[Federal Register Volume 61, Number 53 (Monday, March 18, 1996)]
[Rules and Regulations]
[Pages 10891-10895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6387]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Commodity Options
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
has amended rule 30.3 to eliminate the requirement that the CFTC
authorize the offer and sale of a particular foreign exchange-traded
commodity option before it can be offered or sold in the United States.
The amendment does not affect existing restrictions on transactions
involving
[[Page 10892]]
stock index futures and foreign government debt.
EFFECTIVE DATE: March 18, 1996.
FOR FURTHER INFORMATION CONTACT:
Jane C. Kang, Esq., or Robert H. Rosenfeld, Esq., Division of Trading
and Markets, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581; telephone (202)
418-5435.
SUPPLEMENTARY INFORMATION:
Background
Commission rule 30.3(a) of the Commission's Part 30 rules governing
the offer and sale of foreign futures and option transactions makes it
unlawful for any person to engage in the domestic offer or sale of any
foreign commodity option contract until the Commission, by order,
authorizes the foreign option to be offered or sold in the United
States.1 A Commission order is not required with respect to
foreign futures. However, an option on a foreign stock-index futures
contract will not be approved unless, among other things, the
Commission's Office of the General Counsel has issued a no-action
letter authorizing the offer and sale in the United States of the
underlying foreign stock-index futures contract. In addition, debt
obligations of a foreign country must be designated as an exempted
security by the SEC under its rule 3a12-8, 17 CFR 240.3a12-8, before a
futures contract based on such debt obligation (or an option on such a
futures contract) may be offered or sold to a U.S. person.2
\1\ The Commission previously made clear that subject to certain
conditions applicable to transactions involving stock indexes and
foreign government debt, a rule 30.3 order would not be necessary
for transactions effected by U.S. futures commission merchants (FCM)
on behalf of foreign customers. See 57 FR 36369 (August 13, 1992).
\2\ Consistent with section 2(a)(1)(B) of the Commodity Exchange
Act (CEA), this proposed rulemaking would not affect existing
restrictions applicable to transactions involving stock index
futures or foreign government debt. Accordingly, commodity options
based on or involving a foreign futures contract based on a foreign
stock index may not be offered or sold to U.S. persons unless the
foreign stock index futures contract has been the subject of a no-
action letter issued by the Commission's Office of the General
Counsel. Further, commodity options based on a foreign government
debt could not be offered or sold to U.S. persons unless the
underlying debt instrument has been designated as an exempted
security under SEC rule 3a12-8.
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On December 5, 1995, the Commission proposed to eliminate the
specific authorization requirement of rule 30.3 and thereby permit,
subject to existing prohibitions with respect to stock index futures
and options and foreign government debt futures and options products,
the offer and sale of foreign commodity options in the same manner as
currently applies to the offer and sale of foreign futures.3
\3\ 60 FR 63472 (December 11, 1995).
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The Commission's proposal to modify rule 30.3(a) was based on its
generally positive experiences with the initial regulations imposed on
foreign options trading. The proposal reflects the Commission's
assessment that the continued treatment of foreign commodity options
differently from foreign futures (which do not require a specific
authorization order) should be reevaluated.4
\4\ See 60 FR 63472-63474 (December 11, 1995), for a history of
commodity option regulation by the Commission.
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Summary of Comments
The Commission received twelve comments from six domestic and
foreign futures exchanges (the Chicago Board of Trade (CBT), Chicago
Mercantile Exchange (CME), the Tokyo Grain Exchange (TGE), the Tokyo
International Financial Futures Exchange (TIFFE), Sydney Futures
Exchange (SFE), and the Winnipeg Commodity Exchange (WCE)), the Futures
Industry Association (FIA), the FIA Japan Chapter, National Futures
Association (NFA), the American Bar Association's Section of Business
Law (ABA Business Sec.), the Association of the Bar of the City of New
York (Committee on Futures Regulation) (NY Bar), and a CFTC registered
firm, Commodities Corporation (U.S.A.) N.V. (Commodities Corp.).
In general, all of the commenters either affirmatively supported
the rule change or, in the case of the CBT and the CME, did not object.
Those commenters affirmatively supporting the rule generally agreed
with the rationale set forth in the Commission's proposal--that the
differential treatment of foreign commodity options as opposed to
foreign futures was based on historical factors which no longer exist;
the implementation of regulations governing the offer and sale of
foreign options has increased regulatory protections; and that
continuation of such differential treatment is no longer
warranted.5 Many commenters also noted that the amendment would
likely result in an increase in the number of option instruments
available to U.S. traders thereby giving them a greater choice of risk-
shifting instruments. One commenter, Commodities Corp. (a registered
commodity pool operator and commodity trading advisor), noted that the
trading of foreign commodity options has significantly benefited
clients through enhanced portfolio diversification and by enabling them
to participate in additional market opportunities. Commodities Corp.
urged the Commission similarly to widen access to other foreign
products by eliminating the necessity for a Commission staff no-action
letter before a foreign exchange-traded stock index futures contract
can be offered or sold in the United States.6
\5\ In this regard, the FIA noted that the Commission's generic
risk disclosure statement does not draw any distinction between the
risks of foreign futures and foreign commodity options.
\6\ Commodities Corp. suggested that expedited procedures be
considered at least with respect to ``sophisticated'' clients.
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U.S. Contract Market Concerns
In its proposal, the Commission invited comment, in particular
from the contract markets, to indicate any other areas in which the
requirements for options and futures generally could be further
harmonized.
In general, the CBT's and CME's specific suggestions fall into two
broad categories: (1) those which raise issues which the Commission
believes either have been addressed or could be addressed by current
matters before the Commission and (2) those which raise more
complicated statutory issues surrounding the requirements imposed on
contract markets and product authorization.7
\7\ In this regard, the CBT stated that it viewed the proposal
as ``confirmation that the Commission exempts foreign boards of
trade and, in other contexts, over-the-counter markets, from many of
the very regulations it continues to impose on domestic markets.''
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In the first category were suggestions to:
--Delete the requirement in rule 33.4(b) that an FCM give notice
to its designated self-regulatory organization (DSRO) of any
disciplinary action taken against the FCM or its associated persons
(APs) by the Commission or another self-regulatory organization
(SRO);
--Consolidate the options disclosure required by rule 33.7(b)
into rule 1.55(b); and
--Delete the requirement in 33.4(a)(2) that FCMs collect the
full option premium.
In response, the Commission notes that it recently adopted a final
rule amending rule 33.4(b) to eliminate the notice requirement referred
to above (see 61 FR 2719 (January 29, 1996), and that the generic risk
disclosure statement adopted by the Commission as an alternative to
separate risk disclosure in rules 33.7 and 1.55 already reflects a
consolidation of those disclosure statements.8 The Commission has
not to date advanced U.S. exchanges long-standing request to delete the
[[Page 10893]]
requirement in rule 33.4(a)(2) that FCMs collect the full option
premium.9 However, it has indicated that such a proposal could be
entertained with respect to the section 4(c) exemption authority
granted with the adoption of Part 36 of the Commission's regulations.
At the same time, the Commission has permitted certain foreign
exchange-traded commodity options to be offered with margining of the
premium, and the Commission has not been informed of any concerns
associated with that feature.10 In this connection, the Commission
notes that the proposed linkage arrangement between the U.S. CBT and
U.K. LIFFE may provide the Commission an opportunity to review the
feasibility of implementing a program to permit the futures-style
margining of the option premium on a U.S. contract in a limited
context.11 In particular, the product fungibility requirements of
the proposed linkage may necessitate that the Commission address
permitting CBT options to trade on the same basis as LIFFE options
(which permit margining of the premium).
\8\ FCMs may elect whether to provide the generic statement or
individual rules 1.55 and 33.7 statements.
\9\ While U.S. exchanges had petitioned for the ability to
designate option contracts having margining of the premium, a
proposal published in 1989 was never finalized. See 51 FR 11233
(March 17, 1989).
\10\ See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 24,597 (disclosure statement
relating to the deferred payment of option premiums for certain
foreign exchange-traded options, superseding separate disclosure
addenda required by orders concerning the London International
Financial Futures Exchange (LIFFE) (54 FR 37636 (September 12,
1989)), the International Petroleum Exchange (54 FR 50356 (December
6, 1989)), and the London Futures and Options Exchange (renamed as
the London Commodity Exchange) (54 FR 50348 (December 6, 1989)); and
55 FR 14238 (April 17, 1990) (Sydney Futures Exchange).
\11\ See CBT letter dated July 28, 1995 to Jean A. Webb,
Secretary to the Commission (rule 1.41(b) submission).
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The second category of suggestions included the following:
--The ability of foreign products to trade in the United States
immediately as compared to the delay that is involved with the
designation process for contract market products [the CBT urged the
Commission to focus on the disparate treatment between foreign and
domestic products];
--The need for domestic U.S. requirements such as speculative
position limits since foreign products may not be subject to similar
limitations by their home regulatory scheme;
--Differences in the quality of audit trail; and
--A suggestion that the Commission amend rule 1.35(a-1) to
eliminate what one exchange characterized as the ``additional and
burdensome'' time-stamp requirement for option orders,'' a
requirement which currently does not exist for futures orders.
In this regard, the Commission reiterates the commitment set forth
in the 1994 CFTC Competitiveness Study to keeping its regulatory
programs under continuous review to assure that, consistent with its
responsibilities for market integrity and customer protection, they
keep pace with changes in the marketplace and do not unnecessarily
impede domestic exchanges from evolving to remain competitive,
especially with regard to the cost of compliance relative to non-U.S.
exchanges.12
\12\ A Study of the Global Competitiveness of U.S. Futures
Markets, CFTC (April 1994) (``CFTC Competitiveness Study''), p.2.
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The Commission recognizes, however, that its review of its
regulations cannot proceed purely on the basis of cost equivalency.
While differences of opinion may exist regarding the implementation of
specific regulatory requirements, ultimately the overriding scheme
pursuant to which U.S. contract markets operate and the level of market
integrity that must be maintained is established by Congress in the
CEA. Thus, speculative position limits exist because of section 4a of
the CEA and are based on the historic concern expressed in the CEA with
avoiding ``excessive'' speculation that could cause ``sudden or
unreasonable fluctuations'' in commodity prices. The Commission
believes that it has been responsive to the economic realities of
contemporary markets and exchange competitive concerns by, for example,
permitting U.S. exchanges to replace their speculative position limit
rules with more flexible position accountability rules for eligible
non-agricultural contracts. Nonetheless, the fundamental requirement to
have such limits or their equivalent has been established by Congress.
Similarly, the designation process and audit trail requirements are
statutory. See section 5a of the CEA. While the basis for any
particular Commission rule is a subject for legitimate comment and
analysis--and the Commission believes that its record reflects a
responsiveness to such comment--ultimately the underlying requirement
is established by Congress. The Commission wishes to note, in this
regard, that it continues to review the appropriateness of all of its
programs under current circumstances.
Finally, notwithstanding differences in regulation, the Commission
notes that most countries with internationally active futures exchanges
appear to share certain common regulatory concerns which result in
comparable regulation, such as position limits and market surveillance
programs, relative to futures trading in their respective
jurisdictions. While the content and complexity of these regulatory
systems differ, such differences often reflect the particular maturity
and market experiences of the market and regulator.13
\13\ See CFTC Competitiveness Study, pp. 31-71.
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Adequacy of Sales Practice Compliance Audits
In its proposal, the Commission stated that prior to adopting any
final rules it would need to be assured that arrangements exist through
NFA or otherwise to ensure that sales practice compliance audits of
registrants offering foreign commodity options will be undertaken,
thereby ensuring complete sales practice compliance audit coverage of
firms (which heretofore has been mandated on a product-specific basis
under rule 30.3 orders). Consistent with the description of NFA sales
practice audit procedures described in the notice of proposed
rulemaking,14 NFA has confirmed that its audit program already
includes steps for determining whether an NFA member FCM or introducing
broker (IB) solicits or executes commodity option transactions on any
foreign exchange.15 If NFA determines that the firm does engage in
such foreign transactions, NFA includes a reasonable number of those
transactions in its audit sample and tests those transactions for
compliance with applicable sales practice rules. NFA has confirmed that
the audit steps cover all authorized commodity options traded on
foreign exchanges and will continue to do so when the authorization is
expanded to include all foreign exchange-traded commodity
options.16
\14\ 60 FR 63472,63474 (December 11, 1995).
\15\ Letter dated January 16, 1996 from Daniel A. Driscoll,
Vice-President-Compliance, National Futures Association to Jean A.
Webb, Secretariat of the Commission.
\16\ Id.
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NFA also has confirmed that it has entered into an agreement with
certain other self-regulatory organizations (joint contractor self-
regulatory organizations (SROs)) whereby the joint contractor SROs
audit the sales practices of joint FCM members and their guaranteed
IBs. The audit steps used by the joint contractor SROs under the
agreement sample and test foreign option transactions in a manner
similar to that used by NFA.
Similarly, as previously noted in its notice of proposed
rulemaking, the Commission's rule 30.10 orders permitting foreign firms
to directly solicit U.S. persons for foreign products
[[Page 10894]]
address options and futures sales practice concerns.17
\17\ See 60 FR 63472, 63474 (December 11, 1995).
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Availability of Arbitration
NFA also confirmed that NFA arbitration is available to U.S.
customers who enter into foreign exchange-traded commodity option
transactions and that NFA Member or Associate participation in claims
filed by customers is mandatory.18 Similarly, U.S. customers
solicited by foreign firms under rule 30.10 will, pursuant to the
express terms of such orders, continue to have access to arbitration
procedures both abroad and through NFA.19
\18\ NFA noted that if a claim is brought by a customer against
an NFA Member or Associate, NFA will hear the claim under the Code
of Arbitration and the Member or Associate's participation in the
arbitration process is mandatory. If a claim is brought by a
customer against a foreign party who is not an NFA Member or
Associate, the claim can be heard under NFA's Rules Governing
Arbitration of Disputes Involving Foreign Parties if the parties
agree (unless the claim arises primarily out of delivery, clearance,
settlement or floor practices of a foreign exchange and a similar
dispute-resolution forum is available in the foreign jurisdiction).
\19\ See 60 FR 63472, 63475 (December 11, 1996).
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Revision Will Not Affect Existing Restrictions Related to Options
Involving Stock Index Products and Foreign Government Debt
The Commission reiterates that the elimination of the specific
authorization requirement in rule 30.3(a) will not affect the existing
product restrictions applicable to options on futures contracts based
on stock index products (i.e., the underlying stock index futures must
be the subject of a no-action letter issued by the CFTC's Office of the
General Counsel) and foreign government debt (i.e., the debt product
must be designated by the SEC as an exempted security under SEC rule
3a12-8) contained in section 2(a)(1)(B)(v) of the CEA.20
\20\ Among the commodity option contracts to which this relief
would apply are option contracts on foreign currencies that are
traded on a foreign board of trade.
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Continued Monitoring by Commission; Availability of Transaction Data
Assumed
The Commission notes that elimination of the specific authorization
requirement will not affect the existing regulatory requirements
applicable to the manner in which appropriate products may be offered
or sold to U.S. persons, e.g., registration of intermediaries,21
requirements related to sales practices (including appropriate
disclosures), prohibitions on fraudulent activities and the
availability to the Commission of books and records.
\21\ Foreign futures and foreign commodity options may be
offered by foreign firms operating under confirmed rule 30.10 relief
consistent with the scope of the relevant rule 30.10 order and
subject to existing product restrictions.
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The Commission reiterates that FCMs which are not members of
foreign exchanges should assure themselves that there are no statutory
or regulatory impediments on their ability to obtain information from
foreign exchange-member firms necessary to enable such FCMs to comply
with the CEA and regulations thereunder relative to confirming the
execution of foreign option transactions. In this connection, the
Commission believes that the level of ``adequate supervision'' intended
by rule 166.3 22 would require that firms be able to document to
the Commission all material trade-specific data.
\22\ Commission rule 166.3, 17 CFR 166.3, requires that:
Each Commission registrant, except an associated person who has
no supervisory duties, must diligently supervise the handling by its
partners, officers, employees and agents (or persons occupying a
similar status or performing a similar function) of all commodity
interest accounts carried, operated, advised or introduced by the
registrant and all other activities of its partners, officers,
employees and agents (or other persons occupying a similar status or
performing a similar function) relating to its business as a
Commission registrant.
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The Commission will continue to monitor the situation and take
appropriate action should it determine that U.S. investors, U.S. FCMs
or the Commission, are not able to obtain appropriate information
related to the commodity option transactions of a specific exchange or
are otherwise being adversely affected by the rule change.
Conclusion
Based on the comments received and the rationale set forth in its
proposal, the Commission concludes that the elimination of the specific
authorization requirement for foreign exchange-traded commodity options
23 is warranted and is amending rule 30.3 accordingly.
\23\ Rule 30.3 addresses ``foreign futures'' and ``foreign
options'' which are defined in rule 30.1. by reference to
transactions that are ``made or to be made on or subject to the
rules of any foreign board of trade.'' Thus, rule 30.3 does not
independently authorize the offer and sale in the U.S. of futures
and options which are not executed on or subject to the rules of a
foreign board of trade. However, the trade option exemption of
Commission rule 32.4(a) would continue to apply to foreign commodity
options. See, e.g., 60 FR 30462, n.4 (June 9, 1995).
The Commission also has previously noted that it recognizes that
differences may exist between the practices of foreign boards of
trade and their U.S. counterparts and that the definition should be
interpreted as broadly as possible to effectuate the intent of
Congress. In this connection, to the extent questions arise as to
whether a particular transaction occurs subject to the rules of a
foreign board of trade, the Commission encourages affected persons
to request staff interpretations. See 52 FR 28980, 28987 (August 5,
1987).
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Other Matters
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission has previously
determined that FCMs should be excluded from the definition of ``small
entity'' based upon the fiduciary nature of the FCM/customer
relationships as well as the fact that FCMs must meet minimum financial
requirements. 47 FR 18618, 18619 (April 30, 1982). The Commission
similarly determined that commodity pool operators (CPOs) are not small
entities for purposes of the RFA. 47 FR 18618, 18620 (April 30, 1982).
With respect to commodity trading advisors (CTAs) and IBs, the
Commission has stated that it would evaluate within the context of a
particular rule proposal whether all or some affected CTAs would be
considered to be small entities and, if so, the economic impact on them
of any rule. 47 FR 18618, 18620 (April 30, 1982) (CTAs); 48 FR 35248,
35276 (August 3, 1983) (IBs).
The amendment of rule 30.3 is intended to facilitate the ability of
Commission registrants or exempted firms to provide customers with
access to desired products by eliminating a current product-by-product
authorization requirement, thus providing easier access to a greater
number of persons.
Accordingly, the Acting Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C. 605(b), that the revised rule
will not have a significant economic impact on a substantial number of
small entities.
Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (Act), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the Act. The Commission has
determined that the amendment of rule 30.3 does not have any paperwork
burden. Copies of the information collection submission to the Office
of Management and Budget are available from Joe Mink, CFTC Clearance
Officer, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581; telephone (202) 418-5170.
List of Subjects in 17 CFR Part 30
Foreign futures and options; Futures commission merchants;
Introducing
[[Page 10895]]
brokers; Commodity trading advisors; Commodity pool operators.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1)(A), 4, 4c and 8a of the Commodity Exchange Act, 7 U.S.C. 2, 6,
6c and 12a, the Commission hereby amends part 30 of chapter I of title
17 of the Code of Federal Regulations as follows:
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. Section 30.3 is amended by revising paragraph (a) to read as
follows:
Sec. 30.3 Prohibited Transactions.
(a) It shall be unlawful for any person to engage in the offer and
sale of any foreign futures contract or foreign options transaction for
or on behalf of a foreign futures or foreign options customer, except
in accordance with the provisions of this part: Provided, that, with
the exception of the disclosure and antifraud provisions set forth in
Secs. 30.6 and 30.9 of this part, the provisions of this part shall not
apply to transactions executed on a foreign board of trade, and carried
for or on behalf of a customer at a designated contract market, subject
to an agreement with and rules of a contract market which permit
positions in a commodity interest which have been established on one
market to be liquidated on another market.
* * * * *
Issued in Washington, DC on March 12, 1996 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-6387 Filed 3-15-96; 8:45 am]
BILLING CODE 6351-01-P
