[Federal Register Volume 62, Number 39 (Thursday, February 27, 1997)]
[Rules and Regulations]
[Pages 8875-8877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4865]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Foreign Futures and Option Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is issuing a Supplemental Order authorizing members of the 
Montreal Exchange (``Exchange'') designated for relief under Commission 
rule 30.10 (``Exchange Member'' or ``Member'') to solicit and accept 
orders from U.S. customers for otherwise permitted transactions <SUP>1 
on all non-U.S. exchanges where such Members are authorized by the 
regulations of the Montreal Exchange to conduct futures business for 
customers.
---------------------------------------------------------------------------

    \1\ Relief under this Supplemental Order extends only to those 
products falling within the jurisdiction of the Commodity Exchange 
Act (``CEA'' or ``Act'') 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).
---------------------------------------------------------------------------

    This Supplemental Order is issued pursuant to Commission rule 
30.10, which permits the Commission to grant an exemption from certain 
provisions of Part 30 of the Commission's regulations, and the 
Commission's Order dated March 14, 1989, granting relief under rule 
30.10 to designated members of the Montreal Exchange.

EFFECTIVE DATE: February 27, 1997.

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, N.W., 
Washington, D.C. 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION: The Commission has issued the following 
Supplemental Order:

Supplemental Order Permitting Members of the Montreal Exchange 
Designated for Relief Under Commission Rule 30.10 to Solicit and to 
Accept Orders from U.S. Customers for Otherwise Permitted Transactions 
on All Non-U.S. Exchanges Where Such Members Are Authorized by Exchange 
Regulations to Conduct Futures Business for Customers

    On March 14, 1989, the Commission issued an Order granting relief 
under rule 30.10 to designated members of the Montreal Exchange, 54 FR 
11179 (March 17, 1988) (``Original Order''). The Original Order limited 
the scope of permissible brokerage activities undertaken by designated 
Montreal Exchange members on behalf of U.S. customers to transactions 
``on or subject to the rules of the Exchange.'' 54 FR at 11811 
(condition (1)(c)). Subsequently, however, the Commission has issued 
rule 30.10 orders which did not include this limitation.<SUP>2
---------------------------------------------------------------------------

    \2\ In 1989 the Commission issued a series of rule 30.10 orders 
authorizing firms designated by the U.K. Securities and Investments 
Board and certain U.K. ``Self-Regulating Organisations'' to conduct 
brokerage activities for U.S. customers on any non-U.S. exchange 
designated under U.K. law. See 54 FR 21599, 21600 (May 19, 1989) 
(SIB), 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'')), and 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. See 56 FR 14017 (April 5, 1991).
    The Commission also has issued similar supplemental relief to 
the Sydney Futures Exchange, see 58 FR 19209 (April 13, 1993), and 
to the New Zealand Futures and Options Exchange, see 61 FR 64985 
(December 10, 1996).
---------------------------------------------------------------------------

    By letter dated March 26, 1996, the Montreal Exchange petitioned 
the Commission to revise the Original Order to permit designated 
members of the Montreal Exchange to solicit or accept orders from U.S. 
foreign futures and options customers for all otherwise permitted 
transactions on all non-U.S. exchanges <SUP>3 where Exchange Members 
are authorized by Exchange regulations to conduct futures and options 
business for customers, subject to the Montreal Exchange's and Members' 
continued compliance with the terms of the Original Order and such 
other conditions as may be imposed by the Commission.<SUP>4 The 
Exchange further represented that it would carry out its compliance, 
surveillance, and rule enforcement activities with respect to 
solicitations and acceptances of orders by designated Montreal Exchange 
members of U.S. customers for otherwise permitted transactions on all 
non-U.S. markets where such Members are authorized by Exchange 
regulations to conduct futures and options business for U.S. customers.
---------------------------------------------------------------------------

    \3\ The term ``non-U.S. exchange'' refers to a foreign board of 
trade which is defined in Commission rule 1.3(ss), 17 CFR 
Sec. 1.3(ss) 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 CEA are 
not within the scope of this Order.
    \4\ Letter dated March 26, 1996, from Johanne Dupont, Legal 
Counsel to the Montreal Exchange, to Ms. Jane Kang, CFTC Division of 
Trading and Markets (``March 26, 1996 Request'').
---------------------------------------------------------------------------

    Upon due consideration and for the reasons stated in the Original 
Order, the Commission has determined to issue this Supplemental Order 
permitting Montreal Exchange members designated for rule 30.10 relief 
to solicit and to accept orders from U.S. foreign futures and options 
customers for otherwise permitted transactions in commodity futures and 
commodity options (including options on futures) on or subject to the 
rules of any exchange where such Montreal Exchange Members are 
authorized by Exchange regulations to conduct options and futures 
business for customers, other than a contract market designated as such 
pursuant to section 5 of the CEA,

[[Page 8876]]

undertaken by such Members from a location in Quebec.
    The expanded rule 30.10 relief provided under this Supplemental 
Order, however, is contingent on the Montreal Exchange's and Exchange 
Members' continued compliance with the Original Order and their 
compliance with the following conditions:

    (1) The Montreal Exchange will carry out its compliance, 
surveillance and rule enforcement activities with respect to 
solicitations and acceptance of orders by designated Exchange 
Members of U.S. customers for options and futures business on all 
non-U.S. exchanges listed in Article 7452 of the Exchange rules to 
the same extent that it conducts such activities in regard to 
Exchange business;
    (2) It will cooperate with the Commission with respect to any 
inquiries concerning any activity which is the subject of this 
Supplemental Order, including sharing the information specified in 
Appendix A to the Part 30 rules, 17 CFR Part 30, on an ``as needed'' 
basis on the same basis as set forth in the Original Order;
    (3) Each Montreal Exchange Member firm confirmed for relief 
under the Original Order seeking to engage in activities which are 
the subject of this Supplemental Order must agree to provide the 
books and records related to such activities required to be 
maintained under the applicable Exchange regulations and laws in 
effect in Quebec on the same basis as set forth in the Original 
Order.<SUP>5

    \5\ Montreal Exchange member firms which currently operate under 
the Original Order will be deemed to have consented to condition (3) 
by effecting transactions pursuant to this Supplemental Order. 
Exchange members which apply for confirmation of rule 30.10 relief 
subsequent to the issuance of this Supplementary Order must submit 
representations to the Commission consistent with condition (3) of 
this Order.
---------------------------------------------------------------------------

    Furthermore, the Commission seeks to ensure that the funds of U.S. 
foreign futures and options customers will be subject to consistent 
protection irrespective of whether the Montreal Exchange Member effects 
trades directly on the Montreal Exchange (where under the terms of the 
Original Order Exchange Members are required to maintain a separate 
account in a manner consistent with the provisions of rule 30.7) <SUP>6 
effects trades on another foreign futures and options exchange of which 
the Montreal Exchange firm is a member, or trades through the 
intermediation of a foreign exchange member. Accordingly, the expanded 
relief permitting Montreal Exchange Member firms to engage in foreign 
futures and options transactions for U.S. customers other than on the 
Montreal Exchange under this Supplemental Order will be contingent upon 
compliance by the Exchange Member firm with the following additional 
conditions:

    \6\ See paragraph (2)(f) of the Original Order.
---------------------------------------------------------------------------

    (4) Foreign futures and options exchanges on which the Montreal 
Exchange Member firm may engage in transactions on behalf of U.S. 
customers are those non-U.S. exchanges identified in Article 7452 of 
the Exchange rules, provided however, that Exchange Members may not 
engage in any transactions on behalf of U.S. customers on an 
exchange designated as a contract market under section 5 of the CEA;
    (5) The Montreal Exchange Member firm will continue to comply 
with the terms of the Original Order with respect to transactions 
effected for U.S. customers on the Montreal Exchange; <SUP>7
---------------------------------------------------------------------------

    \7\ See CFTC Advisory No. 87-4, Foreign Futures and Options: 
Compliance and Operational Questions and Answers, November 18, 1987, 
reprinted in Comm. Fut. L. Rep. (CCH) para. 23,975.
---------------------------------------------------------------------------

    (6) With respect to transactions effected on any other non-U.S. 
futures and options exchange on behalf of U.S. customers, whether by 
the Montreal Exchange Member directly as a clearing member of such 
other exchange or through the intermediation of one or more 
intermediaries, the Montreal Exchange Member complies with 
paragraphs (6) 1 or 2 below:
    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 Member, with any 
proprietary account of such Member and may not use such money, 
securities and property to secure or guarantee the obligations of, 
or extend credit to, the Member or any proprietary account of the 
Member;
    c. may deposit together with the secured amount required to be 
on deposit in the separate account or accounts referred to in 
paragraph (6)1. a. above, money, securities or property held for or 
on behalf of non-U.S. customers of the Member 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 (6)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 (6)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, regulation or order, or any rule of any self-regulatory 
organization;
    d. the separate account or accounts referred to in paragraph 
(6)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 
(6)1. a. may be deemed a good secured amount depository only if the 
Member obtains and retains in its files for the period required by 
applicable law and Exchange regulations 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 Member; 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 Member 
assures itself that such separate account depository will not pass 
on such money, securities or property to any other depository unless 
the Member 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 (6)1 herein; <SUP>8 or,
---------------------------------------------------------------------------

    \8\ This proviso is intended to ensure that the originating 
Member 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 (6)2. The Member 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 Member 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 (6) 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.

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

[[Page 8877]]

    2. must set aside funds constituting the entire secured amount 
requirement in a separate account as set forth in Commission rule 
30.7, 17 C.F.R. Sec. 30.7, and treat those funds in the manner 
described by that rule.

    The expanded rule 30.10 relief provided by this Supplemental Order 
also is contingent upon the Montreal Exchange's and Montreal Exchange 
Members' continued compliance with the Original Order and the 
enumerated conditions above.
    This Supplemental Order is issued based on the information provided 
to the Commission as set forth herein, including the letter dated March 
26, 1996, from the Montreal Exchange. Any changes or material omissions 
may require the Commission to reconsider the authorization granted in 
this Supplemental Order.
    Further, if experience demonstrates that the continued 
effectiveness of this Order in general, or with respect to a particular 
Member, 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 Member, 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.

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

    2. Appendix C to Part 30 is amended by adding the following 
citation under the existing entry for Firms designated by the Montreal 
Exchange to read as follows:
    Appendix C to Part 30-Foreign Petitioners Granted Relief From the 
Application of Certain of the Part 30 Rules Pursuant to Sec. 30.10
* * * * *
    Firms designated by the Montreal Exchange.
* * * * *
    FR date and citation: February 27, 1997, 62 FR.
* * * * *
    Issued in Washington, D.C. on February 21, 1997.
Jean Webb,
Secretary of the Commission.
[FR Doc. 97-4865 Filed 2-26-97; 8:45 am]
BILLING CODE 6351-01-P