[Federal Register Volume 72, Number 163 (Thursday, August 23, 2007)]
[Notices]
[Pages 48262-48264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-16641]


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COMMODITY FUTURES TRADING COMMISSION


Petition of the Chicago Mercantile Exchange Inc. for Exemptive 
Relief, Pursuant to Section 4(c) of the Commodity Exchange Act, From 
the Requirement That the China Foreign Exchange Trade System and 
National Interbank Funding Center or Its Members Register as Futures 
Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Chicago Mercantile Exchange Inc. (CME) has petitioned the 
Commodity Futures Trading Commission (Commission) for exemptive relief, 
pursuant to section 4(c) of the Commodity Exchange Act (Act or CEA), 
from the requirement that the China Foreign Exchange Trade System and 
National Interbank Funding Center (CFETS) or its members register as 
futures commission merchants (FCMs). The Commission seeks comment on 
CME's petition. Copies of the petition are available for inspection at 
the Office of the Secretariat by mail at the address listed below, by 
telephoning (202) 418-5100, or on the Commission's Web site (http://www.cftc.gov).

DATES: Comments must be received on or before September 24, 2007.

ADDRESSES: Comments should be sent to David A. Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments may be sent by facsimile 
transmission to (202) 418-5521, or by e-mail to [email protected]. 
Reference should be made to ``CME Petition for Exemption from FCM 
Registration on Behalf of CFETS.'' Comments may also be submitted by 
connecting to the Federal eRulemaking Portal at http://www.regulations.gov and following the comment submission instructions. 
Comments will be published on the Commission's Web site.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, (202) 418-5092, [email protected], Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    By petition dated July 27, 2007 (Petition), CME applied for an 
exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 6(c), from the 
requirement (pursuant to section 4d of the Act, 7 U.S.C. 6d) that CFETS 
or its members register as FCMs.
    According to the Petition, CFETS is a non-profit affiliate of the 
People's Bank of China (PBC). CFETS operates an electronic trading 
system with respect to trading in the interbank foreign exchange 
market, Renminbi (RMB) lending, and trading on the bond market in 
China. The foreign currencies traded against the RMB through CFETS 
include the U.S. dollar, Japanese yen, Euro, and Hong Kong dollar, and 
CFETS provides trading services for foreign exchange spot, forwards, 
and swaps. CFETS also operates China's interbank RMB money

[[Page 48263]]

market and facilitates the trading of government securities and repo 
transactions. CFETS has over 270 members engaged in foreign exchange 
trading, including all of the major Chinese banks. CFETS members also 
include insurance and securities companies, fund management companies, 
and foreign financial institutions.
    CME and CFETS have entered into an agreement pursuant to which 
CFETS will become a ``super-clearing'' member of CME authorized to 
clear foreign currency and interest rate futures transactions on behalf 
of CFETS members and their customers domiciled in China. Although CFETS 
members include non-Chinese financial institutions, only those of its 
members (and their customers) that are domiciled in China would be 
permitted to clear CME contracts through CFETS under the agreement. 
Pursuant to the agreement, CME will, among other things, provide 
consulting services and technical assistance to CFETS. In addition, CME 
and CFETS will cooperate to complete both a comprehensive training 
program and a marketing program. Under the arrangement, CFETS' 
compliance with CME operational procedures will not be enforced via 
regulatory processes applicable to other clearing members, but instead 
under the terms of the agreement.
    As a clearing member of CME, CFETS would fall within the FCM 
definition of section 1a(20) of the Act, 7 U.S.C. 1a(20), in that it 
would ``accept[] orders for the purchase or sale of [a] commodity for 
future delivery on or subject to the rules of [a] contract market * * * 
and * * * in or in connection with such * * * acceptance of orders, 
[would] accept[] * * * money, securities, or property * * * to margin, 
guarantee, or secure * * * trades or contracts that * * * result 
therefrom.'' While the Commission and its predecessor agencies have not 
applied the FCM registration requirement to foreign brokers \1\ that 
clear through U.S. FCMs, Commission staff have stated that the FCM 
registration requirement of Section 4d(a)(1) of the Act, 7 U.S.C. 
6d(a)(1), applies to foreign brokers that clear directly through a 
U.S.-based clearinghouse,\2\ as CFETS will under the proposed 
arrangement with CME.
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    \1\ In this context, ``foreign broker'' means any person located 
outside the U.S., its territories, or possessions who is engaged in 
soliciting or in accepting orders only from persons located outside 
the U.S., its territories, or possessions for the purchase or sale 
of any commodity interest transaction on or subject to the rules of 
any designated contract market or derivatives execution facility and 
that, in or in connection with such solicitation or acceptance of 
orders, accepts any money, securities, or property (or extends 
credit in lieu thereof) to margin, guarantee, or secure any trades 
or contracts that result or may result therefrom. See Exemption From 
Registration for Certain Foreign Persons, 72 FR 15,637 (Apr. 2, 
2007) (proposing to revise and redesignate a definition for the term 
``foreign broker'').
    \2\ The Commission has recently proposed to codify its 
longstanding view that a foreign broker is not required to register 
if the foreign broker: (1) Limits its customers to foreign 
customers; (2) submits the trades of such foreign customers that are 
entered into on U.S. markets for clearing on an omnibus basis 
through a registered FCM; and (3) does not solicit or accept orders 
from U.S. customers for trading on U.S. markets. See supra note 1; 
see also CFTC Staff Letter 89-07, [1987-1990 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) ] 24,479 at 36,096-97 (June 22, 1989) (``The 
Commission has not required a person located outside the United 
States which engages in the conduct described in section 2(a)(1)(A) 
of [the Act] for or on behalf of foreign customers through a U.S. 
FCM to register as an FCM''). In the proposal, the Commission 
specifically noted that, by limiting exemptive relief in the past to 
activities conducted ``though a U.S. FCM'' ``staff did not extend 
the exemptive relief available to a foreign broker to include the 
submission of trades executed for its customer and non-customer 
accounts directly to a clearing organization for a U.S. market.'' 
See 72 FR at 15,638.
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    CME states that, given CFETS' status as an entity that is not 
separately capitalized, ``CFETS itself will not be in a position to 
provide net capital information to CME. Therefore, CFETS cannot meet 
the requirements that would apply if it were required to register as an 
FCM.'' \3\ CME further states that, in light of CFETS' existing 
business environment, CFETS is currently unable to establish a 
capitalized subsidiary in the U.S. that could otherwise meet the 
requirements applicable to registered FCMs. Consequently, CME is 
seeking an exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 
6(c), on behalf of CFETS, from the FCM registration requirement. CME is 
also seeking relief from any FCM registration requirement that might 
apply to CFETS members.
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    \3\ Petition, at 3.
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    Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), empowers the 
Commission to ``promote responsible economic or financial innovation 
and fair competition'' by exempting any transaction or class of 
transactions, including any person offering or entering into such 
transaction, from any of the provisions of the CEA (subject to 
exceptions not relevant here) where the Commission determines that the 
exemption would be consistent with the public interest.\4\
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    \4\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides that:
    In order to promote responsible economic or financial innovation 
and fair competition, the Commission by * * * order, after notice 
and opportunity for hearing, may ( * * * on application of any 
person, including any board of trade designated or registered as a 
contract market * * *) exempt any agreement, contract, or 
transaction (or class thereof) that is otherwise subject to 
subsection (a) of this section (including any person or class of 
persons offering, entering into, rendering advice or rendering other 
services with respect to, the agreement, contract, or transaction), 
either unconditionally or on stated terms or conditions or for 
stated periods * * * from any * * * provision of this chapter 
(except subparagraphs (C)(ii) and (D) of section 2(a)(1) of this 
title, except that the Commission and the Securities and Exchange 
Commission may by rule, regulation, or order jointly exclude any 
agreement, contract, or transaction from section 2(a)(1)(D) of this 
title), if the Commission determines that the exemption would be 
consistent with the public interest.
    While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), imposes 
additional requirements with respect to any exemption from the 
requirements of Section 4(a) of the Act, 7 U.S.C. 6(a), CME is not 
seeking such relief.
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    The Petition includes, among other things, the following conditions 
that could be included in any order granting an exemption to CFETS 
pursuant to section 4(c), Sec.  6(c):
     CFETS shall be required to comply with financial 
requirements that substitute for those applicable to CME's clearing 
members. Specifically, CFETS shall be required to satisfy CME's 
security deposit requirement, which is currently a minimum of $500,000. 
CFETS shall be required to maintain ``surrogate capital'' \5\ of 8% of 
aggregate required customer performance bond, but in any case, no less 
than $10 million. All such surrogate capital shall be required to be 
held in the form of U.S. dollars or Treasury securities (subject to any 
haircuts required by Regulation 1.17) in a CME-controlled account in 
the U.S.
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    \5\ If the Commission were to grant CFETS' request for relief, 
CFETS would not be required to meet the minimum capital requirements 
of Regulation 1.17. See Regulation 1.17, 17 CFR 1.17 (minimum 
capital requirements applicable to persons ``registered as a futures 
commission merchant''). ``Surrogate capital'' refers to alternative 
minimum capital requirements that CME represents that CFETS would be 
required to meet that are intended to parallel, in effect, the 
minimum capital requirements of Regulation 1.17. These requirements 
may be imposed on CFETS as conditions of a Commission order pursuant 
to Section 4(c)(1), 6(c)(1).
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     CME shall be required to provide the Commission a monthly 
report detailing surrogate capital amounts and calculation (which 
report, or portions thereof, would be published on the Commission's Web 
site). CME shall be required to provide next-day notice to the 
Commission if: (i) Surrogate capital falls below 110% of the 
requirement; or (ii) if a customer margin call exceeds excess surrogate 
capital on deposit.\6\

[[Page 48264]]

CME shall be required to provide the Commission immediate notice of any 
deficiency in surrogate capital.
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    \6\ For example, if CFETS had a surrogate capital requirement of 
$10 million, it would be required to maintain surrogate capital of 
$11 million (110% of the requirement) in a CME-controlled account in 
order to avoid providing the Commission with next-day notice of its 
surrogate capital on deposit.
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     CME and CFETS shall be required to provide all large-
trader reporting information at the same time and in the same format 
that CFETS would be required to provide if CFETS were registered as an 
FCM. CME and CFETS shall be required to act as agent for service of 
process regarding trading on CME for both CFETS members and customers 
of CFETS members.
     CME shall not hold CFETS positions and associated funds in 
U.S. customer accounts segregated pursuant to section 4d of the Act, 7 
U.S.C. 6d.
     CME and CFETS shall be required to maintain records, in 
English, in the U.S., sufficient to permit the Commission to confirm 
compliance with any provision of any order issued by the Commission. 
CME and CFETS shall be required to make such records available to the 
Commission in the U.S. within 72 hours of any request.
     CME and CFETS shall be required to comply with U.S. anti-
money laundering requirements as determined by the U.S. Treasury.
     CME and CFETS shall be required to accept joint and 
several liability in any Commission enforcement action relating to 
compliance with any order issued by the Commission.
     CME and CFETS shall be required to file a report with the 
Commission providing statistics and analyzing issues (to be determined) 
within 18 months after issuance of any relief.

II. Request for Comments

    The Commission requests public comment on any aspect of the 
Petition that commenters believe may raise issues under the CEA or 
Commission regulations. In particular, the Commission invites comment 
regarding: (1) Whether the proposed exemption is consistent with the 
requirements for relief set forth in section 4(c) of the Act, 7 U.S.C. 
6(c), including whether granting the exemption would be consistent with 
the public interest and the purposes of the CEA; (2) whether CME's 
representations, as discussed above, if imposed as conditions of an 
order pursuant to section 4(c)(1), section 6(c)(1), would provide 
adequate safeguards with respect to the U.S. clearing system in light 
of CFETS' exemption from the FCM registration requirement; (3) whether 
an order granting the request for relief should include requirements 
different from or in addition to those discussed above; (4) whether an 
order granting the request for relief should exclude any one or more of 
the requirements discussed above; (5) any material adverse effects that 
granting the petition would have upon other derivatives clearing 
organizations, exchanges, or other Commission registrants from a 
competitive \7\ or other perspective \8\; and (6) any other issues 
relevant to this petition.
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    \7\ As noted above, the Commission may grant an exemption 
pursuant to Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), ``[i]n 
order to promote responsible economic or financial innovation and 
fair competition.'' Section 15(b) of the Act, 7 U.S.C. 19(b), 
provides that the ``Commission shall take into consideration the 
public interest to be protected by the antitrust laws and endeavor 
to take the least anticompetitive means of achieving the objectives 
of this chapter, as well as the policies and purposes of this 
chapter, in issuing any order * * *.''
    \8\ The Commission notes that Section 15(a) of the Act, 7 U.S.C. 
19(a), requires that the Commission, before issuing an order, 
consider the costs and benefits in light of considerations of 
protection of market participants and the public; considerations of 
the efficiency, competitiveness, and financial integrity of futures 
markets; considerations of price discovery; considerations of sound 
risk management practices; and other public interest considerations.

    Issued in Washington, DC, on August 8, 2007 by the Commission.
David A. Stawick,
Secretary of the Commission.
 [FR Doc. E7-16641 Filed 8-22-07; 8:45 am]
BILLING CODE 6351-01-P