[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Rules and Regulations]
[Pages 64985-64989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31326]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Options Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC''), subject to the conditions specified below, is granting to
designated Dealers of the New Zealand Futures and Options Exchange
(``Exchange'' or ``NZFOE'') the following relief: Exemption under
Commission rule 30.10, 17 CFR 30.10 (1996), from application of certain
of the Commission's foreign futures and options rules to solicit and
accept orders from United States customers for otherwise permitted
transactions on the NZFOE and on any non-U.S. exchange 1 where
such Dealers are permitted under New Zealand law to conduct futures
business for customers; and confirmation of the applicability of the
Limited Marketing Orders.
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\1\ The term ``non-U.S. exchange'' refers to a foreign board of
trade which is defined in Commission rule 1.3 (ss), 17 CFR 1.3(ss)
(1996) as:
Any board of trade, exchange or market located outside the
United States, its territories or possessions, whether incorporated
or unincorporated, where foreign futures or foreign options
transactions are entered into.
Thus, contracts that are traded on a market that has been
designated as a contract market pursuant to section 5 of the
Commodity Exchange Act (``CEA'' or ``Act'') are not within the scope
of this Order.
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EFFECTIVE DATE: January 9, 1997.
FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Marianne A.
Bueno, Esq., Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: On July 23, 1987, the Commission adopted
final rules governing the domestic offer and sale of commodity futures
and option contracts traded on or subject to the rules of a foreign
board of trade.2 These rules, which are codified in Part 30 of the
Commission's regulations,3 generally extend the Commission's
existing customer protection regulations for products offered or sold
on contract markets in the United States to foreign futures and option
products 4 sold to U.S. customers by imposing requirements with
respect to registration, disclosure, capital adequacy, protection of
customer funds, recordkeeping and reporting, sales practice and
compliance procedures that are generally comparable to those applicable
to wholly domestic transactions.
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\2\ 52 FR 28980 (Aug. 5, 1987).
\3\ 17 CFR Part 30 (1996).
\4\ Commission rule 30.1(a), 17 CFR 30.1(a) (1996), defines the
term ``foreign futures'' as ``any contract for the purchase or sale
of any commodity for future delivery made, or to be made, on or
subject to the rules of any foreign board of trade.''
Commission rule 30.1(b), 17 CFR 30.1(b) (1996), defines the term
``foreign option'' as ``any transaction or agreement which is or is
held out to be of the character of, or is commonly known to the
trade as, an `option', `privilege', `indemnity', `bid', `offer',
`put', `call', `advance guaranty', or `decline guaranty', made on or
subject to the rules of any foreign board of trade.''
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In formulating a regulatory program to govern the offer and sale of
foreign futures and options products to U.S. customers, the Commission,
among other things, considers the potential extraterritorial impact of
such a program and the desirability of avoiding duplicative regulation
of firms engaged
[[Page 64986]]
in international business. Based upon these considerations, the
Commission, as set forth in Commission rule 30.10, determined to permit
persons located outside the United States and subject to a comparable
regulatory structure in the jurisdiction in which they are located to
seek an exemption from certain of the requirements imposed by the Part
30 rules so as to solicit or accept orders directly from U.S. customers
for foreign futures or option transactions.5 Provided such
exemption would not otherwise be contrary to the public interest,
persons located and doing business outside of the United States were
granted relief based upon substituted compliance with the comparable
regulatory requirements imposed by the foreign jurisdiction.6
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\5\ In general, foreign exchanges have filed rule 30.10
applications on behalf of their members in connection with
transactions on those exchanges. In certain cases, where a
regulatory/self-regulatory authority has requested that firms
subject to its jurisdiction be granted broader relief to engage in
transactions on exchanges other than in its home jurisdiction, the
relief has been granted where the relevant authority has represented
that it will monitor its firms for compliance with the terms of the
order in connection with such offshore transactions.
To date, such expanded relief has been granted:
(a) on May 15, 1989, to firms designated by the U.K. Securities
and Investments Board and certain U.K. SROs to conduct brokerage
activities for U.S. customers on any non-U.S. exchange designated
under U.K. law. 54 FR 21599, 21600 (May 19, 1989); 54 FR 21604,
21605 (May 19, 1989) (Association of Futures Brokers and Dealers
(``AFBD'')); 54 FR 21609, 21610 (May 19, 1989) (The Securities
Association (``TSA'')); 54 FR 21614, 21615 (May 19, 1989)
(Investment Management Regulatory Organisation). The AFBD and TSA
subsequently merged to form the Securities and Futures Association,
which became the successor organization for rule 30.10 purposes. 55
FR 14017 (Apr. 5, 1991); and
(b) on April 7, 1993, to firms designated by the Sydney Futures
Exchange (``SFE''). 58 FR 19209 (Apr. 13, 1993).
\6\ The Commission has authorized, subject to certain
conditions, firms which have received rule 30.10 relief to engage in
limited marketing conduct with respect to foreign futures or option
contracts from locations within the United States through their
employees or other representatives. 57 FR 49644 (Nov. 3, 1992); 59
FR 42156 (Aug. 17, 1994) (hereinafter ``Limited Marketing Orders'').
Prior to the issuance of the Limited Marketing Orders, rule
30.10 relief was available only to qualified firms subject to a
comparable regulatory system which solicited U.S. customers from a
foreign location. The Limited Marketing Orders interpret rule 30.10
relief more expansively to allow rule 30.10 exempted firms and their
employees or other representatives to market foreign futures and
option products to qualified customers from U.S. locations under
certain conditions. Among other conditions, the Limited Marketing
Orders require that the regulatory or self-regulatory organization
to which the Commission has issued 30.10 relief or its equivalent
obtain written confirmation from the Commission that the Limited
Marketing Orders apply to such rule 30.10 order.
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In issuing orders under rule 30.10, the Commission evaluates
whether the particular foreign regulatory program provides a basis for
permitting substituted compliance for purposes of exemptive relief
pursuant to Commission rule 30.10. The specific elements examined are
set forth in Appendix A to Part 30, ``Interpretative Statement With
Respect to the Commission's Exemptive Authority Under Section 30.10 of
Its Rules'' (``Appendix A'').7 These elements include: (1)
Registration, authorization or other form of licensing, fitness review
or qualification of persons (both individuals and firms) through which
customer orders are solicited and accepted; (2) minimum financial
requirements for those persons who accept customer funds; (3)
protection of customer funds from misapplication; (4) minimum sales
practice standards, including the disclosure of the risks of futures
transactions; (5) recordkeeping and reporting requirements; (6)
procedures to audit for compliance with, and to take action against
those persons who violate, the requirements of the program; and (7) the
existence of appropriate information-sharing arrangements. The
Commission may apply additional conditions to ensure that brokers
licensed under other regulatory regimes are not permitted to solicit
U.S. customers while effectively evading U.S. requirements, such as
those relative to statutory disqualification.
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\7\ 17 CFR Part 30, Appendix A (1996).
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Moreover, the Commission specifically stated in adopting rule 30.10
that no exemption based on substituted compliance of a general nature
would be granted unless the persons to whom the exemption is to be
applied: (1) Consent to jurisdiction in the United States and designate
an agent for service of process in the United States with respect to
transactions subject to Part 30 by filing a copy of the relevant agency
agreement with the National Futures Association (``NFA''); (2) agree to
make their books and records available in the United States to
Commission and Department of Justice representatives; and (3) notify
NFA of the commencement or termination of business in the United
States.8
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\8\ 52 FR 28980, 28981 and 29002 (Aug. 5, 1987).
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By letters dated June 8 and June 12, 1993, as supplemented, counsel
for the Exchange requested that the Commission exercise its authority
under Commission rule 30.10 to exempt certain Dealers 9 from
compliance with the registration and other requirements of Part 30
relative to brokerage activities undertaken on or subject to the rules
of the NZFOE for or on behalf of customers in the United States 10
and which are otherwise permissible as to U.S. customers.11 By
letter dated February 22, 1996, counsel for the Exchange requested
expanded rule 30.10 relief to permit Dealers to also solicit or accept
orders from U.S. customers for otherwise permitted transactions on any
non-U.S. exchange where the Dealers are entitled to carry such
accounts. The Exchange construes its customer protection rules broadly
to also apply to regulated activities on exchanges other than the NZFOE
and as authorizing disciplinary action against its Dealers in
connection with such activities.12
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\9\ Subsequent to the acquisition of the NZFOE by the SFE,
member firms of the NZFOE are called ``Dealers'' and shall be
referred to as such in this Order.
\10\ See letters dated June 8 and June 12, 1993, from Philip
McBride Johnson, counsel for the Exchange, to Jean A. Webb,
Commission, Re: Petition for Authorization of the Offer and Sale in
the United States of Futures and Option Contracts Traded on the
NZFOE.
By letter dated July 12, 1993, counsel for the Exchange also
requested that the Commission authorize the offer and sale of option
contracts traded on the Exchange to persons resident in the United
States. See letter dated July 12, 1993 from Mr. Johnson to Ms. Webb,
Re: Petition Pursuant to Commission Regulation Sec. 30.3(a) for
Exemption of Certain Commodity Options on the NZFOE.
On March 12, 1996, the Commission amended Commission rule
30.3(a) to no longer require an authorization order before a
particular foreign option product could be offered or sold to U.S.
customers. However, the amendment does not affect existing
restrictions on transactions involving stock index futures and
foreign government debt. 61 FR 10891 (Mar. 18, 1996). Based on the
foregoing, by letter dated March 22, 1996 from Jane C. Kang,
Commission, to Mr. Johnson, the Exchange was notified that its
application under rule 30.3 was deemed withdrawn.
\11\ The Part 30 rules apply solely with respect to foreign
futures and foreign options, which are defined by reference to the
term ``foreign board of trade.'' See note 1 above.
\12\ Letter dated February 22, 1996 from Philip McBride Johnson,
counsel for the Exchange, to Jane C. Kang, Commission.
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By letter dated June 5, 1996, counsel for the Exchange requested
confirmation from the Commission that the Limited Marketing Orders will
apply to Dealers which have confirmed rule 30.10 relief.13
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\13\ Letter dated June 5, 1996 from Philip McBride Johnson,
counsel for the Exchange, to Jane C. Kang, Commission.
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Order: The Commission is hereby issuing the following order:
Order under CFTC Rule 30.10 exempting designated dealers of the
NZFOE from the application of certain of the foreign futures and
options rules the later of thirty days after publication of the
order herein in the Federal Register or after the filing of relevant
consents by dealers of the exchange and the exchange under the terms
and conditions of this order.
The Commission has reviewed the information and representations
contained in, among other things, the following submissions:
[[Page 64987]]
--The Securities Act 1978, as amended, 1988, No. 234 (21 December
1988)(``SAA'');
--The Futures Industry (Client Funds) Regulations 1990, No. 227 (3
September 1990)(``Client Funds Regulations'');
--The Companies Act 1955, Articles of Association of New Zealand
Futures and Options Exchange Limited;
--New Zealand Securities Commission Annual Report (30 June 1992);
--The Annual Audited Financial Statements of the New Zealand Futures
and Options Exchange (31 March 1992);
--New Zealand Futures & Options Exchange, A Specialist, Screen-Trading
Marketplace;
--Aklaw Number Thirty-Nine Limited (Aklaw) Petition to the Australian
Ministerial Council; and
--Letters dated June 8, 1993; June 12, 1993; June 9, 1994; February 22,
1996; June 6, 1996; and November 12, 1996 from Philip McBride Johnson,
Skadden, Arps, Slate, Meagher & Flom, counsel for the Exchange.
Based upon its review of the above supporting materials and the
Memorandum from the Division of Trading and Markets dated November 21,
1996, and subject to the conditions set forth below, the Commission has
determined to issue this Order which will become effective the later of
thirty days after publication of this Order in the Federal Register or
the filing of consents by Dealers of the Exchange and the Exchange to
the terms and conditions of the Order herein.
Furthermore, subject to the conditions set forth below, the
Commission concludes that the standards for relief set forth in
Commission rule 30.10 and, in particular, Appendix A thereof, have
generally been satisfied and that compliance with the SAA, the Client
Funds Regulations and NZFOE rules may be substituted for compliance
with certain sections of the Act as more particularly set forth herein.
By this Order, the Commission hereby exempts, subject to specified
conditions, those Dealers identified to the Commission as eligible for
the rule 30.10 relief granted herein from registration with the
Commission based upon substituted compliance by such Dealers with the
applicable statutes and relevant Exchange and other rules in effect in
New Zealand.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory scheme
governing the firms trading on the Exchange who would be exempted
hereunder provides:
(1) A system of qualification or licensing of firms and persons
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 licensees;
(2) Financial requirements for licensees;
(3) A system for the segregation of customer funds that applies
to all customers and which requires the separate accounting for such
funds, augmented by funds designed to compensate customers who have
suffered a loss as a result of fraud or insolvency or other failure
of a Dealer;
(4) Recordkeeping and reporting requirements pertaining to
financial and trade information including, without limitation, order
tickets, trade confirmations, customer account statements,
customers' deposit records and accounting records for customer and
proprietary trades;
(5) Sales practice standards for licensees which include, for
example, required disclosures to customers and prohibitions on
misrepresentations and other deceptive practices;
(6) Procedures to audit for compliance with, and to redress
violations of, customer protection and sales practice requirements
including, without limitation, a surveillance program and the
existence of broad powers to conduct investigations and to impose
sanctions; and
(7) Mechanisms for sharing information between the Exchange and
the New Zealand Securities Commission (``NZSC'') and the Commission
on an ``as needed'' basis including, without limitation,
confirmation data, data necessary to trace funds, position data,
data on firms' standing to do business and financial condition, and
mechanisms for cooperating with the Commission in inquiries,
compliance matters, investigations and enforcement
proceedings.14
\14\ On September 16, 1996, the Commission and the NZSC signed a
Memorandum of Understanding concerning consultation and mutual
assistance for the exchange of information. In addition, the
Exchange has provided assurances to the Commission regarding the
availability of information relevant to Part 30 on an ``as needed''
basis. See letter dated June 9, 1994 from Philip McBride Johnson,
counsel for the Exchange, to Jane C. Kang, Commission.
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Further, the Commission has determined in this Order to permit
Dealers designated for rule 30.10 relief to solicit and accept orders
from U.S. customers for otherwise permitted transactions in commodity
futures and commodity options (including options on futures) 15 on
or subject to the rules of any non-U.S. exchange permitted under New
Zealand law, other than a contract market designated as such pursuant
to section 5 of the CEA, undertaken by such Dealers from a location in
New Zealand.
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\15\ Relief under this Order extends only to those products
falling within the jurisdiction of the CEA and remains subject to
existing product restrictions under the CEA and Commission
regulations and procedures thereunder related to stock indices and
foreign government debt (see CEA section 2(a)(1)(B)(v) and
Securities and Exchange Commission rule 3a12-8, 17 CFR 240.3a12-8
(1996)).
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The Commission also hereby confirms that the Limited Marketing
Orders will apply to Dealers designated by the Exchange for rule 30.10
relief pursuant to this Order. Any such Dealer acting pursuant to the
Limited Marketing Orders will be required to comply with the terms and
conditions of the Limited Marketing Orders in addition to those
specified herein.
This Order does not provide an exemption from any provision of the
Act or regulations thereunder not specified herein, for example,
without limitation, the antifraud provision in Commission rule 30.9, 17
CFR 30.9 (1996), or the disclosure provisions of Commission rules 1.55,
30.6 and 33.7, 17 CFR 1.55, 30.6 and 33.7 (1996), including the
requirements of rule 1.55(f), 30.6(e) and 33.7(f).16
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\16\ These rules essentially provide that delivery of a mandated
risk disclosure statement does not eliminate any obligation under
the Act to disclose all material information to existing or
prospective customers even if the information is not specifically
required by the applicable risk disclosure rule.
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The relief does not extend to rules or regulations relating to
trading, directly or indirectly, on U.S. exchanges. For example, a
Dealer trading in U.S. markets for its own account would be subject to
the Commission's large trader reporting requirements.17 Similarly,
if such a Dealer were carrying a position on a U.S. exchange on behalf
of foreign clients, it would be subject to the reporting requirements
applicable to foreign brokers.18 The relief herein does not apply
to Dealers that solicit U.S. customers for transactions on U.S.
markets. In that case, the Dealer must comply with all applicable U.S.
laws and regulations, including the requirement to register in the
appropriate capacity.
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\17\ See, e.g., 17 C.F.R. Part 18 (1996).
\18\ See, e.g., 17 C.F.R. Parts 17 and 21 (1996).
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The eligibility of any Dealer to seek rule 30.10 relief under this
exemptive Order is subject to the following conditions:
I. The regulatory or self-regulatory organization responsible
for monitoring the compliance of such Dealer with the regulatory
requirements described in the rule 30.10 petition must represent in
writing to the CFTC that:
A. Each Dealer for which relief is sought is registered,
licensed or authorized, as appropriate, and is otherwise in good
standing under the standards in place in New Zealand; such Dealer is
engaged in business with customers located in New Zealand as well as
in the United States; and such Dealer would not be statutorily
disqualified from
[[Page 64988]]
registration under section 8a(2) of the CEA, 7 U.S.C. 12(a)(2)
(1994);
B. It will monitor Dealers 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 Dealer which would affect its
continued eligibility for the exemption granted hereunder, including
the termination of its activities in the United States;
C. All transactions on the Exchange with respect to customers
resident in the United States will be made on or subject to the
rules of the Exchange and be otherwise permissible as to U.S.
customers, and the Commission will receive prompt notice of all
material changes to NZSC and Exchange rules, the SAA and Client Fund
Regulations;
D. It will carry out its compliance, surveillance and rule
enforcement activities with respect to solicitations and acceptance
of orders by designated Dealers of U.S. customers for otherwise
permissible transactions involving options and futures business on
non-U.S. exchanges to the same extent that the Exchange conducts
such activities in regard to Exchange business;
E. Customers resident in the United States will be provided no
less stringent regulatory protection than New Zealand customers
under all relevant provisions of New Zealand law;
F. It consents to maintain all Exchange records for a minimum of
five years; and
G. It will cooperate with the Commission with respect to any
inquiries concerning any activity subject to regulation under the
Part 30 rules, including sharing the information specified in
Appendix A to the Part 30 rules on an ``as needed'' basis in
accordance with the agreed information sharing arrangement and will
use its best efforts to notify the Commission if it becomes aware of
any information which in its judgment affects the financial or
operational viability of a New Zealand-domiciled Dealer doing
business in the United States under the exemption granted by this
Order.
II. Each Dealer seeking rule 30.10 relief hereunder must apply
in writing whereby it:
A. Consents to jurisdiction in the United States under the Act
and files a valid and binding appointment of an agent in the United
States for service of process in accordance with the requirements
set forth in Commission rule 30.5, 17 CFR 30.5 (1996);
B. Acknowledges that it can be required by the Exchange to
provide the Exchange immediate access to its books and records
related to transactions under Part 30 required to be maintained
under the applicable laws and Exchange rules in effect in New
Zealand and that the Exchange will cooperate in providing access to
such books and records to the Commission in accordance with the
agreed upon information sharing arrangement;
C. Consents that all futures or regulated option transactions
with respect to customers resident in the United States will be made
on or subject to the rules of the Exchange or any other exchange,
other than a contract market designated as such pursuant to section
5 of the Act, and will be undertaken consistent with the rules of
the NZSC and Exchange and applicable provisions of the SAA and
Client Funds Regulations;
D. Represents that no principal, and no employee who solicits or
accepts orders from U.S. customers, would be disqualified from
directly applying to do business in the United States under section
8a(2) of the CEA, 7 U.S.C. 12a(2) (1994), and consents to notify the
Commission promptly of any change in that representation based on a
change in control as generally defined in Commission rule 3.32, 17
CFR 3.32 (1996);
E. Discloses the identity of each subsidiary or affiliate
domiciled in the United States with a related business (e.g., banks
and broker/dealer affiliates) and provides a brief description of
such subsidiary's or affiliate's principal business in the United
States;
F. Consents to participate in any NFA arbitration program which
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 resident in the United States of the availability of such
a program; and if the U.S. customer elects NFA arbitration, that the
Dealer consents to participate in NFA arbitration even in
circumstances where the claim involves a matter arising primarily
out of delivery, clearing, settlement or floor practices;
G. Consents to maintain all firm records for a minimum of five
years;
H. Undertakes to comply with the applicable provisions of New
Zealand law and Exchange and NZSC rules which form the basis upon
which this exemption from certain provisions of the Act is granted;
I. Agrees to provide to any U.S. customer either the generic
risk disclosure statement approved by the Commission under rule
1.55(c), or the risk disclosure statements mandated by Commission
rules 30.6(a) [i.e., 1.55(a)] and 33.7, and applicable Commission
orders, as appropriate;19
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\19\ See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 24,597 (Feb. 21, 1990)
(disclosure statement related to the deferred payment of options
premiums).
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J. With respect to transactions effected on behalf of U.S.
customers on the NZFOE, complies with the regulations relating to
segregation of client funds under NZFOE rules and New Zealand laws;
K. With respect to transactions effected on behalf of U.S.
customers on any non-U.S. futures and options exchange other than
the NZFOE and the SFE 20, whether by the Dealer directly as a
clearing member of such other exchange or through the intermediation
of one or more intermediaries, complies with paragraphs 1, 2 or 3
below:
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\20\ NZFOE is a wholly-owned subsidiary of SFE, which received
rule 30.10 relief from the Commission on November 1, 1988. 53 FR
44856 (Nov. 7, 1988). The SFE and its members are required to
segregate customer funds from money and property belonging to the
firm and cannot use customer funds to satisfy the firm's
obligations, both at the firm level and at the SFE clearing house in
connection with all transactions effected on the SFE. See Section
1209 of the Australian Corporations Law; SFE Article 43; and SFE
Clearing House By-Law 41. Consequently, with respect to transactions
on the SFE on behalf of U.S. foreign futures and options customers,
NZFOE Dealers may comply with existing NZFOE and SFE rules in
connection with paragraph K relating to the foreign futures and
options secured amount.
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1. a. Must maintain in a separate account or accounts money,
securities and property in an amount at least sufficient to cover or
satisfy all of its current obligations to U.S. customers denominated
as the foreign futures or foreign options secured amount;
b. May not commingle such money, securities and property with
the money, securities or property of the Dealer, with any
proprietary account of such Dealer, and may not use such money,
securities and property to secure or guarantee the obligations of,
or extend credit to, the Dealer or any proprietary account of the
Dealer;
c. May deposit together with the secured amount required to be
on deposit in the separate account or accounts referred to in
paragraph 1. a. above money, securities or property held for or on
behalf of non-U.S. customers of the Dealer for the purpose of
entering into foreign futures and options transactions. In such a
case, the amount that must be deposited in such separate account or
accounts must be no less than the greater of (1) the foreign futures
and foreign options secured amount required by paragraph 1. a. above
plus the amount that would be required to be on deposit if all such
customers (including non-U.S. customers) were subject to such
requirement, or (2) the foreign futures and foreign options secured
amount required by paragraph 1. a. above plus the amount required to
be held in a separate account or accounts for or on behalf of such
non-U.S. customers pursuant to any applicable law, rule or
regulation or order, or any rule of any self-regulatory
organization;
d. The separate account or accounts referred to in paragraph 1.
a. above must be maintained under an account name that clearly
identifies them as such, with any of the following depositories:
(1) Another person registered with the Commission as a futures
commission merchant (``FCM''), or a firm exempted from FCM
registration pursuant to CFTC rule 30.10;
(2) The clearing organization of any foreign board of trade;
(3) Any member and/or clearing member of such foreign board of
trade; or
(4) A bank or trust company which any of the depositories
identified in (1)-(3) above may use consistent with the applicable
laws and rules of the jurisdiction in which the depository is
located; and
e. The separate account or accounts referred to in paragraph 1.
a. may be deemed a good secured amount depository only if the Dealer
obtains and retains in its files for the period required by
applicable law and Exchange rules, a written acknowledgement from
such separate account depository that:
(1) It was informed that such money, securities or property are
held for or on behalf of customers of the Dealer; and
(2) It will ensure that such money, securities or property will
be held and treated at all times effectively in accordance with the
provisions of this paragraph; and, provided further, that the Dealer
assures itself that such separate account depository will not pass
on such money, securities or
[[Page 64989]]
property to any other depository unless the Dealer has assured
itself that all such other separate account depositories will treat
such funds in a manner consistent with the procedures described in
this paragraph 1 herein; 21 or
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\21\ This proviso is intended to ensure that the originating
Dealer makes reasonable inquiries and understands prior to the
initiation of a trade the conditions under which its customers'
funds will be held at all subsequent depositories, so that it may
determine whether it may count a particular intermediary or clearing
house as a good separate account depository for purposes of this
Order or must alternatively set aside funds in the manner set forth
in paragraph 2. The Dealer initially would discuss with its
immediate intermediary broker whether funds will be transferred to
any subsequent depositories and determine the conditions under which
such funds would be treated. Compliance with this condition would be
satisfied by the Dealer obtaining relevant information or assurances
from appropriate sources such as, for example, the immediate
intermediary broker, exchanges or clearinghouses, exchange
regulators, banks, attorneys or regulatory references.
This requirement is intended to ensure that funds provided by
U.S. customers for foreign futures and options transactions, whether
held at a U.S. FCM under rule 30.7(c) or a firm exempted from
registration as an FCM under CFTC rule 30.10, will receive
equivalent protection at all intermediaries and exchange clearing
organizations. Thus, for example, an exchange that does not
segregate customer from firm obligations and firms which trade on
such exchanges and which do not arrange to comply otherwise with any
of the procedures described in paragraph K would not be deemed an
acceptable separate account. Specifically, such exchange or firms
could not provide a valid and binding acknowledgement to a rule
30.10 exempted firm.
This provision is not intended to create a duty on a rule 30.10
firm that it audit any intermediaries for continued compliance with
the undertakings it has obtained based on discussions with those
relevant intermediaries. It is intended to make clear that firms
must engage in a due diligence inquiry before customer funds are
sent to another intermediary and take appropriate action (i.e., set
aside funds) in the event that it becomes aware of facts leading it
to conclude that customer funds are not being handled consistent
with the requirements of Commission rules or relevant rule 30.10
order by any subsequent intermediary or clearing house.
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2. Must set aside funds constituting the entire secured amount
requirement in a separate account as set forth in Commission rule
30.7, 17 CFR Sec. 30.7 (1996), and treat those funds in the manner
described by that rule; or
3. Must comply with the terms and procedures of paragraph 1 or
2, with the amount required to be segregated under NZFOE rules and
New Zealand laws to be substituted for the secured amount
requirement as set forth in such paragraphs.22
\22\ The Client Funds Regulations permit a Dealer to send client
funds to a depository outside New Zealand which cannot or will not
provide the acknowledgement required by the Client Funds
Regulations, provided that the Dealer has first:
--advised the client that the money may not receive the
protection afforded by section 20 of the Client Funds Regulations
(i.e., segregation); and
--obtained the written agreement of the client that
notwithstanding such notice, the money may be credited to the client
funds account. See section 10 of the Client Funds Regulations.
The Commission notes, however, that such waiver is inconsistent
with the terms of this Order requiring that the secured amount funds
of U.S. foreign futures and options customers (or the segregated
amount under New Zealand law) be in appropriate separate account
locations and protected for the benefit of such customers.
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Upon filing of the notice required under paragraph I. B. as to any
such Dealer, the rule 30.10 relief granted by this Order may be
suspended immediately as to that Dealer. That suspension will remain in
effect pending further notice by the Commission, or the Commission's
designee, to the Dealer and the Exchange and/or any applicable
regulatory or self-regulatory organization.
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 issuance of an order
under Commission rule 30.10, including Appendix A of rule 30.10, have
generally been satisfied.
Further, if experience demonstrates that the continued
effectiveness of this Order in general, or with respect to a particular
Dealer, 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 Dealer, or otherwise restrict the
exemptive relief granted in this Order, as appropriate, on its own
motion. If necessary, provisions will be made for servicing existing
client positions.
List of Subjects in 17 CFR Part 30
Commodity futures, Commodity options, Foreign futures and options.
Accordingly, 17 CFR Part 30 is amended as set forth below:
PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS
1. The authority citation for part 30 continues to read as follows:
Authority: Secs. 2(a)(1)(A), 4, 4c, and 8a of the Commodity
Exchange Act, 7 U.S.C. 2, 6, 6c and 12a.
2. Appendix C to part 30 is amended by adding at the end of the
appendix the following entry to read as follows:
Appendix C--Foreign Petitioners Granted Relief From the Application of
Certain of the Part 30 Rules Pursuant to Sec. 30.10
* * * * *
Firms designated by the New Zealand Futures and Options Exchange
(``NZFOE'')
FR date and citation, ________, 1996, ________ FR ________.
Issued in Washington, D.C., on December 3, 1996.
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 96-31326 Filed 12-9-96; 8:45 am]
BILLING CODE 6351-01-U
