[Federal Register Volume 75, Number 116 (Thursday, June 17, 2010)]
[Notices]
[Pages 34429-34434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14680]


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COMMODITY FUTURES TRADING COMMISSION


Petition of Hard Eight Futures, LLC for Exemptive Relief, 
Pursuant to Section 4(c) of the Commodity Exchange Act, From Section 
2(a)(1)(C)(iv) of the Commodity Exchange Act and Appendix D to Part 30 
of the Rules of the Commodity Futures Trading Commission

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of petition and request for comment.

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SUMMARY: Hard Eight Futures, LLC (``HEF'') has petitioned the Commodity 
Futures Trading Commission (``Commission'' or ``CFTC'') for exemptive 
relief, pursuant to Section 4(c) of the Commodity Exchange Act

[[Page 34430]]

(``Act'' or ``CEA''),\1\ to permit U.S. eligible contract participants 
(``ECPs''),\2\ subject to certain conditions, to trade foreign non-
narrow-based security index futures contracts where the foreign 
exchange has not obtained a staff no-action letter with respect to the 
offer and sale of such futures contracts to U.S. persons. The 
conditions proposed in HEF's petition are: (i) Relief is only available 
for futures on broad-based security indexes; (ii) the securities 
comprising such an index are principally traded on, by, or through any 
exchange or market located outside the U.S.; (iii) the Commission must 
have a Memorandum of Understanding with the foreign exchange's 
regulator with respect to information sharing and cooperation; \3\ and 
(iv) an ECP seeking to claim the exemption would file notice with the 
Commission, which would be effective with respect to that person and 
index, unless the Commission notifies the person within ten (10) 
business days that the claimant does not meet the requirements of the 
exclusion, or that the index does not qualify as broad based.
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    \1\ 7 U.S.C. 6(c).
    \2\ The term ``eligible contract participant'' is defined in 
Section 1a(12) of the Act, 7 U.S.C. 1a(12).
    \3\ A foreign exchange seeking to offer foreign security index 
futures to the general public in the U.S. would still need staff no-
action relief, and if it sought to do so through terminals located 
in the U.S., it would still need a second ``direct access no-action 
letter'' from the staff.
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    The Commission seeks comment on HEF's petition and related 
questions. 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 July 19, 2010. Comments 
must be in English or, if not, accompanied by an English translation.

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 ``Hard Eight 
Futures Petition for Exemption from Section 2(a)(1)(C)(iv) of the Act 
and Appendix D to Part 30 of the Rules of the Commission.'' 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: Julian E. Hammar, Assistant General 
Counsel, Office of General Counsel, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5118. E-mail: [email protected] or Edwin 
J. Yoshimura, Counsel, Office of General Counsel, Commodity Futures 
Trading Commission, 525 W. Monroe Street, Suite 1100, Chicago, IL 
60661. Telephone: (312) 596-0562. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    In general, foreign exchange-traded futures and commodity option 
products may be offered or sold by properly registered or exempt 
intermediaries to persons located in the U.S., without prior product 
approval.\4\ Special review procedures apply, however, to the offer or 
sale of futures contracts based on a group or index of securities 
(``security index'').\5\ Specifically, Section 2(a)(1)(C)(iv) of the 
CEA \6\ generally prohibits any person from offering or selling a 
futures contract based on a security index in the U.S., except as 
otherwise permitted under Section 2(a)(1)(C)(ii) or Section 
2(a)(1)(D).\7\ By its terms, Section 2(a)(1)(C)(iv) applies to futures 
contracts on security indexes traded on both domestic and foreign 
boards of trade.
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    \4\ See Foreign Commodity Options, 61 FR 10891 (Mar. 18, 1996).
    \5\ The CEA, as amended by the Commodity Futures Modernization 
Act of 2000 (``CFMA''), Appendix E of Public Law No. 106-554, 114 
Stat. 2763 (2000), provides that the offer or sale in the U.S. of 
futures contracts based on a security index, including those 
contracts traded on or subject to the rules of a foreign board of 
trade, is subject to the Commission's exclusive jurisdiction, with 
the exception of security futures products, over which the 
Commission shares jurisdiction with the Securities and Exchange 
Commission (``SEC''). A security future, in turn, is defined in CEA 
Section 1a(31) as a futures contract on a single security or a 
``narrow-based security index.'' 7 U.S.C. 1a(31). Thus, the 
Commission's jurisdiction remains exclusive with regard to futures 
contracts on a security index that is broad-based, i.e., that does 
not meet the definition of a ``narrow-based security index'' in CEA 
Section 1a(25), 7 U.S.C. 1a(25).
    \6\ 7 U.S.C. 2(a)(1)(C)(iv).
    \7\ CEA Section 2(a)(1)(D), 7 U.S.C. Sec.  2(a)(1)(D), governs 
the offer and sale of security futures products.
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    Section 2(a)(1)(C)(ii) of the CEA \8\ sets forth three criteria to 
govern the trading of futures contracts on a security index to be 
traded on contract markets and derivatives transaction execution 
facilities designated or registered by the Commission:
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    \8\ 7 U.S.C. 2(a)(1)(C)(ii).
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    (a) The contract must provide for cash settlement;
    (b) The contract must not be readily susceptible to manipulation or 
to being used to manipulate any underlying security; and
    (c) The security index must not constitute a narrow-based security 
index.\9\
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    \9\ With regard to the third criterion, the CFTC and SEC have 
jointly promulgated Commission Rule 41.13 under the CEA and Rule 
3a55-3 under the Securities Exchange Act of 1934, governing security 
index futures contracts traded on foreign boards of trade. These 
rules provide that ``[w]hen a contract of sale for future delivery 
on a security index is traded on or subject to the rules of a 
foreign board of trade, such index shall not be a narrow-based 
security index if it would not be a narrow-based security index if a 
futures contract on such index were traded on a designated contract 
market or registered derivatives transaction execution facility.'' 
Commission Rule 41.13, 17 CFR 41.13; SEC Rule 3a55-3, 17 CFR 
240.3a55-3.
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    The CEA does not explicitly address the standards to be applied to 
a security index futures contract traded on a foreign board of trade. 
Historically, though, Commission staff has applied the aforementioned 
three criteria in evaluating requests by foreign boards of trade 
seeking to offer and sell their foreign security index futures 
contracts in the U.S. (without becoming designated as a contract 
market, or registered as a derivatives transaction execution facility).
    In reviewing such requests, Commission staff evaluates the foreign 
security index futures contract to ensure that it complies with the 
three criteria of Section 2(a)(1)(C)(ii) of the CEA. In making its 
determination, the staff considers the design and maintenance of the 
index, the method of index calculation, the nature of the component 
security prices used to calculate the index, the breadth and frequency 
of index dissemination, and other relevant factors.\10\ With respect to 
whether a foreign futures contract based on a foreign security index is 
not readily susceptible to manipulation or being used to manipulate any 
underlying security, one preliminary consideration is the requesting 
board of trade's ability to access information regarding the securities 
underlying the index.\11\
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    \10\ See generally Appendix D to Part 30 of the Commission's 
regulations.
    \11\ In general, staff has requested that the foreign board of 
trade provide a copy of the surveillance agreements between the 
board of trade and the exchange(s) on which the underlying 
securities are traded; assurances that the board of trade will share 
information with the Commission, directly or indirectly; and when 
applicable, information regarding foreign blocking statutes and 
their impact on the ability of U.S. government agencies to obtain 
information concerning the trading of futures contracts on security 
indexes. The staff reviews this information to ensure that the 
requesting foreign board of trade (and/or its regulator) has the 
ability and willingness to access adequate surveillance data 
necessary to detect and deter manipulation in the futures contracts 
and underlying securities, as well as share such data with the 
Commission.

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[[Page 34431]]

    Upon determination by staff that the subject futures contract and 
underlying index comport with the criteria set forth in Section 
2(a)(1)(C)(ii) of the CEA, Commission staff issues a no-action letter 
to the foreign board of trade with respect to the offer and sale of 
such futures contract in the U.S.\12\ A foreign board of trade that has 
received prior no-action relief with respect to a particular foreign 
security index futures contract must file a new submission for each 
foreign security index futures contract that it seeks to offer or sell 
in the U.S.
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    \12\ A no-action letter generally is a written statement issued 
by the staff of a Division or Office of the Commission 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 by the 
requestor. See Commission Rule 140.99(a)(2), 17 CFR 140.99(a)(2). A 
no-action letter to a foreign board of trade does not affect or 
alter the application of Part 30 of the Commission's Rules, which 
governs the offer and sale by financial intermediaries of foreign 
futures and foreign option contracts to persons located in the U.S.
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II. HEF's Petition

    By letter dated April 21, 2008 (``Petition''), HEF, a registered 
commodity trading advisor (``CTA''), applied for exemptive relief, 
pursuant to Section 4(c) of the Act, from Section 2(a)(1)(C)(iv) of the 
Act and Appendix D to Part 30 of the Rules of the Commission.\13\ 
According to the Petition, this exemption is necessary to promote 
responsible economic innovation and fair competition. Granting the 
exemption will enable U.S. ECPs \14\ to trade a foreign security index 
futures contract even if the foreign board of trade that lists the 
contract has not obtained no-action relief relating to the offer and 
sale of that contract to U.S. persons.
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    \13\ Appendix D to Part 30 sets forth the process by which 
Commission staff evaluates requests for no-action relief from 
foreign boards of trade seeking to offer and sell their futures 
contracts on non-narrow-based security indexes in the U.S., and sets 
forth the information that such a foreign board of trade should 
submit when seeking no-action relief. 17 CFR Part 30, Appendix D.
    \14\ The CEA provides that the Commission may only issue 
exemptive relief to ``appropriate persons'' as described in CEA 
Section 4(c)(3), 7 U.S.C. 6(c)(3). For purposes of its Petition, HEF 
requests that the Commission define ``appropriate persons'' as 
including all ECPs.
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    Under the exemptive relief requested by HEF's Petition, U.S. ECPs 
could trade, on a foreign board of trade, futures contracts on foreign 
security indexes that are not security futures products (i.e., the 
index is not a narrow-based security index) on the same basis as they 
may trade any other futures contract on a foreign board of trade. 
Currently, no prior qualifying action by the Commission or its staff is 
required in order for U.S. persons to enter into non-security-based 
futures contracts traded on a foreign board of trade. Rather, U.S. 
customers are permitted to access futures products offered by a foreign 
board of trade through a U.S. registered futures commission merchant or 
introducing broker, or through a foreign firm pursuant to an exemption 
under Commission Rule 30.10.\15\ HEF's Petition asks that for U.S. 
ECPs, the same rules apply to foreign security index futures contracts 
as well.
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    \15\ 17 CFR 30.10.
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III. SEC Exemptive Order Regarding Foreign Security Futures

    Due to the applicability of the federal securities laws, though, 
security index futures are not the same as futures on non-security 
based commodities. In this regard, with respect to security futures 
products (i.e., futures on a single security or a narrow-based security 
index) traded on foreign boards of trade, Section 2(a)(1)(E) of the CEA 
and Section 6(k) of the Securities Exchange Act of 1934 (``Exchange 
Act'') provide that: (i) The CFTC and SEC ``shall jointly issue such 
rules, regulations, or orders as are necessary and appropriate to 
permit the offer and sale of a security futures product traded on or 
subject to the rules of a foreign board of trade to United States 
persons;'' and (ii) such rules, regulations or orders ``shall take into 
account, as appropriate, the nature and size of the markets that the 
securities underlying the security futures product reflects.'' \16\
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    \16\ 7 U.S.C. 2(a)(1)(E); 15 U.S.C. 78f(k).
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    After HEF's Petition was filed, the SEC on June 30, 2009, issued an 
Order (``SEC Order'') \17\ exempting certain persons from Section 
6(h)(1) of the Exchange Act, which makes it unlawful for U.S. persons 
to enter into security futures traded on foreign boards of trade 
(``foreign security futures'').\18\ The SEC Order, among other things, 
permits certain sophisticated investors to access foreign security 
futures and provides relief for certain intermediaries in order to 
effect these transactions under certain conditions, including that the 
``primary trading market'' for the underlying securities of foreign 
private issuers is outside the U.S.\19\ Specifically, the sophisticated 
investors to which the SEC Order applies include qualified 
institutional buyers (``QIBs'') as defined in SEC Rule 144A under the 
Securities Act of 1933.\20\ A QIB is generally an entity that owns and 
invests on a discretionary basis at least $100 million in securities of 
unaffiliated issuers; it is, therefore, a narrower class of investors 
than the class of ECPs as defined in the CEA.\21\
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    \17\ See Order Under Section 36 of the Securities Exchange Act 
of 1934 Granting an Exemption From Exchange Act Section 6(h)(1) for 
Certain Persons Effecting Transactions in Foreign Security Futures 
and Under Exchange Act Section 15(a)(2) and Section 36 Granting 
Exemptions From Exchange Act Section 15(a)(1) and Certain Other 
Requirements, 74 FR 32200 (July 7, 2009).
    \18\ 15 U.S.C. 78f(h).
    \19\ In light of questions received following the issuance of 
the SEC Order, the Commission's Division of Clearing & Intermediary 
Oversight has recently issued an ``Advisory Concerning the Offer and 
Sale of Foreign Security Futures Products to Customers Located in 
the United States.''
    \20\ 15 U.S.C. 77a et seq.
    \21\ 17 CFR 230.144A (a QIB is one of the enumerated entities, 
``acting for its own account or the accounts of other qualified 
institutional buyers, that in the aggregate owns and invests on a 
discretionary basis at least $100 million in securities of issuers 
that are not affiliated with the entity'').
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    The relief granted by the SEC Order, although not coterminous with 
the relief requested by HEF, is relevant to HEF's Petition. Prior to 
the SEC Order, if a foreign broad-based security index underlying a 
foreign exchange-traded futures contract became a narrow-based security 
index for a certain period of time, a U.S. person had to exit its 
position in that futures contract during a specified grace period, or 
be in violation of the Exchange Act's prohibition on trading foreign 
security futures.\22\ Since June 30, 2009, though, if an ECP is 
eligible for and the contract satisfies the requirements for the 
exemption issued in the SEC Order, the ECP could continue to trade such 
a contract as a foreign security future pursuant to the terms and 
conditions of the SEC Order. But if an ECP is not eligible--that is, if 
the ECP does not meet the high threshold to qualify as a QIB--or the 
contract is not eligible under the SEC Order, then the ECP would not 
have relief in trading such a contract.
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    \22\ If an index becomes narrow-based for more than 45 business 
days over three consecutive calendar months, the CEA and the 
Exchange Act provide a grace period of three months during which the 
index is excluded from the definition of a ``narrow-based security 
index.'' See Section 1a(25)(D) of the CEA, 7 U.S.C. 1a(25)(D) and 
Section 3(a)(55)(E) of the Exchange Act, 15 U.S.C. 78c(a)(55)(E). 
Although these provisions apply to security index futures contracts 
traded on certain U.S. exchanges, by joint regulation, the 
Commission and the SEC have made these provisions applicable to 
security index futures contracts traded on foreign boards of trade. 
See Commission Rule 41.13, 17 CFR 41.13 and SEC Rule 3a55-3, 17 CFR 
240.3a55-3.

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[[Page 34432]]

IV. Relief Sought by HEF

    Section 4(c)(1) of the Act 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.\23\ The Petition requests relief from the 
requirement that U.S. persons may only enter into a futures contract on 
a foreign security index listed on a foreign board of trade if the 
foreign board of trade has first received a letter providing no-action 
relief to offer and sell that futures contract to U.S. persons.
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    \23\ 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 
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 Act (except 
subparagraphs (C)(ii) and (D) of section 2(a)(1), except that the 
Commission and Securities and Exchange Commission may by rule, 
regulation, or order jointly exclude any agreement, contract, or 
transaction from section 2(a)(1)(D)), 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), HEF is not 
seeking such relief.
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    The proposed exemptive relief would require that a person wishing 
to trade a particular security index futures contract listed on a 
foreign board of trade that has not received no-action relief notify 
the Commission of the person's intent to do so. The notice would 
require the claimant to demonstrate his or her qualification for the 
exemption (i.e., that he or she is an ECP), and that the index is not a 
narrow-based security index. The exemption would be effective with 
respect to that person and index unless the Commission notifies the 
person within ten (10) business days that the claimant does not meet 
the requirements of the exclusion, or the index does not qualify under 
the Act as a non-narrow based index (including an explanation of why it 
considers the person not to be qualified or the index to be narrow-
based, respectively).
    Further, this exemption would be available only for contracts 
traded on foreign boards of trade for which the applicable foreign 
regulator has entered into a Memorandum of Understanding (``MOU'') with 
respect to information sharing and cooperation with the CFTC.\24\ Also, 
the securities comprising the index underlying the futures contract 
would have to be principally traded on, by, or through an exchange or 
market located outside the U.S.
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    \24\ This could be either a bilateral MOU between the Commission 
and the applicable foreign regulator, or a multilateral MOU such as 
the ``Multilateral Memorandum of Understanding Concerning 
Consultation and Cooperation and the Exchange of Information'' 
created by the International Organization of Securities Commissions 
(``IOSCO Multilateral MOU'').
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    The Petition does not seek an exemption from the requirement that a 
foreign board of trade be granted no-action relief before offering and 
selling such foreign security index futures contracts to the general 
public. Nor does it seek an exemption from the requirement that such 
contracts may be traded through direct access from the U.S. to a 
foreign board of trade's electronic trading system only pursuant to a 
Commission staff direct access no-action letter.\25\
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    \25\ See Policy Statement Regarding 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, 71 FR 64443 (Nov. 2, 2006).
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    More specifically, HEF is seeking an exemption, pursuant to Section 
4(c) of the Act, from Section 2(a)(1)(C)(iv) of the Act and 17 CFR Part 
30 Appendix D in the following form, with conditions:
    (X) Exemption for Eligible Contract Participants Trading Non-narrow 
Based Stock Indexes on a Foreign Board of Trade. The Commodity Futures 
Trading Commission, pursuant to its authority under Section 4(c)(1) of 
the Commodity Exchange Act, hereby determines that notwithstanding the 
provisions of Section 2(a)(1)(C)(iv) of the Act and Appendix D to Part 
30 of its Rules, nothing in the Act is intended to prohibit any 
``eligible contract participant,'' as defined in Section 1a(12) of the 
Act, located in the U.S. from purchasing or carrying futures contracts 
on a securities index that is not a ``narrow-based index'' as defined 
in Section 1a(25) of the Act, traded on or subject to the rules of a 
foreign board of trade to the same extent such person may be authorized 
to purchase or carry a futures contract on any other commodity so long 
as the underlying securities comprising such index are principally 
traded on, by or through any exchange or market located outside the 
United States, and the regulator of such foreign board of trade has 
entered into a Memorandum of Understanding with respect to information 
sharing and cooperation with the Commission.
    (a) Notification: Persons wishing to avail themselves of this 
exemption shall so notify the Commission. This notification shall be 
filed with the Secretary of the Commission at its Washington, D.C. 
headquarters, in electronic form, shall be labeled as ``Notification of 
Trading in a Non-narrow Based Index Traded on a Foreign Board of 
Trade,'' and shall include:
    (1) The name and address of the person and representation that the 
person qualifies as an Eligible Contract Participant, and the basis 
upon which the person so qualifies;
    (2) The name of the non-narrow based index and of the foreign board 
of trade on which the index is traded;
    (3) A demonstration that the index is not a ``narrow-based index'' 
under the definition of Section 1a(25) of the Act; and
    (4) A representation that the regulator of the foreign board of 
trade has entered into an information-sharing agreement with the 
Commission or to which the Commission is also a signatory.
    (b) Effective Date: The exemption shall be effective ten (10) 
business days after filing of the notice with the Commission, unless 
the Commission within that period notifies the person claiming the 
exemption that the exemption may not be made effective with respect to 
that person and/or that index and its reason for so finding.
    According to HEF, the purpose behind the no-action process is in 
furtherance of Congress' expressed intent ``to protect the interests of 
U.S. residents against fraudulent or other harmful practices.'' \26\ 
HEF maintains that ECPs, due to their size and sophistication, are not 
dependent upon the terms and conditions imposed on the trading of 
foreign security index futures in the staff's no-action relief for 
protection from fraud. Further, HEF notes that in the U.S., ECPs 
currently are able to trade contracts, agreements, or transactions that 
replicate futures contracts on foreign security indexes in the over-
the-counter (``OTC'') markets. HEF states that granting this exemptive 
relief will enable ECPs to trade futures contracts on a foreign board 
of trade that are equivalent to contracts that ECPs are able to trade 
in the OTC markets. Because contracts on foreign security

[[Page 34433]]

indexes are already traded in the OTC markets by U.S. ECPs, HEF 
believes that it is in the public interest to provide U.S. ECPs the 
choice to trade foreign security indexes in a more regulated, 
transparent exchange environment on foreign boards of trade.
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    \26\ H.R. Rep. No. 97-565, Part I, at p. 85 (May 17, 1982).
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V. 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 the following:
    (1) Conditions Proposed by HEF: Should an order granting the 
request for relief include any one or more of the conditions proposed 
by HEF in its Petition?
    (2) Surveillance: In granting no-action relief to a foreign board 
of trade seeking to offer and sell a futures contract on a foreign 
security index to U.S. persons, Commission staff generally rely on 
surveillance sharing agreements between the securities exchanges on 
which the securities comprising the index are traded, and the foreign 
board of trade. See infra n.11. Also, before issuing such no-action 
relief, Commission staff often requests a representation or commitment 
from the foreign board of trade of its willingness and ability to share 
information with the Commission. Id. Similarly, in granting no-action 
relief to a foreign board of trade seeking to offer and sell any 
futures contract to U.S. persons through direct access to its 
electronic trading system from the U.S., Commission staff typically 
confirm that the market and its regulator have the ability 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, Commission staff generally obtains 
evidence of the foreign market's and regulator's willingness to share 
information (e.g., through explicit undertakings) with the Commission.
    To ensure that there are similar protections in place in the 
circumstances posed by HEF's Petition, should an order granting the 
request for relief require that the foreign board of trade that lists 
the foreign security index futures contract to be traded by the ECP 
have: (i) Submitted a pending request for no-action relief with respect 
to that futures contract; (ii) received a prior no-action letter for 
another foreign security index futures contract; and/or (iii) received 
a foreign direct access no action letter?
    (3) MOUs: The Commission is concerned that the condition for an MOU 
included in HEF's Petition may not be workable in practice, given the 
wide spectrum of information sharing agreements to which the Commission 
is a party. An MOU may only mean that the foreign regulator will share 
information, not that it has access to surveillance information to 
share. Should an order granting the relief requested in HEF's Petition 
be conditioned on the existence of an MOU that is specifically tailored 
to obtain the information that the Commission needs to assess the 
efficacy of the foreign board of trade and its regulator, and to obtain 
surveillance information as it deems necessary? Should any such relief 
be limited to foreign security index futures contracts listed in 
jurisdictions that are signatories to the IOSCO Multilateral MOU?
    (4) Broad vs. Narrow-Based Security Indexes: As discussed above, a 
futures contract on a security index that moves from broad to narrow-
based thereby becomes a security future that may no longer be traded by 
U.S. persons subject to the exclusive jurisdiction of the CFTC. To 
ensure full compliance with the requirements of the CEA and the federal 
securities laws, should an order granting the relief requested in HEF's 
Petition require an undertaking by the ECP to: (i) Continually monitor 
the underlying index to ensure that it remains broad-based; (ii) notify 
the Commission if the index becomes a narrow-based security index; and 
(iii) if the index continues to be narrow-based for more than 45 
business days during 3 consecutive calendar months, to cease trading 
the futures contract and liquidate existing positions in an orderly 
manner over the next 3 calendar months (provided, however, that if the 
ECP and the futures contract are eligible for the exemptive relief 
granted by the SEC Order, the ECP may continue to trade that contract 
as a foreign security future)?
    (5) Additional Conditions: Should an order granting the relief 
requested in HEF's Petition require that there be no solicitation of 
ECP orders, and/or that ECPs be required to trade only for their own 
account? \27\
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    \27\ Granting the relief requested in HEF's Petition would in no 
way alter the requirements of Part 30 of the Commission's 
regulations concerning foreign futures and options transactions.
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    (6) OTC Derivatives Reform Legislation: As discussed above, HEF's 
Petition justifies its request for relief, in part, on the proposition 
that: (i) U.S. ECPs currently are able to trade contracts that 
replicate futures on foreign security indexes in the unregulated OTC 
markets; and (ii) it is in the public interest to enable them to do so 
in a more regulated and transparent exchange environment on a foreign 
board of trade. Yet, legislation currently pending before the Congress, 
if eventually enacted, could change this premise to some degree, as it 
would significantly enhance the transparency of OTC derivatives and 
require that certain swaps (subject to an ``end-user exception'') be 
traded on a contract market or a ``swap execution facility'' as 
provided for in that legislation. What are the implications of the OTC 
derivatives reform legislation pending in Congress, if any, on HEF's 
Petition?
    (7) Foreign Securities: As discussed above, HEF's Petition proposes 
that an order granting its request for relief be conditioned upon all 
the securities in the index underlying the foreign futures contract 
being principally traded on, by, or through an exchange or market 
located outside the U.S. This ``principally traded'' formulation may be 
based on the language of CEA Section 2(a)(1)(F)(ii), which addresses 
trading of foreign security futures by ECPs in the U.S.\28\ What are 
the implications, if any, of the use of this standard in an order 
granting the relief requested in HEF's Petition in comparison to the 
``primary trading market'' test that the SEC created for securities of 
foreign private issuers in a narrow-based security index as set forth 
in paragraph (1)(a)(ii) of the SEC Order? \29\ Should an order granting 
the relief requested in HEF's Petition treat securities in an index as 
being principally traded on, by, or through an exchange outside the 
United States if they meet the criteria for securities in a narrow-
based security index contained in paragraph (1)(a)(ii) of the SEC 
Order? \30\
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    \28\ 7 U.S.C. 2(a)(1)(F)(ii). See text accompanying n.31 infra 
for full text.
    \29\ The SEC Order provides that for U.S. QIBs to be able to 
trade foreign security futures, the securities issued by foreign 
private issuers that underlie a foreign security future must have 
their ``primary trading market'' outside the U.S. For purposes of 
this condition, under the SEC Order a security's ``primary trading 
market'' is deemed to be outside the U.S. if at least 55% of the 
worldwide trading volume in the security took place in, on, or 
through a securities market or markets located in either: (i) A 
single foreign jurisdiction; or (ii) no more than two foreign 
jurisdictions during the most recently completed fiscal year. If the 
trading in the foreign private issuer's security is in two foreign 
jurisdictions, the trading for the issuer's security in at least one 
of the two foreign jurisdictions must be greater than the trading in 
the U.S. for the same class of the issuer's securities in order for 
such security's ``primary trading market'' to be considered outside 
the U.S.
    \30\ In addition to securities of foreign private issuers whose 
primary trading market is outside the U.S. underlying narrow-based 
security indexes, paragraph (1)(a)(ii) of the SEC Order permits debt 
securities issued or guaranteed by a foreign government as defined 
in Rule 405 of the Securities Act, 17 CFR 230.405, that are eligible 
to be registered with the SEC under Schedule B of the Securities 
Act, 15 U.S.C. 77aa. Further, paragraph (1)(a)(ii) requires that at 
the time of the transaction, at least 90% of the index, both in 
terms of the number of underlying securities and their weight, must 
meet these eligibility requirements. No more than 10% of the 
securities in the index, both in terms of their number and their 
weight, at the time of the transaction, that do not meet the 
requirements, must be from issuers that are required to file reports 
with the SEC pursuant to Section 13 or Section 15(d) of the Exchange 
Act, 15 U.S.C. 78m and 78o.

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[[Page 34434]]

    (8) ECPs vs. QIBs: CEA Section 2(a)(1)(F)(ii), cited in the 
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preceding paragraph, provides in full as follows:

    Nothing in this Act is intended to prohibit any eligible 
contract participant located in the United States from purchasing or 
carrying securities futures products traded on or subject to the 
rules of a foreign board of trade, exchange, or market to the same 
extent such person may be authorized to purchase or carry other 
securities traded on a foreign board of trade, exchange, or market 
so long as any underlying security for such security futures 
products is traded principally on, by, or through any exchange or 
market located outside the United States.\31\
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    \31\ 7 U.S.C. 2(a)(1)(F)(ii).

As discussed above, the SEC Order generally limits the category of U.S. 
persons that may trade foreign security futures to QIBs (who own and 
invest $100 million or more). This is a narrower class of investors 
than ECPs. The group of persons that satisfy the ECP definition but may 
not be QIBs includes registered investment companies, commodity pools, 
pension plans, corporations and high net worth individuals. These 
persons may have a real need for risk management based upon exposures 
in foreign financial markets or to economic conditions in other 
countries, or they may want to gain exposure to those markets as part 
of the asset allocation in their investment portfolio.
    If the relief requested in HEF's Petition is granted, an ECP that 
is a QIB and trades a foreign futures contract on a foreign security 
index that moves from broad to narrow-based can continue to trade that 
contract as a foreign security future, provided the contract otherwise 
meets the requirements of the SEC Order. An ECP that is not a QIB, 
however, would have to exit its position in the foreign futures 
contract within the applicable grace period or be in violation of the 
Exchange Act. Given this difference in legal status, should an order 
issued by the Commission granting the relief requested in HEF's 
Petition be limited to QIBs?
    With respect to access to foreign security futures by U.S. persons, 
are the conditions contained in the SEC Order consistent with Section 
2(a)(1)(F)(ii) of the CEA? Should ECPs that are not QIBs be permitted 
to trade foreign security futures? What conditions, if any, should be 
imposed on such trading by ECPs that are QIBs, and ECPs that are not 
QIBs? How should an order permitting ECPs to trade foreign security 
futures take into account, as mandated by Section 2(a)(1)(E) of the 
CEA, ``the nature and size of the markets that the securities 
underlying the security futures product reflects?''
    (9) Nature of Foreign Security Indexes: Lying at the core of the 
complex interplay between HEF's Petition on the one hand, and the CEA 
and the federal securities laws on the other hand, is the application 
of the statutory definition of a ``narrow-based security index'' to 
foreign security indexes. To the extent that a foreign security index 
falls squarely on the broad-based side of the line, distinctions 
between ECPs that are QIBs and those that are not, and the prospect of 
an ECP that is relying on the relief requested by HEF violating the 
securities laws, may be of less concern.
    Congress has recognized that ``[t]he detailed statutory test of a 
narrow-based security index was tailored to fit the U.S. equity 
markets, which are by far the largest, deepest and most liquid 
securities markets in the world.'' \32\ In the CFMA in 2000, Congress 
directed that the CFTC and the SEC, within one year, jointly adopt 
rules or regulations that set forth requirements for broad-based 
foreign security indexes traded on a foreign board of trade.\33\ And 
shortly thereafter, the CFTC and SEC promised to consider amending the 
rules regarding security index futures trading on or subject to the 
rules of a foreign board of trade.\34\
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    \32\ H.R. Rep. No. 110-627 at 983 (2009) (Conference Report on 
the CFTC Reauthorization Act of 2008, Title XIII of the 2008 ``Farm 
Bill,'' Public Law No. 110-246, 122 Stat. 1651 (June 18, 2008)).
    \33\ See 7 U.S.C. 1a(25)(B)(iv) and 1a(25)(C); 15 U.S.C. 
3(a)(55)(C)(iv) and 3(a)(55)(D).
    \34\ See Method for Determining Market Capitalization and Dollar 
Value of Average Daily Trading Volume; Application of the Definition 
of Narrow-Based Security Index, 66 FR 44490, 44501-44502 (August 23, 
2001).
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    Should the CFTC and the SEC establish criteria to exclude 
appropriate foreign security indexes from the definition of a ``narrow-
based security index?'' If so, on what basis? How should it be 
determined whether a foreign security index is appropriately treated as 
a broad-based security index so that foreign futures on such an index 
would trade subject to the exclusive jurisdiction of the CFTC, or as a 
narrow-based security index so that foreign futures on such an index 
would trade as foreign security futures? The Commission encourages 
commenters to submit any quantitative data and analysis to support any 
proposed distinctions between broad and narrow-based foreign security 
indexes.
    (10) CEA Section 4(c) Requirements:
     Is the exemption requested in HEF's Petition consistent 
with the requirements for relief set forth in Section 4(c) of the CEA?
     Would granting the exemption requested in HEF's Petition 
be consistent with the public interest and purposes of the CEA?
     Would granting the relief requested in HEF's Petition have 
any material adverse effects upon derivatives clearing organizations, 
exchanges, or other Commission registrants from a competitive or other 
perspective?
    (11) Other Issues: The Commission welcomes comment on any other 
issues relevant to HEF's Petition for an exemption.
* * * * *

    Issued in Washington, DC, on June 11, 2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010-14680 Filed 6-16-10; 8:45 am]
BILLING CODE P