E8-21857. Exemption From Registration for Certain Firms With Regulation 30.10 Relief

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission”) has amended the regulation concerning the registration of firms located outside the U.S. that are engaged in commodity interest activities with respect to trading on U.S. designated contract markets (“DCMs”) and U.S. derivatives transaction execution facilities (“DTEFs”).^[1] The amended regulation codifies past actions of the Commission's staff to permit certain foreign firms that have confirmed relief from registration as futures commission merchants (“FCMs”) in accordance with the regulations to introduce to registered FCMs certain U.S. customers in connection with trading futures and commodity options listed on, or subject to the rules of, a U.S. DCM or DTEF without having to register as an introducing broker (“IB”) pursuant to Section 4d of the Commodity Exchange Act (“Act”). The Commission also has revoked the regulation regarding quarterly reporting requirements for foreign futures and foreign options transactions.

DATES:

Effective Date: October 20, 2008.

FOR FURTHER INFORMATION CONTACT:

Andrew V. Chapin, Associate Director, at [phone], Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: [e-mail].

SUPPLEMENTARY INFORMATION:

I. The Proposal

Part 3 of the Commission's regulations governs the registration of intermediaries engaged in the offer and sale of, and providing advice concerning, futures and commodity options traded on U.S. markets, including both DCMs and DTEFs. Regulation 3.10 sets forth the manner in which FCMs, IBs, commodity pool operators (“CPOs”), commodity trading advisors (“CTAs”), and leverage transaction merchants must apply for registration with the Commission. Regulation 3.10(c) also provides an exemption from registration for certain persons. For example, Regulation 3.10(c)(3) provides an exemption from registration to any foreign person engaged in the activity of an IB, CPO or CTA solely on behalf of customers located outside the U.S., provided that all commodity interest transactions are submitted for clearing to a registered FCM.^[2] Part 30 of the Commission's regulations governs the offer and sale to U.S. persons of futures and option contracts entered into on or subject to the rules of a foreign board of trade.

On January 25, 2008, the Commission published for comment proposed amendments to Regulations 3.10 and 30.8 (the “Proposal”).^[3] Specifically, the Commission proposed new Regulation 3.10(c)(4) to exempt from registration as an IB the foreign affiliate of a registered FCM that introduces eligible contract participants (“ECPs”) to a registered FCM for the purpose of trading U.S. exchange-traded futures and options. Among other conditions, the registration relief described in the Proposal was predicated upon the foreign affiliate obtaining an exemption from FCM registration pursuant to Regulation 30.10 (“Regulation 30.10 firm”) and the affiliated FCM's acknowledgment that it would be jointly and severally liable for any violations of the Act or the Commission's regulations by the foreign affiliate in connection with those activities, even if the FCM did not submit the trade for clearing.

As explained in the Proposal, the Commission sought to codify past no-action positions taken by Commission staff that provided a limited-purpose exemption from IB registration only to those foreign affiliates of registered FCMs engaged in global futures brokerage activities on behalf of institutional customers located in the U.S. In doing so, the Commission recognized that institutional U.S. customers who trade globally throughout the 24-hour trading day may achieve greater operational and economic efficiencies by eliminating the need to use multiple order entry systems to execute transactions both domestically and abroad.

The Commission also proposed to revoke Regulation 30.8 requiring each FCM to provide the National Futures Association (“NFA”) with a quarterly report containing data for the total volume of foreign futures and options contracts effected on foreign boards of trade. In the Proposal, the Commission stated that the Regulation 30.8 reporting requirement was overly burdensome in lieu of other extensive reporting and recordkeeping requirements applicable to FCMs as set forth in Part 1 of its regulations.

II. Comments Regarding the Proposal

A. The Comments

The Commission received four comment letters. All of the commenters supported the adoption of Regulation 3.10(c)(4). The two commenters on the proposal to revoke Regulation 30.8 similarly supported that action.

One commenter, a registered FCM, requested the Commission to preserve the position taken in Staff Letter 07-16, applicable to one of the FCM's foreign affiliates.^[4] In contrast to other recipients of prior no-action relief, the FCM's foreign affiliate was exempt from IB registration pursuant to Regulation 30.5 and not Regulation 30.10. As such, the FCM's foreign affiliate would not be eligible for the IB registration exemption under the Proposal until such time that either its foreign regulator or self-regulatory organization filed a petition with the Commission in accordance with Regulation 30.10. Another commenter, a membership organization comprised of FCMs and other futures industry participants, commented that FCMs' foreign affiliates in non-30.10 jurisdictions may be interested in obtaining exemptive relief consistent with Regulation 3.10(c)(4) and, accordingly, it requested that the Commission consider addressing those foreign affiliates in the final rulemaking.

B. The Commission's Response

The Commission does not believe it is appropriate at this time to extend the proposed IB registration exemption for trading on domestic markets as set forth in Regulation 3.10(c)(4) to those foreign affiliates exempt from IB registration pursuant to Regulation 30.5. This is because, while the limited-purpose exemption from IB registration set forth in Regulation 3.10(c)(4) is predicated on the existence of a comparable regulatory program in the jurisdiction in which the Regulation 30.10 firm is located, the exemption available in Regulation 30.5 is not. The Commission's determination to limit the relief set forth in Regulation 3.10(c)(4) to Regulation 30.10 firms will benefit U.S. customers by requiring any firm not registered with the Commission as an IB to be subject to a comparable regulatory program in lieu of compliance with the provisions of the Act and Commission regulations applicable to IBs. As set forth in Appendix A to Part 30, the Commission's review of each Regulation 30.10 firm's regulatory program, among other requirements, addresses the foreign laws and regulations applicable to registration and fitness, recordkeeping and reporting, and minimum sales practice standards.

III. Final Rulemaking

Accordingly, the Commission has determined to adopt Regulation 3.10(c)(4) as proposed. As the Commission indicated would be the case in the Proposal, the adoption of Regulation 3.10(c)(4) will supersede the following Staff Letters: 03-28, 04-09, 04-14, 05-06, 07-05, 07-08, 07-16, 07-17, 07-20, and 07-23 (the “Prior Staff Letters”).

Regulation 3.10(c)(4)(iii) requires that the FCM affiliated with the Regulation 30.10 firm seeking relief thereunder file with NFA an acknowledgment of joint and several liability with the 30.10 Firm. Notwithstanding that the Prior Staff Letters have been superseded by the adoption of Regulation 3.10(c)(4), by this Federal Register release the Commission confirms that any FCM that previously filed an acknowledgment of joint and several liability pursuant to the conditions of a Prior Staff Letter is not required to file a new acknowledgment with NFA—provided that the previously filed acknowledgment complies with Regulation 3.10(c)(4)(iii).

For the reasons provided in the Proposal, and in the absence of any comments to the contrary, the Commission similarly has determined to revoke and reserve Regulation 30.8.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”), 5 U.S.C. 601-611, requires that agencies, in proposing regulations, consider the impact of those regulations on small businesses. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its regulations on such entities in accordance with the RFA.^[5] The Commission previously has determined that registered FCMs are not small entities for the purpose of the RFA because each FCM has an underlying fiduciary relationship with its customers, regardless of the size of the FCM.^[6] The Commission notes that certain foreign persons affected by the changes to the Commission's regulations would be registered as FCMs if not for the exemption provided therein and, as such, would maintain a fiduciary relationship with customers similar to the relationship maintained by each registered FCM.

With respect to IBs, the Commission has stated that it would evaluate within the context of a particular rule whether all or some affected IBs would be considered to be small entities and, if so, the economic impact on them of any rule.^[7] The Commission does not believe that any affected global IBs would be considered to be small entities. Moreover, the Commission invited public comment on the impact these proposed rules may have on small entities and received no comments.

Therefore, the Acting Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that these regulations will not have a significant economic impact on a substantial number of small entities. No comment was received regarding the impact of these amendments on small businesses.

B. Paperwork Reduction Act

As required by the Paperwork Reduction Act of 1995,^[8] the Commission submitted a copy of the proposed rule amendments to the Office of Management and Budget for its review. The Commission did not receive any public comments relative to its analysis of paperwork burdens associated with this rulemaking.

C. Cost-Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the costs and benefits of its actions before issuing new regulations under the Act. The Commission published an analysis of costs and benefits when it proposed the rule amendments that it is now adopting.^[9] It did not receive any public comments pertaining to the analysis.

List of Subjects

17 CFR Part 3

• Definitions
• Foreign futures
• Consumer protection
• Foreign options
• Registration requirements

17 CFR Part 30

• Definitions
• Foreign futures
• Consumer protection
• Foreign options
• Registration requirements

In consideration of the foregoing, and pursuant to the authority contained in the Commodity Exchange Act and, in particular, Sections 2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982), and pursuant to the authority contained in 5 U.S.C. 552 and 552b (1982), the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 3—REGISTRATION

1. The authority citation for part 3 continues to read as follows:

Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, 23, unless otherwise noted.

2. Section 3.10 is amended by adding paragraph (c)(4) to read as follows:

§ 3.10

Registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.

* * * * *

(c) * * *

(4) A person located outside the United States, its territories or possessions that is exempt from registration as a futures commission merchant in accordance with § 30.10 of this chapter is not required to register as an introducing broker in accordance with section 4d of the Act if:

(i) Such a person is affiliated with a futures commission merchant registered in accordance with section 4d of the Act;

(ii) Such a person introduces, on a fully-disclosed basis in accordance with § 1.57 of this chapter, any institutional customer, as defined in § 1.3(g) of this chapter, to a registered futures commission merchant for the purpose of trading on a designated contract market or derivatives execution facility;

(iii) Prior to a person located outside the United States, its territories or possessions, that is exempt from registration as a futures commission merchant pursuant to § 30.10 of this chapter, engaging in the introducing activities described in this paragraph, the affiliated futures commission merchant has filed with the National Futures Association (ATTN: Vice President, Compliance) an acknowledgement that it will be jointly and severally liable for any violations of the Act or the Commission's regulations committed by such person in connection with those introducing activities, whether or not the affiliated futures commission merchant submits for clearing any trades resulting from those introducing activities; and

(iv) Such person does not solicit any person located in the United States, its territories or possessions for trading on a designated contract market or derivatives transaction execution facility, nor does such person handle the customer funds of any person located in the United States, its territories or possessions for the purpose of trading on any designated contract market or derivatives transaction execution facility.

(v) For the purposes of this paragraph, a person shall be affiliated with a futures commission merchant if such a person:

(A) Owns 50 percent or more of the futures commission merchant;

(B) Is owned 50 percent or more by the futures commission merchant; or

(C) Is owned 50 percent or more by a third person that also owns 50 percent or more of the futures commission merchant.

* * * * *

PART 30—FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

3. The authority citation for part 30 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a, unless otherwise noted.

§ 30.8

[Removed and reserved]

4. Section 30.8 is removed and reserved.

Dated: September 12, 2008.

By the Commission.

David Stawick,

Secretary of the Commission.

Footnotes

1.  Commission regulations referred to herein are found at 17 CFR Ch. I (2007) and may be accessed through the Commission's Web site, http://www.cftc.gov/​lawandregulation/​index.htm.

2.  See 72 FR 63976 (Nov. 14, 2007).

3.  73 FR 4499 (Jan. 25, 2008).

4.  CFTC Staff Letter 07-16, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ ____ (Aug. 21, 2007). CFTC Staff Letters issued since 1995 may be accessed through http://www.cftc.gov/​lawandregulation/​exemptivenoactionandinterpretativeletters/​index.htm.

5.  47 FR 18618-18621 (Apr. 30, 1982).

6.  47 FR 18619-18620.

7.  47 FR 18618; see also 48 FR 35276 (Aug. 3, 1983).

8.  Pub. L. 104-13 (May 13, 1995).

9.  73 FR at 4502.