60558 Federal Register / Vol. 65, No. 197 / Wednesday, October 11, 2000 / Rules and Regulations

1Commission rules referred to herein are found

at 17 CFR Chapter I.

2 61 FR 10891 (March 18, 1996).

3 65 FR 53946 (September 6, 2000). Persons

concerned with what options on foreign stock index

or government debt futures can be lawfully offered

or sold to customers located in the U.S. may consult

the foreign instruments approval backgrounder on

the Commission’s website at http://www.cftc.gov/

opa/backgrounder/part30.htm.

1 ‘‘Foreign futures or foreign options customer’’

means ‘‘any person located in the United States, its

territories or possessions who trades in foreign

futures or foreign options: Provided, That an owner

or holder of a proprietary account as defined in

paragraph (y) of [Rule 1.3] shall not be deemed to

be a foreign futures or foreign options customer

within the meaning of [Rules 30.6 and 30.7].’’ Rule

30.1(c). ‘‘Foreign futures’’ means ‘‘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.’’ Rule 30.1(a).

‘‘Foreign option’’ means ‘‘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 or to be made on or subject to the

rules of any foreign board of trade.’’ Rule 30.1(b).

2Under Rule 30.10, the Commission may exempt

a foreign firm acting in the capacity of an FCM from

registration under the Commodity Exchange Act

(‘‘Act’’) and compliance with certain Commission

rules based upon the firm’s compliance with

comparable regulatory requirements imposed by the

firm’s home-country regulator or self-regulatory

organization (‘‘SRO’’). Once the Commission

determines that the foreign jurisdiction’s regulatory

structure offers comparable regulatory oversight, the

Commission may issue an Order granting general

relief subject to certain conditions. Firms seeking

confirmation of relief (referred to herein as ‘‘Rule

30.10 firms’’) must make certain representations set

forth in the Rule 30.10 order issued to the regulator

or SRO from the firm’s home country. For a list of

those foreign regulators and SROs that have been

issued a Rule 30.10 order, see Appendix C to Part

30. In certain cases, where a foreign regulator or

SRO has requested that firms subject to its

jurisdiction be granted broader relief to engage in

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 30

Foreign Futures and Options

Transactions

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final rule; Interpretative

statement.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’ or

‘‘CFTC’’) is clarifying its interpretation

of the foreign futures or foreign options

secured amount requirement set forth in

Commission Rule 30.7 (‘‘secured

amount requirement’’). The Commission

previously interpreted Rule 30.7 to

require futures commission merchants

(‘‘FCMs’’) and certain firms exempt from

such registration to perform an inquiry

with respect to the treatment of the

foreign futures or foreign options

secured amount by any depository

handling those funds. Under that

interpretation, if a firm determines that

any depository, including those beyond

the initial depository, would not hold

the funds set aside to cover the secured

amount in a manner consistent with the

provisions of the rule, then the firm

must set aside funds with an acceptable

depository in order to include such

funds in the daily computation of the

secured amount. As part of the

Commission’s ongoing program of

regulatory reform, the Commission is

revising its interpretation of Rule 30.7 to

clarify the obligations of an FCM or a

firm exempt from FCM registration in

accordance with Rule 30.10 concerning

the treatment of funds of foreign futures

or foreign options customers under Rule

30.7. The Commission’s revised

interpretation set forth herein is a

revised appendix to our Rules.

EFFECTIVE DATE: October 11, 2000.

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, or Andrew V. Chapin, Staff

Attorney, Division of Trading and

Markets, Commodity Futures Trading

Commission, 1155 21st Street, NW.,

Washington, DC 20581. Telephone:

(202) 418–5430.

SUPPLEMENTARY INFORMATION: The

current Appendix B to Part 30 sets forth

option contracts permitted to be offered

or sold in the U.S. pursuant to Rule

30.3(a).1 The Commission previously

amended Rule 30.3(a) to eliminate the

requirement that the Commission

authorize the offer and sale of a

particular foreign exchange-traded

commodity option before it can be

offered or sold in the U.S., except for

those involving stock indices or foreign

government debt futures.2 That action

rendered existing Appendix B to Part 30

generally irrelevant. Accordingly, the

Commission proposed to remove the

current Appendix B and replace it with

the Interpretative Statement to Rule 30.7

contained herein.3

The Commission received one

favorable comment on the proposed

Interpretative Statement. The

commenter noted that ‘‘the extra

requirements imposed by the current

interpretation effectively compel FCMs

to choose between becoming insurers of

funds their customers knowingly

commit to foreign markets or refusing to

accept those trades[,]’’ and stated that

the revised interpretation ‘‘is a more

logical approach to balancing the desire

of U.S. customers to trade on foreign

exchanges with the increased

insolvency risks involved in trading in

some of those jurisdictions.’’

Administrative Procedures Act

The Administrative Procedures Act

provides that the required publication of

a substantive rule shall be made not less

than 30 days before its effective date,

but provides an exception for ‘‘a

substantive rule which grants or

recognizes an exemption or relieves a

restriction.’’ The Interpretative

Statement to Rule 30.7 set forth in

revised Appendix B will relieve the

obligation of FCMs and certain foreign

firms exempt from registration as an

FCM under Rule 30.10 to set aside their

own funds to satisfy the secured amount

requirement set forth in Rule 30.7.

Accordingly, the Commission has

determined to make Appendix B

effective immediately.

List of Subjects in 17 CFR Part 30

Consumer protection, Definitions,

Foreign futures, Foreign options,

Treatment of foreign futures or foreign

options secured amount.

Accordingly, the Commission hereby

amends 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: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a,

unless otherwise noted.

2. Appendix B is revised to read as

follows:

Appendix B to Part 30—Interpretative

Statement With Respect to the Secured

Amount Requirement Set Forth in

§ 30.7

1. Rule 30.7 requires FCMs who accept

money, securities or property from foreign

futures and foreign options customers to

maintain in a separate account or accounts

such money, securities and property in an

amount at least sufficient to cover or satisfy

all of its current obligations to those

customers.1 This amount is denominated as

the ‘‘foreign futures or foreign options

secured amount’’ and that term is defined in

Rule 1.3(rr). The separate accounts must be

maintained under an account name that

clearly identifies the funds as belonging to

foreign futures and foreign options customers

at a depository that meets the requirements

of Rule 30.7(c). Further, each FCM must

obtain and retain in its files for the period

provided in Rule 1.31 an acknowledgment

from the depository that the depository was

informed that such money, securities or

property are held for or on behalf of foreign

futures and foreign options customers and

are being held in accordance with the

provisions of these regulations.

2. In a series of orders issued pursuant to

Rule 30.10, the Commission required that

certain foreign firms exempt from registration

as FCMs essentially comply with the

standards of Rule 30.7.2 Specifically, the

Federal Register / Vol. 65, No. 197 / Wednesday, October 11, 2000 / Rules and Regulations 60559

transactions on exchanges other than in its home

jurisdiction (referred to herein as ‘‘expanded

relief’’), 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. Although Rule 30.10 orders generally

exempt foreign intermediaries from compliance

with the secured amount requirement under Rule

30.7, firms seeking confirmation of the expanded

relief must represent that, with respect to

transactions entered into on behalf of U.S.

customers on any non-U.S. exchange located

outside their home country, they will treat U.S.

customer funds in a manner consistent with the

provisions of Rule 30.7. For the most recent order

granting expanded relief, see 64 FR 50248

(September 16, 1999) (Singapore Exchange

Derivatives Trading Limited).

3 64 FR 50248, 50251, n.19 (emphasis added).

4Although orders for expanded relief exempt

foreign firms from compliance with Rule 1.55, sales

practice standards and the treatment of customer

funds constitute two of the specific elements

examined in evaluating whether the particular

foreign regulatory program provides a basis for

permitting substituted compliance for purposes of

exemptive relief pursuant to Rule 30.10. Appendix

A to Part 30.

5 63 FR 8566 (February 20, 1998). The list of

sophisticated customers referenced in Rule 1.55(f)

closely tracks, with one exception, the list of

‘‘eligible swap participants’’ in Rule 35.1. 6 Id. at 8569. 7Rule 1.55(b)(7) reads as follows: Foreign futures

transactions involve executing and clearing trades

on a foreign exchange. This is the case even if the

foreign exchange is formally ‘‘linked’’ to a domestic

exchange whereby a trade executed on one

exchange liquidates or establishes a position on the

other exchange. No domestic organization regulates

the activities of a foreign exchange, including the

execution, delivery and clearing of transactions on

such exchange, and no domestic regulator has the

power to compel enforcement of the rules of the

foreign exchange or the laws of the foreign country.

Moreover, such laws or regulations will vary

depending on the foreign country in which the

transaction occurs. For these reasons, customers

who trade on foreign exchanges may not be afforded

certain of the protections which apply to domestic

transactions, including the right to use alternative

dispute resolution. In particular, funds received

from customers to margin foreign futures

transactions may not be provided the same

protections as funds received to margin futures

transactions on domestic exchanges. Before you

trade, you should familiarize yourself with the

foreign rules which will apply to your particular

transaction.

8Appendix A to Rule 1.55(c) is the Generic Risk

Disclosure Statement, which FCMs may use as an

alternative to the Risk Disclosure Statement

prescribed in Rule 1.55(b). The Commission

understands that most FCMs, in particular those

that are most active in international markets, use

the Generic Risk Disclosure Statement.

Paragraphs 6 and 8 of Appendix A to Rule 1.55(c)

read as follows:

6. Deposited cash and property.

You should familiarize yourself with the

protections accorded money or property you

deposit for domestic and foreign transactions,

particularly in the event of a firm insolvency or

bankruptcy. The extent to which you may recover

your money or property may be governed by

specified legislation or local rules. In some

jurisdictions, property which has been specifically

identifiable as your own will be pro-rated in the

same manner as cash for purposes of distribution

in the event of a shortfall.

8. Transactions in other jurisdictions.

Transactions on markets in other jurisdictions,

including markets formally linked to a domestic

market, may expose you to additional risk. Such

markets may be subject to regulation which may

offer different or diminished investor protection.

Before you trade you should enquire about any

rules relevant to your particular transactions. Your

local regulatory authority will be unable to compel

the enforcement of the rules of the regulatory

authorities or markets in other jurisdictions where

your transactions have been effected. You should

ask the firm with which you deal for details about

the types of redress available in both your home

jurisdiction and other relevant jurisdictions before

you start to trade.

Commission stated that ‘‘[the secured

amount] 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.’’ 3 The Commission further

interpreted Rule 30.7 to require each FCM

and Rule 30.10 firm to take appropriate

action (i.e., set aside funds in a ‘‘mirror’’

account) in the event that it becomes aware

of facts leading it to conclude that foreign

futures and foreign options customer funds

are not being handled consistent with the

requirements of Commission rules or relevant

order for relief by any subsequent

intermediary or exchange clearing

organization.

3. Upon further analysis and

reconsideration of this matter, the

Commission has determined to revise its

prior interpretation of the Rule 30.7 secured

amount requirement. The Commission notes

that the initial depository’s ability to identify

customer funds affords foreign futures and

foreign options customers a measure of

protection in the event that the

intermediating FMC or foreign firm becomes

insolvent. Moreover, Rule 30.6(a) requires

that foreign futures and foreign options

customers receive a Rule 1.55 written

disclosure explaining that the treatment of

customer funds outside the U.S. may not

afford the same level of protection offered in

the U.S. These protections exist whetehr the

intermediating firm is a U.S. FCM or a firm

exempt from such registration under Rule

30.10.4

4. The Commission further notes, however,

that, in February 1998, Rule 30.6 was

amended to permit an FCM to open a

commodity account for a foreign futures or

foreign options customer without providing

the Rule 1.55 risk disclosure statement or

obtaining an acknowledgment of receipt of

such statement, provided that the customer

is, at the time at which the account is

opened, one of several types of sophisticated

customers enumerated in Rule 1.55(f) (‘‘Rule

1.55(f) customers’’).5 While the amendment

to Rule 30.6(a) extinguished the obligation to

provide a standardized risk disclosure

statement to Rule 1.55(f) customers at the

time of the account opening, the Commission

stated that FCMs have obligations to these

customers independent of such a duty that

would be material in the circumstances of a

given transactions.6

5. After careful consideration of the issue,

the Commission has determined that

intermediaries should advise all customers

(regardless of their level of sophistication) to

consider making appropriate inquiries

relating to the treatment of customer funds by

depositories located outside the jurisdiction

of the intermediating firm. Accordingly, the

Commission has determined that an FCM, at

a minimum, must provide each foreign

futures or foreign option customer with a

written disclosure tracking the language in

either: (1) Rule 1.55(b)(7),7 or (2) Paragraphs

6 and 8 of Appendix A to Rule 1.55(c).8 Rule

30.10 firms must provide each foreign futures

or foreign options customer with a written

disclosure tracking the language in either

Rule 1.55(b)(7) or paragraphs 6 and 8 of

Appendix A to Rule 1.55(c), or a comparable

disclosure statement prescribed by the firm’s

home country regulator. The Commission

further encourages all firms, whether

domestic or foreign, to provide a Rule 1.55

written risk disclosure to all customers,

regardless of each customer’s respective level

of experience. The Commission notes that, in

any instance where a firm provides a Rule

1.55(f) customer with a written disclosure, it

is not necessary for the firm to obtain an

acknowledgment of receipt. In addition,

those FCMs that already have provided

customers with a disclosure tracking either

Rule 1.55(b)(7) or paragraphs 6 and 8 of

Appendix A to Rule 1.55(c) (or in the case

of Rule 30.10 firm, a comparable disclosure

statement prescribed by its home country

regulatory) need not provide those same

customers with an additional written

disclosure.

6. For the reasons set forth above, the

Commission is revising its interpretation of

the secured amount requirement set forth in

Rule 30.7. The Commission believes that the

Rule 30.7 acknowledgment required of FCMs,

or other appropriate acknowledgment

required by Rule 30.10 firms, only applies to

the maintenance of the account or accounts

containing foreign futures and foreign

options customer funds by the initial

depository, and not to the manner in which

any subsequent depository holds or

subsequently transmits those funds. If an

FCM receives from the initial depository the

acknowledgment described in Rule 30,7,

furnishes to each foreign futures or foreign

options customer a written disclosure

statement tracking the language set forth in

Rule 1.55(b)(7) or paragraphs 6 and 8 of

Appendix A of Rule 1.55(c) and otherwise

complies with the provisions of Rule 30.7,

then it may include all funds maintained in

the separate account or accounts in

calculating its secured amount requirement.

A Rule 30.10 firm must satisfy the same

requirements, except that it may provide

each foreign futures or foreign options

customer with a comparable disclosure

statement prescribed by is home regulator.

7. IF an FCM or Rule 30.10 firm fails to

receive the required acknowledgment from

the initial depository or provide the above

written disclosure statement (and in certain

circumstances, receive from customers and

acknowledgment of receipt), then it must set

aside funds with an acceptable depository

and receive from such depository the

required acknowledgment.

60560 Federal Register / Vol. 65, No. 197 / Wednesday, October 11, 2000 / Rules and Regulations

1 ‘‘Foreign futures’’ as defined in Part 30 means

‘‘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.’’ Rule 30.1(a). Commission rules referred to

herein are found at 17 CFR Ch. I (2000).

2 ‘‘Foreign option’’ as defined in Part 30 means

‘‘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 or to be made on or subject

to the rules of any foreign board of trade.’’ Rule

30.1(b).

3The specific elements examined by the

Commission in evaluating whether the particular

foreign regulatory program provides a basis for

issuing an order pursuant to Rule 30.10 are set forth

in Appendix A to Part 30. See 52 FR 28990, 29001

(August 5, 1987).

4These conditions require the regulator or SRO

responsible for monitoring the compliance of the

firm with the regulatory requirements described in

the Rule 30.10 petition to make certain

representations regarding the fitness of each firm

seeking to receive confirmation of Rule 30.10 relief,

the protections to be afforded to U.S. Customers,

and the exchange of information with the

Commission. See 62 FR 47792, 47793, n.7

(September 11, 1997).

5For a list of representations typically required of

each Rule 30.10 firm, see 62 FR 47792, 47793, n.8.

6The Commission has issued orders granting

expanded relief to the U.K. Investment Management

Regulatory Organisation (‘‘IMRO’’) 62 FR 10449

(March 7, 1997), the U.K. Securities and Futures

Association (‘‘SFA’’) 62 FR 10447 (March 7, 1997,

New Zealand Futures and Options Exchange

(‘‘NZFOE’’), 61 FR 64985 (December 10, 1996), the

Montreal Exchange, 62 FR 8875 (February 27, 1997)

and the Sydney Futures Exchange (‘‘SFE’’), 62 FR

10445 (March 7, 1997). In addition, the Commission

has authorized members of the Singapore

International Monetary Exchange, now known as

the Singapore Exchange Derivatives Trading

Limited (‘‘SGX–DT’’), to solicit and accept orders

from U.S. customers for otherwise permitted

transactions on Eurex Deutschland, 64 FR 50248

(September 16, 1999). Although applicants for Rule

30.10 orders generally have obtained relief from

transactions entered into from within their home

country before seeking expanded relief applicable

to transactions entered into on an exchange located

outside their borders, e.g., IMRO, the Commission

has combined the two forms of relief into one single

order, e.g., NZFOE.

8. The Commission’s interpretation of the

Rule 30.7 secured amount requirement will

apply to all regulated activities with all new

and existing foreign futures and foreign

options customers as of October 11, 2000.

The Commission’s interpretation does not

alter any other requirement set forth in Rule

30.7 or any other section of Part 30.

Dated: Issued in Washington, D.C. on

October 5, 2000.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 00–26068 Filed 10–10–00; 8:45 am]

BILLING CODE 6351–01–M

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 30

Foreign Futures and Options

Transactions

AGENCY: Commodity Futures Trading

Commission.

ACTION: Order.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’ or

‘‘CFTC’’) is amending the orders issued

pursuant to Rule 30.10 to the New

Zealand Futures and Options Exchange,

the Montreal Exchange, the Sydney

Futures Exchange, the U.K. Securities

and Futures Authority, the U.K.

Investment Management Regulatory

Organisation Limited, and the Singapore

Exchange Derivatives Trading Limited.

The amendment reflects the

Commission’s revised interpretation of

the Rule 30.7 foreign futures or foreign

options secured amount requirement

(‘‘secured amount requirement’’) as it

applies to both futures commission

merchants (‘‘FCMs’’) and certain foreign

firms exempt from such registration.

Specifically, the Commission has

determined to revise its interpretation of

Rule 30.7 to clarify the obligations of an

FCM or a firm exempt from FCM

registration in accordance with Rule

30.10 concerning the treatment of funds

of foreign futures or foreign options

customers under Rule 30.7. The

Commission’s revised interpretation of

the secured amount requirement is set

out in a revised appendix issued

concurrently with this release and

published elsewhere in today’s Federal

Register.

EFFECTIVE DATE: October 11, 2000.

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, or Andrew V. Chapin, Staff

Attorney, Division of Trading and

Markets, Commodity Futures Trading

Commisison, 1155 21st Street, NW,

Washington, DC 20581. Telephone:

(202) 418–5430.

SUPPLEMENTARY INFORMATION: The

Commission has issued the following

Order:

Order Amending Prior Orders Issued

Pursuant to Rule 30.10 to the New

Zealand Futures and Options Exchange,

the Montreal Exchange, the Sydney

Futures Exchange, the U.K. Securities

and Futures Authority, the U.K.

Investment Management Regulatory

Organisation Limited, and the

Singapore Exchange Derivatives

Trading Limited

I. Background

Part 30 of the Commission’s rules sets

forth rules governing foreign futures 1

and foreign option 2 transactions. Under

Rule 30.10, the Commission may

exempt a foreign firm acting in the

capacity of a futures commission

merchant (‘‘FCM’’) from registration

under the Commodity Exchange Act

(‘‘Act’’) and compliance with certain

Commission rules based upon the firm’s

compliance with comparable regulatory

requirements imposed by the firm’s

home-country regulator or selfregulatory organization (‘‘SRO’’).3 Once

the Commission determines that the

foreign jurisdiction’s regulatory

structure offers comparable regulatory

oversight, the Commission may issue an

Order granting general relief subject to

certain conditions.4 Firms seeking

confirmation of relief (referred to herein

as ‘‘Rule 30.10 firms’’) must make

certain representations set forth in the

Rule 30.10 Order issued to the regulator

or SRO from the firm’s home country.5

In certain cases, where a foreign

regulator or SRO has requested that

firms subject to its jurisdiction to be

granted broader relief to engage in

transaction on exchanges other than in

its home jurisdiction (referred to herein

as ‘‘expanded relief’’), 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.6

Although Rule 30.10 orders generally

exempt foreign intermediaries from

compliance with the secured amount

requirement under Rule 30.7, firms

seeking confirmation of the expanded

relief must represent that, with respect

to transactions entered into on behalf of

U.S. customers on any non-U.S.

exchange located outside their home

country, they will treat U.S. customer

funds in a manner consistent with the

provisions of Rule 30.7.

The orders granting expanded relief

require Rule 30.10 firms to either set

aside funds constituting the secured

amount requirement in a separate

account: (1) As set forth in the relevant

order for expanded relief (see below), (2)

as set forth in Rule 30.7 (treating those

funds in the manner prescribed by that

rule), or (3) in compliance with either of

the above procedures, with the amount

required to be segregated under local

law to be substituted for the secured

amount. The alternative secured amount

requirement described within each

order for expanded relief states, in

relevant part:

The separate account or accounts referred

to [herein] may be deemed a good secured

amount depository only if the [firm] obtains

and retains in its files for the period required

by applicable law and [exchange or SRO]

rules, a written acknowledgment from such

separate account depository that: