light of Section 4(a)'s exclusion from the 
contract market designation requirement for foreign boards of trade, 
(2) the continued appropriateness of the no-action process generally, 
(3) whether objective threshold standards should be developed that 
would indicate that a board of trade is no longer located outside the 
United States for purposes of section 4(a) of the CEA, (4) whether 
enhancements to the no-action process may be necessary, particularly 
where trading may implicate domestic futures and cash markets, and (5) 
how the no-action process relates to perceived competitive issues.

[[Page 64445]]

    Continued ambiguity with respect to these fundamental issues could 
result in an unacceptable degree of uncertainty that may hinder access 
by U.S. users to global products and markets, inhibit continued 
innovation in technology and products, and undermine the ability of 
U.S. markets and intermediaries to structure their business to compete 
globally. Accordingly, the Commission is issuing this Statement of 
Policy in order to provide greater regulatory certainty and 
transparency to issues surrounding access to foreign boards of trade.

Statement of Policy Regarding the Processing of No-Action Requests by 
Foreign Boards of Trade to Provide Direct Electronic Access to Their 
U.S. Members or Authorized Participants

    Since 1996, foreign boards of trade planning to permit members or 
other participants located in the United States to enter trades 
directly into that foreign board of trade's trade matching system 
(``direct access'') \20\ have sought staff no-action letters.
---------------------------------------------------------------------------

    \20\ For purposes of this Statement of Policy, the term ``direct 
access'' refers to the explicit grant of authority by a foreign 
board of trade to an identified member or other participant of that 
board of trade to enter trades directly into the board of trade's 
trade matching system.
    In contrast, the staff no-action letters generally have defined 
the term ``automated order routing systems'' (AORS) as meaning any 
system of computers, software or other devices that allows entry of 
orders through another party (an intermediary) who has been granted 
direct access for transmission to the trading system where, without 
substantial human intervention, trade matching or execution takes 
place.
    The Commission does not view the transmission of intermediated 
orders via AORSs for execution on a foreign board of trade to be 
``direct access'' to that board of trade for purposes of the no-
action process.
    In this regard, the Commission endorses the view that mere 
intermediated electronic access by AORS does not create a presence 
in the U.S., such that a firm exempted from registration as a 
futures commission merchant (FCM) pursuant to Commission Regulation 
30.10, which is prohibited from establishing a U.S. presence, would 
be required to register as an FCM. See, e.g., CFTC Staff Letter No. 
05-16 [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 30,127 
(Aug. 26, 2005) (``For example, Rule 30.10 Firms continue to be 
prohibited from maintaining a presence in the United States. Thus, 
Rule 30.10 Firms cannot provide direct access to LIFFE CONNECT[reg] 
in the United States (although they would be permitted to accept 
orders overseas from customers located in the United States that 
submit such orders by telephone or through an AORS located in the 
United States'').) (Emphasis added.)
    This position is consistent with the Commission's historical 
policy of addressing customer protection concerns with regard to the 
offer or sale of foreign futures to U.S. customers primarily through 
regulation of the intermediary. In this regard, nothing in the 
Statement of Policy is intended to alter current Commission rules 
that require that any person engaging in the offer or sale of a 
foreign futures contract or foreign futures option transaction for 
or on behalf of a U.S. customer must be a registered futures 
commission merchant or operating pursuant to a Rule 30.10 Order.
---------------------------------------------------------------------------

    This Statement of Policy provides guidance for processing requests 
for no-action relief. The Commission intends that this Statement of 
Policy will ensure the consistent treatment of requests and the 
application of an appropriate degree of review, while maintaining the 
ability to respond to the individual factual circumstances raised by 
particular requests.
    The Commission's Statement of Policy takes into account the 
Commission's desire to facilitate access to markets and products, 
foster innovation and competition and eliminate unnecessary regulatory 
burdens, while maintaining customer and market protections mandated by 
the CEA. The adoption by the Commission of such a flexible and 
adaptable policy is consistent with Congressional findings that 
accompanied the enactment of the Commodity Futures Modernization Act of 
2000 (CFMA).\21\
---------------------------------------------------------------------------

    \21\ Section 126(a) of the CFMA, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000), provides:
    ``SEC. 126. INTERNATIONAL ACTIVITIES OF THE COMMODITY FUTURES 
TRADING COMMISSION.
    (a) FINDINGS.--The Congress finds that--
    (1) derivatives markets serving United States industry are 
increasingly global in scope;
    (2) developments in data processing and communications 
technologies enable users of risk management services to analyze and 
compare those services on a worldwide basis;
    (3) financial services regulatory policy must be flexible to 
account for rapidly changing derivatives industry business 
practices;
    (4) regulatory impediments to the operation of global business 
interests can compromise the competitiveness of United States 
businesses;
    (5) events that disrupt financial markets and economies are 
often global in scope, require rapid regulatory response, and 
coordinated regulatory effort across international jurisdictions;
    (6) through its membership in the International Organization of 
Securities Commissions, the Commodity Futures Trading Commission has 
promoted beneficial communication among market regulators and 
international regulatory cooperation; and
    (7) the Commodity Futures Trading Commission and other United 
States financial regulators and self-regulatory organizations should 
continue to foster productive and cooperative working relationships 
with their counterparts in foreign jurisdictions.''
---------------------------------------------------------------------------

I. The Commission's Authority for the No-Action Process

A. Relevant Statutory Considerations: The Commodity Exchange Act 
Circumscribes the Commission's Authority Over Foreign Boards of Trade

    Section 4(a) of the CEA provides that a futures contract may be 
traded lawfully in the U.S. only if, among other things, it is traded 
on or subject to the rules of a board of trade that has been designated 
as a contract market or registered as a DTEF.\22\ Section 4(a) excludes 
from the designation requirement contracts made on or subject to the 
rules of a board of trade, exchange, or market located outside the 
United States, its territories or possessions.'' \23\
---------------------------------------------------------------------------

    \22\ Section 4(a) of the CEA provides in part:
    ``Unless exempted by the Commission pursuant to subsection (c) 
of this section, it shall be unlawful for any person to offer to 
enter into, to enter into, to execute, to confirm the execution of, 
or to conduct any office or business anywhere in the United States, 
its territories or possessions, for the purpose of soliciting or 
accepting any order for, or otherwise dealing in, any transaction 
in, or in connection with, a contract for the purchase or sale of a 
commodity for future delivery (other than a contract which is made 
on or subject to the rules of a board of trade, exchange, or market 
located outside the United States, its territories or possessions) 
(emphasis added)''
    unless--
    ``(1) such transaction is conducted on or subject to the rules 
of a board of trade which has been designated or registered by the 
Commission as a contract market or derivatives transaction execution 
facility * * *.''
    7 U.S.C. 6(b) (2000).
    \23\ In the absence of no-action relief, a board of trade, 
exchange or market that permits direct access by U.S. persons might 
be subject to Commission action for violation of, among other 
provisions, section 4(a) of the CEA, if it were not found to qualify 
for the exclusion from the DCM designation or DTEF registration 
requirement.
---------------------------------------------------------------------------

    Section 4(b) of the CEA, which authorizes the Commission to adopt 
rules governing the offer and sale of foreign futures and options 
contracts, explicitly prohibits the Commission from adopting rules 
pursuant to that section that: (1) Require Commission approval of any 
contract, rule, regulation, or action of any foreign board of trade, 
exchange, or market, or clearinghouse for such board of trade, 
exchange, or market, or (2) govern in any way any rule or contract term 
or action of any foreign board of trade, exchange, or market, or 
clearinghouse for such board of trade, exchange, or market.\24\
---------------------------------------------------------------------------

    \24\ Section 4(b) of the CEA provides:
    ``The Commission may adopt rules and regulations proscribing 
fraud and requiring minimum financial standards, the disclosure of 
risk, the filing of reports, the keeping of books and records, the 
safeguarding of customers' funds, and registration with the 
Commission by any person located in the United States, its 
territories or possessions, who engages in the offer or sale of any 
contract of sale of a commodity for future delivery that is made or 
to be made on or subject to the rules of a board of trade, exchange, 
or market located outside the United States, its territories or 
possessions. Such rules and regulations may impose different 
requirements for such persons depending upon the particular foreign 
board of trade, exchange, or market involved. No rule or regulation 
may be adopted by the Commission under this subsection that (1) 
requires Commission approval of any contract, rule, regulation, or 
action of any foreign board of trade, exchange, or market, or 
clearinghouse for such board of trade, exchange, or market, or (2) 
governs in any way any rule or contract term or action of any 
foreign board of trade, exchange, or market, or clearinghouse for 
such board of trade, exchange, or market.''
    7 U.S.C. 6(b) (2000).

---------------------------------------------------------------------------

[[Page 64446]]

B. Section 4(a)'s Exclusion From Contract Market Designation Applies 
Only With Respect to ``Bona Fide'' Boards of Trade

    The Commission interprets the section 4(a) parenthetical exclusion 
from contract market designation for foreign boards of trade to apply 
only with respect to ``bona fide'' boards of trade. The term ``bona 
fide'' in this context refers to boards of trade that, among other 
things, possess the attributes of established, organized exchanges, 
adhere to appropriate rules prohibiting abusive trading practices, have 
been authorized by a regulatory process that examines customer and 
market protections and are subject to continued oversight by a 
regulator that has power to intervene in the market and share 
information with the Commission. In reaching this conclusion, the 
Commission relies on legislative history found in the Report of the 
Senate Committee on Agriculture, Nutrition, and Forestry,\25\ which 
discusses the addition of section 4(b) to the CEA. Specifically, the 
Report notes that:
---------------------------------------------------------------------------

    \25\ S. Rep. 97-384, 97th Cong. 2d Sess. 46 (1982).

    In addition, the rules and regulations developed under this 
provision [section 4(b)] are not intended to place the solicitation 
or acceptance of orders in the United States for bona fide foreign 
futures contracts at a comparative disadvantage with similar 
solicitation or acceptance of orders for domestic futures contracts. 
For example, rules which require the segregation of all or part of 
customers' funds in the United States would not be consistent with 
the intent of this provision when there is adequate evidence that 
such funds have been transferred to a bona fide market, 
clearinghouse, or market principal and are adequately safeguarded 
---------------------------------------------------------------------------
for the protection of U.S. residents. [emphasis added]

The Commission's conclusion in this regard is harmonious with previous 
Commission interpretations of ``bona fide'' exchange.\26\
---------------------------------------------------------------------------

    \26\ See 63 FR 39779, 39788 (July 24, 1998). See also Compl. 
Count I, CFTC v. Topworth Int'l, Ltd., (No. 94-1256) (C.D. Cal.) 
(Feb. 2, 1994).
---------------------------------------------------------------------------

    A commenter had questioned the appropriateness of applying a ``bona 
fide'' limitation on the application of section 4(a).\27\ However, in 
light of the legislative history quoted above, which the Commission 
previously has interpreted as limiting the exclusion from Section 4(a) 
to bona fide foreign boards of trade, we believe that the 
interpretation we adopt today is an appropriate and reasonable exercise 
of the Commission's powers to interpret and apply its governing 
statute, particularly when it implicates domestic conduct and possible 
effects on domestic persons and markets that the Commission is charged 
with protecting.
---------------------------------------------------------------------------

    \27\ CL 9 (Chicago Mercantile Exchange) at 5.
---------------------------------------------------------------------------

II. The Appropriateness of the No-Action Process

A. The Commission Endorses the No-Action Process

    The Commission endorses the continued use of the no-action process 
as an appropriate and flexible mechanism that should be used 
prospectively to facilitate direct access to the electronic trading 
system of a foreign board of trade by its U.S. members or authorized 
participants.\28\
---------------------------------------------------------------------------

    \28\ We believe the no-action process to be an appropriate 
exercise of discretion committed to Commission staff, subject to 
appropriate Commission oversight. See Board of Trade of the City of 
Chicago v. SEC, 883 F.2d 525, 530 (7th Cir. 1989); 17 CFR 140.99. In 
this connection, the Commission is directing staff to continue to 
circulate through the Secretariat for the Commission's review on an 
``absent objection'' basis, prior to issuance, all staff foreign 
board of trade no-action letters.
---------------------------------------------------------------------------

    The no-action process is appropriate because it gives staff the 
flexibility to address the factual circumstances presented in the 
future, and to apply a consistent approach to reviewing applications 
for no-action relief in light of innovations in electronic trading and 
technology, evolving regulatory standards, and specific customer 
protection and market integrity concerns. This approach is consistent 
with the CFMA's goal of adopting a flexible regulatory policy that can 
account for rapidly changing derivatives industry business practices, a 
theme that also was voiced at the Commission's hearing and in the 
written comments. Among other things, Congress found in the CFMA that 
``financial services regulatory policy must be flexible to account for 
rapidly changing derivatives industry business practices.'' CFMA 
Section 126(a)(3). Moreover, Section 126(b) of the CFMA expresses the 
sense of Congress that the Commission coordinate with foreign 
regulatory authorities to encourage ``the facilitation of cross-border 
transactions through the removal or lessening of any unnecessary legal 
or practical obstacles.''

B. The Commission Endorses the Scope of Review of the No-Action Process

    The scope of review that was established by Commission staff in the 
DTB no-action letter and refined in subsequent no-action letters \29\ 
focuses on establishing the ``bona fide'' status of the foreign board 
of trade and finding that no public interest would be adversely 
affected by persons in the U.S. directly accessing the foreign board of 
trade.\30\
---------------------------------------------------------------------------

    \29\ Letter dated February 29, 1996 from Andrea Corcoran, 
Director, Division of Trading and Markets, to Lawrence Hunt, Jr., 
pp. 12-13 (the DTB no-action letter). CFTC Letter 96-28, indexed at 
http://www.cftc.gov/opa/summaries/opanal96.htm; [1994-1995 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February 
29, 1996).
    \30\ In the 1996 DTB no-action letter staff concluded that the 
``the mere presence of terminals in the United States would not 
cause the Commission to deem any bona fide foreign exchange for 
which products are listed through that system to be a domestic 
exchange, that is, a board of trade designated as a contract market 
by the Commission pursuant to section 5 of the Act.'' (emphasis 
added)
    In order to conclude that the DTB was a ``bona fide'' foreign 
board of trade, and therefore appropriately subject to the 
parenthetical exclusion for foreign boards of trade in section 4(a) 
of the CEA, staff generally examined the DTB's rules and the overall 
regulatory environment. The text of the DTB letter makes clear that 
staff recognized the prohibitions set out in section 4(b) of the 
CEA, but noted that ``the relationship or interface between DTB's 
computer terminals and persons located in the United States may 
raise regulatory concerns that are unrelated to the internal 
operations of the DTB or its computer terminals in the United 
States.'' Accordingly, the review set forth in the DTB letter also 
focused narrowly on the domestic implications for U.S. persons using 
the DTB direct access terminals (i.e., the system integrity and 
clearing review).
---------------------------------------------------------------------------

    In general, staff reviews information and representations provided 
by the applicant that relate to, among other things, the rules and 
structure of the applicant exchange (with an emphasis on the exchange's 
financial integrity, market surveillance, trade practice and rule 
enforcement regime), various system integrity protections that govern 
the foreign board of trade's electronic trading system (using as a 
template the 1990 Principles for the Oversight of Screen-Based Trading 
Systems),\31\ the system's related clearing and customer default 
protections, and information concerning the regulatory structure in the 
applicant's jurisdiction, with a specific emphasis on market 
regulation.\32\ The staff also reviews the

[[Page 64447]]

adequacy of information sharing with the Commission by the market and 
its regulator. Based upon its review of the documents and 
representations submitted by the applicant, and subject to compliance 
with various conditions (e.g., representations governing access to 
books and records and the appointment of a U.S. agent for service of 
process), staff might conclude that granting no-action relief would not 
be contrary to the public interest.
---------------------------------------------------------------------------

    \31\ The 1990 IOSCO Principles for the Oversight of Screen-Based 
Trading Systems (Screen-Based Principles) were developed by IOSCO 
Working Party 7 on futures, which was chaired by the CFTC. The IOSCO 
Screen-Based Principles set out in broad terms the international 
consensus as to the regulatory considerations to be addressed in 
reviewing mechanisms for screen-based trading. The Commission 
adopted the IOSCO Screen-Based Principles as a statement of 
Commission policy. See 55 FR 48670 (November 21, 1990). In adopting 
the IOSCO Screen-Based Principles, the Commission made clear that 
they establish general policy goals that will guide the Commission 
in resolving issues arising from screen-based trading systems, but 
would not mandate a particular substantive response.
    \32\ The Commission previously summarized the scope of the 
staff's foreign board of trade (FBOT) inquiry as follows:
    ``Currently, Commission staff generally examines the following 
when reviewing an FBOT's request for terminal placement no-action 
relief: General information about the FBOT, as well as detailed 
information about: (i) membership criteria (including financial 
requirements); (ii) various aspects of the automated trading system 
(including the order-matching system, the audit trail, response 
time, reliability, security, and, of particular importance, 
adherence to the IOSCO principles for screen-based trading); (iii) 
settlement and clearing (including financial requirements and 
default procedures); (iv) the regulatory regime governing the FBOT 
in its home jurisdiction; (v) the FBOT's status in its home 
jurisdiction and its rules and enforcement thereof (including market 
surveillance and trade practice surveillance); and (vi) extant 
information-sharing agreements among the Commission, the FBOT, and 
the FBOT's regulatory authority. When issued, the terminal placement 
no-action letters conclude with a standard set of terms and 
conditions for the granting of the relief which include, among other 
things, a quarterly volume reporting requirement.''
    See 71 FR 34070, 34071 (June 13, 2006).
---------------------------------------------------------------------------

    Essentially, as it has evolved, the staff review seeks to determine 
that the applicant foreign board of trade is subject to governmental 
authorization, appropriate rules prohibiting abusive trading practices, 
and continuing oversight by a regulator that has powers to intervene in 
the market and share information with the Commission. This review 
generally reflects the internationally accepted approaches used by many 
developed market jurisdictions to govern access to foreign electronic 
exchanges. These approaches generally are based upon a review of, and 
ongoing reliance upon, the foreign market's ``home'' regulatory regime, 
and are designed to maintain regulatory protections while avoiding the 
imposition of duplicative regulation.\33\
---------------------------------------------------------------------------

    \33\ See, e.g., United Kingdom Financial Services Authority, 
Financial Services Handbook, Recognised Overseas Investment 
Exchanges (ROIE) and Recognised Overseas Clearing Houses (ROCH), 
Section 6. (In comparison with full authorisation as a domestic 
exchange, ROIE status ``reduces the involvement which UK authorities 
need to have in the day-to-day affairs of an overseas recognised 
body because they are able to rely substantially on the supervisory 
and regulatory arrangements in the country where the applicant's 
head office is situated.'' See FSA Handbook, REC 6.1.2 http://fsahandbook.info/FSA/html/handbook/REC/6/1.); Australian Securities 
and Investments Commission (ASIC) Policy Statement 177.8 describing 
alternative licensing for overseas markets (``the alternative 
licensing route in s795B(2) for overseas markets is intended to 
facilitate competition and avoid regulatory duplication while 
maintaining investor protection and market integrity.''); Ontario 
Securities Commission Staff Notice 21-702: Regulatory Approach for 
Foreign-Based Stock Exchanges (exemption from recognition under 
section 147 of the Securities Act (Ontario); Autorite des marches 
financiers (Quebec): Policy Statement Respecting the Authorization 
of Foreign-Based Exchanges; the German Bundesanstalt f[uuml]r 
Finanzdienstleistungsaufsicht (BAFIN) authorizes the placement of 
terminals in Germany under Sections 37i et seq. of the German 
Securities Trading Act.
---------------------------------------------------------------------------

    The Commission finds that the staff review appropriately addresses 
the Commission's concern that relief will only be granted with respect 
to bona fide foreign boards of trade.\34\ The Commission also finds 
that the staff's review of foreign board of trade representations and 
the related information submitted with respect to system integrity, 
clearing procedures and default protections is appropriately focused 
and respects the prohibitions of section 4(b). Finally, the various 
terms and conditions that have been imposed in the no-action letters 
have been reasonably and appropriately tailored to the factual 
circumstances raised by the applications for no-action relief.
---------------------------------------------------------------------------

    \34\ See Section I supra.
---------------------------------------------------------------------------

    Accordingly, the Commission endorses the general scope of review 
that was established in the DTB no-action letter, and as it has evolved 
in subsequent staff letters. The Commission also reconfirms its prior 
endorsement of the use of the IOSCO Screen-Based Trading Principles as 
a general template to guide its inquiry into the foreign board of 
trade's electronic trading system. The Commission notes that in 2000 
IOSCO reaffirmed the continuing appropriateness of the Screen-Based 
Trading Principles, concluding that they retained their relevancy 
despite the evolution and increasing sophistication of electronic 
systems ten years after their adoption, and that they constitute an 
internationally accepted framework for the oversight of screen-based 
derivatives trading systems.\35\
---------------------------------------------------------------------------

    \35\ Principles for the Oversight of Screen-Based Trading 
Systems for Derivative Products--Review and Addition, IOSCO 
Technical Committee (2000) at p. 5, section III, Part 1. http://www.iosco.org/library/index.cfm?section=pubdocs&year=2000. In this 
``Review and Addition,'' IOSCO adopted four additional principles 
that encouraged regulatory authorities to develop cooperative 
arrangements to address risks that arise from cross-border 
derivatives markets, to share relevant information in an efficient 
and timely manner, to maintain a transparent framework for 
regulatory cooperation, and to take into account a jurisdiction's 
application of the IOSCO Objectives and Principles of Securities 
Regulation.
---------------------------------------------------------------------------

    In this connection, staff's discretionary, selective reference to 
broad regulatory objectives, such as those contained in the CEA's Core 
Principles and in internationally-accepted standards,\36\ deemed by 
staff in its discretion to be reflective of a bona fide regulatory 
regime,\37\ is an appropriate, non-prescriptive means to structure its 
review for the purposes of determining the bona fide status of a 
foreign board of trade. This observation is not intended to suggest 
that the review should require substituted compliance with CEA market 
designation or registration requirements, apply any prescriptive 
approach,\38\ or otherwise be expanded into a quasi-designation 
process.\39\
---------------------------------------------------------------------------

    \36\ See, e.g., Objectives and Principles of Securities 
Regulation, International Organization of Securities Commissions 
(IOSCO); and the Tokyo Communiqu[eacute] on Supervision of Commodity 
Futures Markets (1997), Annex B: Guidance on Components of Market 
Surveillance and Information Sharing. Annex B of the Tokyo 
Communiqu[eacute] establishes a non-prescriptive framework for 
undertaking market surveillance, the types of information to which 
market authorities should have access and collect, the appropriate 
analysis of information, the type of powers and capacity to 
investigate market abuse, the appropriate powers to intervene in the 
market to address abusive practices or disorderly conditions, the 
need for powers to impose disciplinary sanctions against members of 
the market as well as non-members, and the components of effective 
information sharing.
    \37\ See, e.g., CEA Core Principle 4, section 5(b) of the CEA, 
for designated contract markets, which requires the monitoring of 
trading to prevent manipulation, price distortion, and disruption of 
the delivery or cash settlement process. Principle 28 of the IOSCO 
Objectives and Principles of Securities Regulation states that 
``regulation should be designed to detect and deter manipulation and 
other unfair trading practices.''
    \38\ In adopting the 1990 IOSCO Screen-Based Principles, the 
Commission made clear that ``they establish general policy goals 
that will guide the Commission in resolving issues arising from 
screen-based trading systems, but do not mandate a particular 
substantive response.'' 55 FR 48671, 48672 (November 21, 1990).
    \39\ See generally, footnote 30.
---------------------------------------------------------------------------

C. The Commission Intends To Preserve the Flexibility and Adaptability 
of the No-Action Process

    The Commission's endorsement of the no-action process's overall 
approach and scope of review is not intended to limit the staff's 
ability to adapt or modify its review as it deems necessary to 
determine the bona fide status of a foreign board of trade, or to 
address any particular U.S. customer protection or market integrity 
concerns, as identified in Section 3(b) of the CEA, that might be 
raised by a request for no-action relief. The Commission understands 
that staff potentially may need to adapt its analysis, as well as the 
scope and depth of its inquiry, to address changing factual 
circumstances and any specific regulatory concerns.\40\
---------------------------------------------------------------------------

    \40\ See, e.g., CL 25 ( Chicago Board of Trade) at 1: ``We do 
believe that the analysis preceding the issuance of no-action 
letters must constantly be re-evaluated and updated to reflect 
changes and developments in today's dynamic marketplace.''

---------------------------------------------------------------------------

[[Page 64448]]

    Similarly, there should be broad discretion under the no-action 
process to determine, based on the totality of factors, that the 
foreign exchange and the applicable regulatory regime meet relevant 
regulatory objectives, notwithstanding that a particular aspect of the 
foreign jurisdiction's approach is not identical to that of the 
Commission's regulatory program.\41\ In this regard, the Commission 
recognizes that in an international context, common regulatory 
objectives can be attained through different regulatory means.\42\ The 
mere fact that a foreign jurisdiction has determined to achieve a 
regulatory objective in a manner that is different than the 
Commission's approach often is the result of varied business histories, 
experiences and legislative choices. The determinative factor in the 
review should be an affirmative conclusion that the regulatory 
structure in question addresses the particular regulatory objective 
deemed to be most relevant.\43\
---------------------------------------------------------------------------

    \41\ Compare Appendix A, Part 30 Interpretative Statement with 
Respect to the Commission's Exemptive Authority under Sec.  30.10 of 
Its Rules, 17 CFR Part 30, Appendix A: ``In this connection, the 
Commission would have broad discretion to determine that the 
policies of any program element generally are met, notwithstanding 
the fact that the offshore program does not contain an element 
identical to that of the Commission's regulatory program and 
conversely may assess how particular elements are in fact applied by 
offshore authorities.''
    \42\ See IOSCO Principles and Objectives of Securities 
Regulation at 3: ``There is often no single correct approach to a 
regulatory issue. Legislation and regulatory structures vary between 
jurisdictions and reflect local market conditions and historical 
development.''
    \43\ This can be confirmed through the applicant's submission of 
representations and relevant statutes, rules and statements of 
policy, regulatory and self-regulatory oversight reports, 
confirmations of good standing by the oversight regulator, and 
informal staff discussions with relevant officials of the exchange 
and its oversight regulator. The Commission understands the term 
``regulatory structure'' broadly to include the regulations and 
policies of the exchange, its regulator or another self-regulatory 
organization, as well as relevant laws and regulations.
---------------------------------------------------------------------------

III. Whether Objective Threshold Standards Should Be Developed That 
Would Indicate That a Board of Trade Is No Longer Located Outside the 
United States for Purposes of Section 4(A) of the CEA Such That the 
Commission Should Require DCM Designation or DTEF Registration

    In its release issued in advance of the June 2006 public hearing, 
the Commission requested comment on, among other things, what level of 
presence by a foreign board of trade would be a reasonable threshold 
for determining whether to require DCM/DTEF registration and in 
particular whether volume should be a determinative factor.\44\ The 
Commission also requested comment on whether it would be appropriate 
for the Commission to exercise jurisdiction over foreign boards of 
trade that permit direct access when they list contracts with 
underlying products that are integral to the U.S. economy.\45\
---------------------------------------------------------------------------

    \44\ 71 FR 34073 (June 13, 2006).
    \45\ Id.
---------------------------------------------------------------------------

A. The Commission Is Not Developing Objective Standards Establishing a 
Threshold Test of U.S. Location

    As noted above in the summary of comments and hearing discussions, 
most commenters rejected any wholesale, mechanistic adoption of 
threshold indicators of U.S. location. A theme voiced by many 
commenters was that the Commission should not attempt to formalize any 
objective ``bright line'' test of U.S. location, particularly during a 
period of rapid changes in the technology of direct access and market 
communication, as well as in global business structures and 
relationships.\46\ Among the reasons noted by U.S. industry commenters 
in particular for not adopting objective standards establishing a 
threshold test of U.S. location at this time were: the difficulty of 
developing threshold criteria that would not be viewed as 
arbitrary,\47\ the difficulty of determining primary location in a 
period of rapid structural change in the futures industry,\48\ the 
possible inhibition of structural and technological innovation,\49\ and 
the danger that an overly-inclusive criterion could result in 
duplicative regulation \50\ as well as a protectionist response in 
other jurisdictions that might inhibit the ability of the U.S. futures 
industry to compete effectively on a global basis.\51\
---------------------------------------------------------------------------

    \46\ See, e.g., CL 3 (comments of Ben Steil, Director of 
International Economics, Council on Foreign Relations) at 2.
    \47\ See CL 2 (New York Board of Trade) at 2; and CL 28 (Futures 
Industry Association) at 11.
    \48\ See CL 25 (Chicago Board of Trade) at 9: ``* * * with 
cross-border joint ventures and mergers between boards of trade both 
existing and proposed, it is likely to become more and more 
difficult to determine the primary location of an exchange.''
    \49\ See CL 2 (New York Board of Trade) at 2: ``Similarly, we do 
not believe that defining ``location'' on the basis of management, 
ownership arrangements or the location of offices and technology of 
an exchange is instructive, as they are likely to change over time 
and certain functions, such as clearing and technology services, 
lend themselves to outsourcing.'' See also CL 9 (Chicago Mercantile 
Exchange) at 7: ``For example, a U.S. exchange serving EU customers 
is likely to maintain an EU sales office and sales representatives, 
an EU technical office or outsourced technical services to install 
and service networks, routers and terminals, banking connections, 
delivery facilities and data centers and/or communication hubs. In 
the near future, if distributed computing makes trade matching more 
effective, some part of the matching operations may occur in the EU. 
It is not difficult to imagine the adverse consequences if each of 
the jurisdictions in which these operations take place were to 
assert its right to regulate.''
    \50\ See CL 9 (Chicago Mercantile Exchange, Inc.) at 7.
    \51\ See CL 2 (New York Board of Trade) at 2: ``such an approach 
runs the risk of creating barriers to U.S. exchanges as they attempt 
to expand business abroad;'' CL 7 (Minneapolis Grain Exchange) at 2; 
CL 25 (Chicago Board of Trade) at 7; CL 9 (Chicago Mercantile 
Exchange, Inc.) at 6; CL 28 (Futures Industry Association) at 11; CL 
43 (New York Mercantile Exchange) at 8; and NC 4 (Chicago Mercantile 
Exchange Holdings Inc) at 2.
---------------------------------------------------------------------------

    For the reasons noted above, the Commission has decided not to 
adopt any objective standards establishing a threshold test of U.S. 
location. Commission staff will continue to assess the legitimacy of 
any particular applicant to seek relief as a ``foreign'' board of trade 
by considering the totality of factors presented by an applicant. This 
flexible, case-by-case approach will permit staff, during a period of 
evolving market structure, to consider the unique combination of 
factual indicators of U.S. presence that may be presented by an 
applicant for relief.\52\
---------------------------------------------------------------------------

    \52\ See CL 43 (New York Mercantile Exchange) at 6. 
``Accordingly, while the Commission may want to reserve for the 
future the possibility to revisit this area, we believe by far the 
best approach at this point in time would be to provide guidance to 
Commission staff in the continuation of the ongoing staff no-action 
letter process.''
---------------------------------------------------------------------------

B. Volume Is Not a Determinative Indicator of U.S. Location

    The relevancy of U.S-originating volume as a means to determine 
whether a foreign-organized electronic exchange is ``located'' in the 
United States for purposes of CEA section 4(a) has been a long-
standing, unresolved issue since the issuance of the DTB no-action 
letter.\53\
---------------------------------------------------------------------------

    \53\ The Commission had noted in its 1998 Concept Release that 
`` by conditioning its letter on the DTB providing the Division 
[staff] with quarterly updates of DTB's U.S.-originating trading 
volume, the Division intended to leave open the possibility that at 
some point DTB's activities in the U.S. might rise to a level that 
would necessitate greater Commission regulation.'' See 63 FR 39779, 
39781 (July 24, 1998).
---------------------------------------------------------------------------

    Notwithstanding the intuitive appeal of using volume as a proxy for 
U.S. presence, neither the Commission nor the futures industry in its 
extended consideration of this issue during the Commission's 1998-1999 
rulemaking on access to automated boards of trade could reach consensus 
on the specific manner in which volume could be usefully applied to 
determine when a foreign board of trade's U.S. presence required 
contract market designation.\54\
---------------------------------------------------------------------------

    \54\ See 64 FR at 14170.
---------------------------------------------------------------------------

    Comments submitted in response to the Commission's recent Request 
for Comment, as well as statements made at the related public hearing, 
reiterated the

[[Page 64449]]

various problems associated with the use of volume, such as the 
regulatory uncertainty that would result from using a constantly 
fluctuating variable such as volume, the arbitrary nature of any fixed 
percentage, the difficulties in accurately measuring U.S.-based volume, 
and the possible inhibiting effect on exchanges' global activities.\55\ 
Significantly, all of the U.S. futures exchanges agreed, as did foreign 
exchanges, that volume was not a stable indicator of U.S. presence for 
the purpose of requiring DCM designation or DTEF registration.\56\
---------------------------------------------------------------------------

    \55\ As noted at the Commission's Hearing, it is inevitable that 
as exchanges consolidate, they will list contracts that are of great 
economic interest in other jurisdictions and attract enormous 
participation from other jurisdictions. See Hearing Tr. at 100 (Ben 
Steil). If significant volume denoted grounds for exchange 
licensing, then such an exchange potentially would be subject to 
duplicative and burdensome regulation.
    \56\ See CL 2 (New York Board of Trade) at 2; CL 7 (Minneapolis 
Grain Exchange) at 1; CL 9 (Chicago Mercantile Exchange) at 6; CL 25 
(Chicago Board of Trade) at 9-10; CL 43 (New York Mercantile 
Exchange) at 7. See also CL 21 (Tokyo Financial exchange) at 1; CL 
22 (Federation of European Securities Exchanges) at 3; and CL 23 
(Eurex Deutschland) at 7-8 for representative foreign exchange 
comment. Letter available at: http://www.cftc.gov/dea/deaforeignterminaltable.htm.
---------------------------------------------------------------------------

    Accordingly, the Commission agrees that volume is not determinative 
of U.S. location. This conclusion does not mean, however, that volume 
statistics should no longer be required from boards of trade operating 
under a staff no-action letter, as the submission of volume data may 
serve other regulatory interests. The Commission expects that any data 
collection requirement would be tailored carefully to provide 
meaningful information.

C. Nature of the Underlying Contract Is Not Determinative of 
Designation

    Some commenters have suggested that the Commission should require 
foreign boards of trade that list contracts based on a U.S.-produced or 
economically important commodity to obtain contract market designation 
rather than be permitted to operate under a staff no-action letter.\57\ 
In effect, such proposals would make the application of the 
parenthetical exclusion from designation in CEA section 4(a) for boards 
of trade located outside the U.S. dependent upon the nature of the 
commodity underlying a particular futures contract.
---------------------------------------------------------------------------

    \57\ See CL 25 (Chicago Board of Trade) at 10-11: The statement 
of Policy should exclude U.S. Government Securities. See also letter 
dated January 27, 2006 from the NYMEX to Reuben Jeffery III: ``The 
core regulatory policy question is, of course, whether the WTI crude 
oil futures contract is a foreign contract or whether it is a U.S. 
futures contract requiring ICE Futures to become a U.S. designated 
contract market. * * * NYMEX believes that the new WTI futures 
contract is a U.S. product * * * drilled and produced in the US.''
---------------------------------------------------------------------------

    However, the nature of the underlying commodity is not probative of 
the ``location'' of a board of trade for purposes of CEA section 4(a). 
Such an approach would lead to the anomalous result of a board of trade 
being characterized as ``foreign'' for some contracts, but considered a 
``U.S.-based'' exchange for a single contract and therefore required to 
seek contract market designation. In addition, several U.S. contract 
markets list futures contracts on commodities that are produced or 
delivered in foreign jurisdictions. Were the Commission to endorse 
using such criteria to require designation, such a policy could be 
cited by foreign jurisdictions as a rationale to subject U.S. markets 
to regulation.\58\
---------------------------------------------------------------------------

    \58\ See generally CL 2 (New York Board of Trade).
---------------------------------------------------------------------------

IV. Enhancements to the No-Action Process

    Notwithstanding its endorsement of the no-action process, the 
Commission has identified additional enhancements that are intended to 
ensure the availability of necessary information, and to ensure that 
staff will carefully consider proposals for trading contracts that 
potentially could have an adverse effect on the ability of the 
Commission to carry out its regulatory responsibilities.

A. The Trading of Contracts That May Adversely Affect the Commission's 
Regulatory Responsibilities Should Be Addressed

    Should staff become aware that the trading of products listed on a 
foreign board of trade that has been granted no-action relief:

     Affects adversely the pricing of contracts traded on 
any registered entity as defined in Section 1a(29) of the CEA, or of 
contracts traded on any cash market for commodities subject to the 
CEA;
     Creates unacceptable systemic risks or disruptions in 
those markets or the U.S. financial system, including capital 
markets; or
     Facilitates abusive trading practices on U.S. markets 
or otherwise interferes with the ability of the Commission to carry 
out its regulatory responsibilities, in particular market 
surveillance,

staff may exercise its discretion and consider a full range of 
responses, such as imposing conditions and requiring enhanced 
information sharing arrangements and surveillance procedures (see 
below), or other appropriate action. In this regard, the Commission 
retains plenary authority to address manipulative or abusive trading 
practices that affect U.S. futures and cash markets and market 
users,\59\ and will use that authority when necessary and appropriate.
---------------------------------------------------------------------------

    \59\ See, e.g., CEA Section 9(a)(2), 7 U.S.C. 13(a)(2) and CEA 
section 8a(5), 7 U.S.C. 12a(5).
---------------------------------------------------------------------------

B. Enhanced Information Sharing Procedures Should Be Adopted

    In a global market environment, where conduct that takes place on 
markets located outside the United States may have an impact on U.S. 
futures and cash markets, as well as the members and users of those 
markets, the Commission needs to cooperate closely with foreign market 
authorities in order to ensure that the Commission can carry out its 
regulatory responsibilities. The Commission therefore endorses the 
existing practice of requiring information sharing assurances as a 
condition to issuance of a no-action letter and continued activities 
pursuant to the granted relief. However, in light of the Commission's 
experiences in this area, as well as the development of internationally 
accepted information sharing arrangements and standards, the following 
enhancements are appropriate.
1. Exchange and Its Regulator Should Have Power, Authority and 
Willingness To Share Needed Information
    In negotiating information sharing arrangements, staff should 
confirm that the market and its regulator have the power to obtain the 
specific types of information that may be needed by the Commission, as 
well as the authority to share that information with the Commission on 
an ``as needed'' basis. Moreover, staff should obtain evidence of the 
market's and regulator's willingness to share information (e.g., 
through explicit undertakings). In this regard, staff should note 
whether the applicant's regulator has signed the IOSCO Multilateral 
Memorandum of Understanding (MMOU), which requires as a condition to 
executing the MMOU a demonstration of power, authority and willingness 
to share information. If the applicant's regulator is not a signatory 
of the IOSCO MMOU, staff should ascertain whether any prohibitions to 
information sharing exist.
2. Applicants for No-Action Relief Should Sign the Exchange 
International MOU
    When exchange member firms and market participants trade on 
multiple global exchanges, no one regulator or market authority will 
have all of the information necessary to evaluate the risks to its 
markets. The Exchange

[[Page 64450]]

International Information Sharing Memorandum of Understanding and 
Agreement (Exchange International MOU) \60\ and the Declaration on 
Cooperation and Supervision of International Futures Exchanges and 
Clearing Organizations (Declaration),\61\ a companion arrangement for 
regulators, were developed in 1996 as an international response to 
address such gaps in information. These arrangements facilitate the 
identification of large exposures by firms that could have a 
potentially adverse effect on multiple markets.
---------------------------------------------------------------------------

    \60\ The development of the Exchange International MOU was one 
of the achievements that resulted from the FIA sponsored Global Task 
Force on Financial Integrity, which was convened to address the 
cross-border issues that were identified in connection with the 
failure of Barings Plc. To date, fifty-six global derivatives 
exchanges have signed the MOU.
    \61\ The Declaration was developed through discussions at the 
CFTC's international regulators conference, and was motivated by 
work recommendations issued from the Windsor Conference and Tokyo 
Conference, which were convened by the CFTC, the U.K. FSA and 
Japanese regulators (Ministry of International Trade and Industry 
(MITI) and the Ministry of Agriculture, Forestry and Fisheries 
(MAFF)) to respond to the cross-border issues raised by the failure 
of Barings Plc. The Declaration was developed to address instances 
in which an exchange would not be able to share information directly 
with another exchange under the Exchange International MOU. Twenty-
eight regulators have signed the Declaration. Copy available at: 
http://www.cftc.gov/oia/oiabocadec0398.htm.
---------------------------------------------------------------------------

    Applicants for staff no-action relief should execute, or commit to 
execute, the Exchange International MOU because it demonstrates a 
commitment to share information between exchanges that is needed to 
ensure the integrity of markets and to address systemic risks. In 
circumstances where a foreign board of trade is unable to share 
information directly with another exchange, its regulator should sign 
the Declaration (or commit to share such information pursuant to an 
existing MOU or other arrangement with the Commission).
3. Arrangements To Obtain and Share Information Required To Carry Out 
the Commission's Domestic Market Surveillance Responsibilities Should 
Be a Condition to No-Action Relief
    When an applicant for, or recipient of, no-action relief trades or 
will trade contracts that staff in its discretion determines may affect 
the Commission's ability to carry out its surveillance responsibilities 
(e.g., an economically linked contract), the foreign board of trade 
should be required to provide directly to the Commission and in a 
timely manner, appropriate trade and position data as deemed necessary 
by Commission staff. Alternative arrangements may be acceptable where 
local law or regulatory policies require the interposition of the 
market regulator, provided that such arrangements supply the Commission 
on a timely basis with the market information that the Commission's 
staff determines is necessary to carry out the Commission's market 
surveillance responsibilities.

C. The Continuing Good Standing of the Foreign Board of Trade Should Be 
Verified

    Although the no-action letters require that the foreign board of 
trade submit to staff and keep updated on a quarterly basis certain 
material information, staff should develop a non-burdensome and 
efficient means to confirm the board of trade's continued ``good 
standing'' in its authorizing jurisdiction. This could take the form of 
an annual or biannual confirmation by the relevant oversight regulator 
of the foreign board of trade's authorized status and the continuing 
validity of any relevant representations that had been made by the 
foreign board of trade in its initial application.

V. The No-Action Process Is Not the Appropriate Means To Address 
Competitive Issues

    In their comments, U.S. futures exchanges essentially encouraged 
the Commission to review its regulations to consider the competitive 
impact of differences between its regulations and those of other 
jurisdictions.\62\ Some exchanges suggested that the Commission should 
address perceived regulatory disparities in connection with the no-
action process,\63\ particularly where the exchanges trade similar 
products.\64\
---------------------------------------------------------------------------

    \62\ See, e.g., (Chicago Mercantile Holdings, Inc.) Request to 
Appear at the Public Hearing at 2; CL 7 (Minneapolis Grain Exchange) 
at 1; CL 43 (New York Mercantile Exchange) at 2, 10-12.
    \63\ See CL 25 (Chicago Board of Trade) at 1.
    \64\ See Hearing Tr. (NYMEX Chairman James Newsome) at 72, 82.
---------------------------------------------------------------------------

    The Commission does not believe that it should address competitive 
concerns within the context of any individual request for a staff no-
action letter. Claims of competitive advantage or disadvantage are 
exceedingly difficult to prove. An exchange's competitive status 
reflects an array of contributing factors, such as its overall rule 
structure, its governance and business policy determinations, its fee 
structure, type of contracts offered, the method of trading, the 
efficiency of its technology and clearing systems, as well as external 
factors such as statutory restrictions, tax structure and the overall 
legal system.\65\ Rather, the appropriate focus of the no-action review 
should be on addressing the bona fide status of, and domestic 
regulatory concerns raised by, an applicant for a no-action letter.
---------------------------------------------------------------------------

    \65\ In a 1999 report, the Commission's Division of Economic 
Analysis attributed changes in market activity since the 1980s to 
the continued market maturation process, nonregulatory cost 
considerations and technological change rather than international 
regulatory differences.
    ``In sum, neither trends in the locus of trading activity nor 
regulatory developments over the last five years suggest an erosion 
of U.S. futures markets' global competitive position. However, to 
the extent that the movements toward electronic trading systems and 
exchange consolidation that were observed over the period of this 
study continue into the future, the competitive structure of global 
futures markets is likely to change significantly. The Commission is 
committed to continued regulatory flexibility in the face of these 
trends. However, it is likely that the potential cost savings 
generated by these trends, and not the nature of the differences 
among the regulatory systems of various nations, will be most 
important in shaping the composition and trading interest of the 
global futures industry in the twenty first century.''
    The Global Competitiveness of U.S. Futures Markets Revisited, 
the Commission's Division of Economic Analysis (November 1999), 
http://www.cftc.gov/dea/compete/deaglobal_competitiveness.htm.
---------------------------------------------------------------------------

    The CFMA has materially improved the competitive status of the U.S. 
futures industry.\66\ Nonetheless, the Commission takes seriously the 
CFMA findings, among others, that ``financial services regulatory 
policy must be flexible to account for rapidly changing derivatives 
industry business practices,'' and ``regulatory impediments to the 
operation of global business interests can compromise the 
competitiveness of United States businesses.'' \67\ The Commission will 
continue to address these policy goals through ongoing review of its 
regulatory program.
---------------------------------------------------------------------------

    \66\ See, e.g. CL 9 (Chicago Mercantile Exchange): ``CFMA 
greatly improved the competitive environment in the U.S. and 
eliminated many of the legitimate concerns of U.S. based futures 
exchanges.''
    \67\ CFMA Sections 126(a)(3), 126(a)(4).
---------------------------------------------------------------------------

Conclusion

    The U.S. futures industry is undergoing a period of dynamic change, 
marked by technological innovation, consolidation, evolving business 
relationships, and increasing global competition. The Commission does 
not presume to be able to predict the course of ongoing industry 
evolution in these areas.
    The Commission's appropriate role during such a period of rapid 
change is to construct policies that will foster achievement of the 
Act's section 3 objectives of ensuring market and financial integrity, 
addressing systemic risks, and protecting market participants, but to 
do so in a flexible manner that avoids inadvertently inhibiting 
technological innovation or the ability of the U.S. futures industry

[[Page 64451]]

to compete effectively in a global environment.
    This Statement of Policy has been developed as a means for the 
Commission to respond flexibly to the challenges posed by the ongoing 
evolution in electronic access to global markets. The Commission will 
continue to monitor carefully, and review the Policy Statement as 
necessary in light of, the ongoing evolution of cross-border electronic 
direct access and intermediation in order to ensure that it does not 
adversely affect U.S. cash and futures markets, market participants and 
customers, as well as the consumers affected by those foreign market 
transactions.

    Issued in Washington, DC, on October 27, 2006 by the Commission.
Eileen A. Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-18513 Filed 11-1-06; 8:45 am]
BILLING CODE 6351-01-P