[Federal Register Volume 73, Number 199 (Tuesday, October 14, 2008)]
[Rules and Regulations]
[Pages 60625-60627]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-24315]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Foreign Futures and Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is granting an exemption to firms designated by the Tokyo Financial 
Exchange, Inc. (TFX) from the application of certain of the 
Commission's foreign futures and option regulations based upon 
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 Regulation 30.10, which permits 
persons to file a petition with the Commission for exemption from the 
application of certain of the Regulations 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.

DATES: Effective Date: October 14, 2008.

FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Associate Director; 
Helene Schroeder, Special Counsel; or Peter B. Sanchez, Special 
Counsel, Division of Clearing and Intermediary Oversight, Commodity 
Futures Trading Commission, 1155 21st Street, NW., Washington, DC 
20581. Telephone: (202) 418-5430. E-mail: [email protected].

SUPPLEMENTARY INFORMATION: The Commission has issued the following 
Order:

    Order Under CFTC Regulation 30.10 Exempting Firms Designated by 
the Tokyo Financial Exchange, Inc. (TFX) From the Application of 
Certain of the Foreign Futures and Option Regulations the Later of 
the Date of Publication of the Order Herein in the Federal Register 
or After Filing of Consents by Such Firms and TFX, as Appropriate, 
to the Terms and Conditions of the Order Herein.

    Commission Regulations governing the offer and sale of commodity 
futures and option contracts traded on or subject to the regulations of 
a foreign board of trade to customers located in the U.S. are contained 
in Part 30 of the Commission's regulations.\1\ These regulations 
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.
---------------------------------------------------------------------------

    \1\ Commission regulations referred to herein are found at 17 
CFR Ch. I (2007).
---------------------------------------------------------------------------

    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 regulations 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 Sec.  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 
Regulation 30.10.\2\ These elements include: (1) Registration, 
authorization or other form

[[Page 60626]]

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.
---------------------------------------------------------------------------

    \2\ 52 FR 28990, 29001 (August 5, 1987).
---------------------------------------------------------------------------

    Moreover, the Commission specifically stated in adopting Regulation 
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\
---------------------------------------------------------------------------

    \3\ 52 FR 28980, 28981 and 29002.
---------------------------------------------------------------------------

    On August 10, 2007, TFX petitioned the Commission on behalf of its 
member firms, located and doing business in Japan, for an exemption 
from the application of the Commission's Part 30 Regulations to those 
firms.\4\ In support of its petition, TFX states that granting such an 
exemption with respect to such firms that it has authorized to conduct 
foreign futures and option 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 regulations 
thereunder.
---------------------------------------------------------------------------

    \4\ The Commission previously reviewed petitions from two 
Japanese self-regulatory organizations--the Tokyo Grain Exchange 
(TGE) and the Tokyo Commodity Exchange (TOCOM). See 58 FR10953 
(February 23, 1993) (TGE); 71 FR 6759 (February 9, 2006) (TOCOM).
---------------------------------------------------------------------------

    Based upon a review of the petition, supplementary materials filed 
by TFX and the recommendation of the Commission's staff, the Commission 
has concluded that the standards for relief set forth in Regulation 
30.10 and, in particular, Appendix A thereof, have been met and that 
compliance with applicable Japanese law and TFX regulations may be 
substituted for compliance with those sections of the Act and 
regulations thereunder more particularly set forth herein.
    By this Order, the Commission hereby exempts, subject to specified 
conditions, those firms identified to the Commission by TFX as eligible 
for the relief granted herein from:

--Registration with the Commission for firms and for firm 
representatives;
--The requirement in Commission Regulation 30.6(a) and (d), 17 CFR 
Sec.  30.6(a) and (d), that firms provide customers located in the 
U.S. with the risk disclosure statements in Commission Regulation 
1.55(b), 17 CFR 1.55(b), and Commission Regulation 33.7, 17 CFR 
33.7, or as otherwise approved under Commission Regulation 1.55(c), 
17 CFR 1.55(c);
--The separate account requirement contained in Commission 
Regulation 30.7, 17 CFR 30.7;
--Those sections of Part 1 of the Commission's financial regulations 
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 regulations 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 Japan.
    This determination to permit substituted compliance is based on, 
among other things, the Commission's finding that the regulatory 
framework governing persons in Japan 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, TFX, and the Japanese 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 Japan, position data, and data on firms' 
standing to do business and financial condition.
    Commission staff have concluded, upon review of the petition of TFX 
and accompanying exhibits, that Japan's regulation of financial futures 
and options exchanges is comparable to that of the U.S. in the areas 
specified in Appendix A of Part 30, as described above.
    This Order does not provide an exemption from any provision of the 
Act or regulations thereunder not specified herein, such as the 
antifraud provision in Regulation 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 
regulations of TFX for products that customers located in the U.S. may 
trade.\5\ The relief does not extend to regulations 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.\6\ Similarly, if such 
a firm were carrying positions on a U.S. exchange on behalf of foreign 
clients and submitted such transactions for clearing on an omnibus 
basis through a firm registered as a futures commission merchant under 
the Act, it would be subject to the reporting requirements applicable 
to foreign brokers.\7\ 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.
---------------------------------------------------------------------------

    \5\ See, e.g., Sections 2(a)(1)(C) and (D) of the Act.
    \6\ See, e.g., 17 CFR Part 18 (2007).
    \7\ See, e.g., 17 CFR Parts 17 and 21 (2007).
---------------------------------------------------------------------------

    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

[[Page 60627]]

Regulation 30.10 petition must represent in writing to the CFTC \8\ 
that:
---------------------------------------------------------------------------

    \8\ As described below, these representations are to be filed 
with NFA.

    (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 Japan; such firm is engaged in 
business with customers in Japan 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 regulations of TFX and the 
Commission will receive prompt notice of all material changes to the 
relevant laws in Japan, any regulations promulgated thereunder and 
TFX regulations;
    (d) Customers located in the U.S. will be provided no less 
stringent regulatory protection than Japanese customers under all 
relevant provisions of Japanese law; and
    (e) It will cooperate with the Commission with respect to any 
inquiries concerning any activity subject to regulation under the 
Part 30 Regulations, including sharing the information specified in 
Appendix A on an ``as needed'' basis and will use its best efforts 
to notify the Commission if it becomes aware of any information that 
in its judgment affects the financial or operational viability of a 
member firm doing business in the U.S. under the exemption granted 
by this Order.

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

    (a) Is located outside the U.S., its territories and possessions 
and, where applicable, has subsidiaries or affiliates domiciled in 
the U.S. with a related business (e.g., banks and broker/dealer 
affiliates) along with a brief description of each subsidiary's or 
affiliate's identity and principal business in the U.S.;
    (b) Consents to jurisdiction in the U.S. under the Act by filing 
a valid and binding appointment of an agent in the U.S. for service 
of process in accordance with the requirements set forth in 
Regulation 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 Japan 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 
Japanese laws and TFX regulations that form the basis upon which 
this exemption from certain provisions of the Act and Regulations 
thereunder is granted.

    As set forth in the Commission's September 11, 1997 Order 
delegating to NFA certain responsibilities, the written representations 
set forth in paragraph (2) shall be filed with NFA.\9\ 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.
---------------------------------------------------------------------------

    \9\ 62 FR 47792, 47793 (September 11, 1997). Among other duties, 
the Commission authorized NFA to receive requests for confirmation 
of Regulation 30.10 relief on behalf of particular firms, to verify 
such firms' fitness and compliance with the conditions of the 
appropriate Regulation 30.10 Order and to grant exemptive relief 
from registration to qualifying firms.
---------------------------------------------------------------------------

    The Commission also confirms that TFX members that receive 
confirmation of relief set forth herein may engage in limited marketing 
conduct with respect to certain qualified customers located in the U.S. 
from a non-permanent location in the U.S., subject to the terms and 
conditions set forth in prior Commission Orders.\10\ The Commission 
notes that any firm and their employees or other representatives which 
engage in marketing conduct pursuant to this relief are deemed to have 
consented to the Commission's jurisdiction over such marketing 
activities by their filing of a valid and binding appointment of an 
agent in the U.S. for service of process.
---------------------------------------------------------------------------

    \10\ See 57 FR 49644 (November 3, 1992) (permitted limited 
marketing of foreign futures and foreign option products to certain 
governmental and institutional customers located in the U.S.); 59 FR 
42156 (August 17, 1994) (expanding the relief set forth in the 1992 
release to conduct directed towards ``accredited investors'', as 
defined in the Securities and Exchange Commission's Regulation D 
issued pursuant to the Securities Act of 1933).
---------------------------------------------------------------------------

    This Order will become effective as to any designated TFX firm the 
later of the date of publication of the Order in the Federal Register 
or the filing of the consents set forth in paragraphs (2)(a)-(f). 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 
TFX.
    This Order is issued pursuant to Regulation 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 Regulation 30.10 and, in 
particular, Appendix A, have been met. Further, if experience 
demonstrates that the continued effectiveness of this Order in general, 
or with respect to a particular firm, would be contrary to public 
policy or the public interest, or that the systems in place for the 
exchange of information or other circumstances do not warrant 
continuation of the exemptive relief granted herein, the Commission may 
condition, modify, suspend, terminate, withhold as to a specific firm, 
or otherwise restrict the exemptive relief granted in this Order, as 
appropriate, on its own motion.
    The Commission will continue to monitor the implementation of its 
program to exempt firms located in jurisdictions generally deemed to 
have a comparable regulatory program from the application of certain of 
the foreign futures and option regulations and will make necessary 
adjustments if appropriate.

    Dated: October 8, 2008.

    By the Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E8-24315 Filed 10-10-08; 8:45 am]
BILLING CODE 6351-01-P