Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39779

1 7 U.S.C. 6(a) (1994).

2 7 U.S.C. 7 (1994). Section 5 of the Act authorizes

the Commission to designate any board of trade as

a contract market provided that the board of trade

complies with certain conditions and requirements

set forth in the Act.

3Section 4(a) of the Act states in relevant part:

. . . [I]t shall be unlawful for any person to offer

to enter into, to enter into, execute, to confirm the

execution of, or to conduct any office or business

anywhere in the U.S., its territories or possessions,

for the purpose of soliciting, or accepting any order

for, or otherwise dealing in, any transaction in, or

in connection with, a contract for the purchase or

sale of a commodity for future delivery (other than

a contract which is made on or subject to the rules

of a board of trade, exchange, or market located

outside the U.S., its territories or possessions)

unless—

(1) such transaction is conducted on or subject to

the rules of a board of trade which has been

designated by the Commission as a ‘‘contract

market’’ for such commodity; [and]

(2) such contract is executed or consummated by

or through a member of such contract market[.]

4The Commission has defined the terms ‘‘foreign

futures’’ and ‘‘foreign options’’ in Rules 30.1 (a) and

(b). Commission rules cited herein can be found at

17 CFR Ch. I (1998).

5Section 4(b) of the Act states in pertinent part:

The Commission may adopt rules and regulations

proscribing fraud and requiring minimum financial

standards, the disclosure of risk, the filing of

Continued

Avenue, SW., Washington, DC 20591;

telephone: (202) 267–8783.

SUPPLEMENTARY INFORMATION: On August

2, 1995, an NPRM was published in the

Federal Register proposing to amend 14

CFR part 71 to realign three Federal

airways located in Colorado. No

comments were received on the

proposal.

The FAA has decided to withdraw the

proposal at this time because the flight

check revealed that the proposed

airways would not meet FAA criteria for

such routes.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

Withdrawal of the Proposed Rule

In consideration of the foregoing, the

Notice of Proposed Rulemaking,

Airspace Docket No. 95–ANM–3, as

published in the Federal Register on

August 2, 1995 (60 FR 39280), is hereby

withdrawn.

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

Issued in Washington, DC, on July 15,

1998.

Reginald C. Matthews,

Acting Program Director for Air Traffic

Airspace Management.

[FR Doc. 98–19579 Filed 7–23–98; 8:45 am]

BILLING CODE 4910–13–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 30

Concept Release on the Placement of

a Foreign Board of Trade’s Computer

Terminals in the United States

AGENCY: Commodity Futures Trading

Commission.

ACTION: Request for comment.

SUMMARY: The Commodity Futures

Trading Commission (‘‘CFTC’’ or

‘‘Commission’’) is publishing this

release to solicit the views of the public

on how to address issues related to the

placement by foreign boards of trade of

computer terminals in the U.S. that

would be used for the purpose of

facilitating the trading of products

available through those boards of trade.

The Commission’s staff has received

requests for no-action positions and

other inquiries regarding the

Commission’s regulatory treatment with

respect to foreign board of trade

computer terminals placed in the U.S.

In general, these boards of trade, their

members or their members’ affiliates

have sought confirmation from the

Commission’s staff that the placement

and usage of trading terminals in U.S.

offices of foreign board of trade

members and/or their affiliates would

not require the foreign board of trade to

be designated as a ‘‘contract market’’

under the Commodity Exchange Act

(‘‘Act’’). In light of a significant increase

in these types of requests, the

Commission believes that it is

appropriate to address the subject by

way of the notice and comment

rulemaking process. The Commission

intends to propose rules and ultimately

to adopt rules to govern the treatment of

foreign terminals in the U.S. Toward

this end, the Commission believes that

it is appropriate first to issue this

concept release to solicit public

comment regarding issues raised with

respect to foreign terminal placement

and usage in the U.S.

DATE: Comments must be received on or

before September 22, 1998.

ADDRESSES: Comments on the proposed

rules should be sent to Jean A. Webb,

Secretary of the Commission,

Commodity Futures Trading

Commission, 1155 21st Street, N.W.,

Washington, D.C. 20581. In addition,

comments may be sent by facsimile

transmission to facsimile number (202)

418–5521 or by electronic mail to

secretary@cftc.gov. Reference should be

made to ‘‘Foreign Board of Trade

Terminals.’’

FOR FURTHER INFORMATION CONTACT: I.

Michael Greenberger, Director, David M.

Battan, Chief Counsel, Lawrence B.

Patent, Associate Chief Counsel, or

Lawrence T. Eckert, Attorney Advisor,

Division of Trading and Markets,

Commodity Futures Trading

Commission, 1155 21st Street, N.W.,

Washington, D.C. 20581. Telephone

(202) 418–5450.

SUPPLEMENTARY INFORMATION:

I. Background

A. Prior Views of Certain Commission Staff

Concerning Terminal Placement in the

U.S.

1. Prior Staff Views Related to Listing

Products of Foreign Boards of Trade on

Globex

2. Prior Staff Views Concerning the

Placement of Foreign Board of Trade

Terminals in the U.S.

B. Commission Approval of the Trading of

Products of Foreign Boards of Trade in

the U.S. Pursuant to Trading Link

Programs

C. Foreign Regulators’ Treatment of U.S.

Terminals in Their Jurisdictions

D. Order Routing and Execution of U.S.

Customer Orders on a Foreign Board of

Trade

II. Request for Comment

A. A Possible Approach for Foreign

Terminal Placement and Use in the U.S.

1. Petition Procedure

2. Conditions of an Order

3. Requests for Confirmation of Relief from

Members and Their Affiliates

B. Definitional Issues

1. Definition of Computer Terminal

2. Where May Computer Terminals Be

Located in the U.S.?

3. Definition of an ‘‘Affiliate’’ of a Foreign

Board of Trade Member

C. Other Issues Concerning Foreign Board

of Trade Terminal Placement in the U.S.

1. Bona Fide Foreign Board of Trade

2. Order Execution and Order Routing

Issues

3. Linkages Between Boards of Trade

III. Conclusion

I. Background

In general, under Section 4(a) of the

Act,1 a futures contract may be traded

lawfully in the U.S. only if it is traded

on or subject to the rules of a board of

trade that has been designated as a

‘‘contract market’’ under Section 5 of

the Act,2 unless the contract is traded on

or subject to the rules of a board of

trade, exchange or market located

outside the U.S.3 or is exempted from

the Act. With respect to the regulation

of transactions involving foreign

futures,4 Section 4(b) of the Act permits

the Commission to regulate persons who

offer or sell futures, but prohibits the

Commission from adopting any rule or

regulation that: (1) Would require

Commission approval of any foreign

board of trade contract, rule, regulation

or action; or (2) governs any rule,

contract term or action of a foreign

board of trade.5
39780 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules

reports, the keeping of books and records, the

safeguarding of customers’ funds, and the

registration with the Commission by any person

located in the U.S., its territories or possessions,

who engages in the offer or sale of any contract of

sale of a commodity for future delivery that is made

or to be made on or subject to the rules of a board

of trade, exchange or market located outside the

United States, its territories or possessions. . . . No

rule or regulation may be adopted by the

Commission under this subsection that (1) requires

Commission approval of any contract, rule,

regulation, or action of any foreign board of trade,

exchange or market, or (2) governs in any way any

rule or contract term or action of any foreign board

of trade, exchange or market.

6A discussion concerning how to define

‘‘computer terminal’’ or some similar term is found

at Section II.B.1, below, and makes clear that the

Commission would intend this term (and this

release) to cover not only dedicated proprietary

terminals, but also certain other technologies that

are used in a similar manner.

7 Globex is an automated order entry and

matching system for futures and options on futures.

See note 25, infra, and accompanying text.

8See Letter from Andrea M. Corcoran, Director,

Division of Trading and Markets, to Carl Royal, Vice

President and General Counsel, CME (May 26,

1989).

9 In a later no-action position, the Division also

granted the CME and Chicago Board of Trade

(‘‘CBT’’) so-called ‘‘pass the book’’ relief, which

allows CME and CBT member firms the flexibility

to provide continuous access to Globex trading

without the need for members to staff their offices

24 hours a day. The letter permits CME and CBT

member firms to conduct Globex-related U.S.

customer business through the offices of a foreign

affiliate without requiring the foreign affiliate to

register separately with the Commission as a futures

commission merchant (‘‘FCM’’). Thus, CME

contracts may be traded on Globex terminals

located in non-U.S. offices of foreign affiliates of

FCM-registered CME members, and U.S. customers

may place orders for such contracts on Globex by

contacting the FCMs’ affiliates during hours that the

CME floor is closed. The term ‘‘passing the book’’

is used to describe the process by which a customer

order that is placed outside of regular U.S. business

hours is transferred for entry into a Globex terminal

located in a non-U.S. office of a foreign affiliate of

an exchange member firm. CFTC Interpretative

Letter No. 92–11, [1990–1992 Transfer Binder]

Comm. Fut. L. Rep. (CCH) ¶25,325 (June 25, 1992),

superseded in part by CFTC Interpretative Letter

No. 93–83, [1992–1994 Transfer Binder] Comm.

Fut. L. Rep. (CCH) ¶25,849 (Aug. 9, 1993).

10See Letter from Andrea M. Corcoran, Director,

Division of Trading and Markets, to Gerard

Pfauwadel, President, MATIF (May 7, 1990).

11The Commission later approved a formal crossexchange access program between CME and

MATIF. The Commission’s approval of the CME/

MATIF cross-exchange access program and other

‘‘trading link’’ programs is discussed in Section I.B.,

below.

Significant developments in

technology in recent years have now

made automated trading methods an

attractive addition or alternative to

traditional open outcry for trading of

commodity futures and option products

on or subject to the rules of foreign and

domestic boards of trade. Automated

trading systems make it possible to

execute trades on computer terminals

within the U.S., no matter where the

central computer is located, thus

providing U.S. customers with a

potential additional means of access to

foreign products. Additionally, systems

have been developed that enable

customer orders to be submitted

electronically to an FCM and then

routed for execution on a foreign board

of trade with little or no human

intervention by a member of the foreign

board of trade. These technological

advances raise myriad issues concerning

the use of these technologies. In this

regard, a variety of issues has arisen

concerning the degree to which a

foreign board of trade’s cross-border

trading activities in the U.S. are subject

to Commission regulation. Specifically,

at what point does a foreign board of

trade’s presence within the U.S. become

indistinguishable from that of a U.S.

board of trade? Put another way, when

should a board of trade be deemed to be

a U.S. board of trade that is required to

be designated as a contract market

under Section 5 of the Act in order to

offer its products lawfully within the

U.S.? Should the Commission permit

foreign boards of trade to place

dedicated computer terminals in the

U.S., or permit foreign boards of trade

or their parties to provide persons in the

U.S. with computer software that

provides electronic access to a foreign

board of trade, without the foreign board

of trade first being designated as a U.S.

contract market? 6 To the extent that

‘‘terminals’’ of foreign boards of trade

are allowed to be placed in the U.S. for

trading without the foreign board of

trade being designated as a contract

market, what conditions should apply?

And finally, with respect to the interface

with foreign board of trade terminals, to

what extent should customer use of

automated order routing and execution

systems be permitted and what

safeguards, restrictions and conditions

should apply to their use?

As described below, certain

Commission staff have addressed some

inquiries concerning electronic access to

foreign boards of trade from within the

U.S. by way of no-action letters. These

staff letters do not constitute

Commission action and do not establish

any precedent. They merely convey the

views of certain staff members that they

will not urge the Commission to take

enforcement action for violation of the

Act or Commission regulations by the

requestor of the letter if certain

conditions are met. The Commission is

free to act contrary to the views

expressed by staff in such letters. The

Commission now finds it appropriate to

review the views set forth by certain

Commission staff in these letters and to

seek public comment on the proper

approach for oversight going forward.

The Commission desires to act as

quickly as practicable in this regard and,

accordingly, intends to adhere strictly to

the 60-day comment period provided for

in this release.

A. Prior Views of Certain Commission

Staff Concerning Terminal Placement in

the U.S.

1. Prior Staff Views Related to Listing

Products of Foreign Boards of Trade on

Globex

The first two letters issued by

Commission staff that addressed issues

concerning automated trading in the

U.S. by foreign boards of trade involved

trading through the Chicago Mercantile

Exchange (‘‘CME’’) Globex system

(‘‘Globex’’).7 The first letter was a

response to a request from the CME for

an opinion regarding whether trading

contracts of a foreign board of trade

through Globex computer terminals in

the U.S. required the foreign board of

trade to obtain contract market

designation pursuant to Section 5 of the

Act (‘‘CME Letter’’).8 In the CME Letter,

the Commission’s Division of Trading

and Markets (‘‘Division’’) noted that,

consistent with Section 4(b) of the Act,

the Commission has not issued rules

governing the terms and conditions of

contracts traded on foreign boards of

trade or the rules or actions of foreign

boards of trade. The Division provided

its view that trading of contracts of

foreign boards of trade through Globex

terminals in the U.S. should not cause

the Commission to deem any foreign

board of trade for which products are

listed through that system to be a

domestic board of trade. The Division

noted, however, that it would review

the particulars of any proposal to trade

the contracts of a foreign board of trade

through Globex in light of the

Commission’s obligations under the Act

to maintain the integrity of U.S. markets

and to provide for the protection of U.S.

customers.9

The Division issued a second letter on

related issues to the Marche ́ a` Terme

International de France (‘‘MATIF’’) in

response to MATIF’s request that the

Commission confirm that it would not

assert jurisdiction over MATIF or

MATIF contracts traded on Globex

(‘‘MATIF Letter’’).10 In its response, the

Division, among other things, reiterated

its view that the mere trading of foreign

board of trade products through Globex

terminals in the U.S. should not cause

any foreign board of trade for which

products are listed through the Globex

system to be deemed a domestic board

of trade.11
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39781

12On June 18, 1998, DTB changed its name to

Eurex Deutschland as a step toward a planned

merger later this year with the Swiss Options and

Financial Futures Exchange (‘‘SOFFEX’’). For the

sake of historical accuracy and simplicity we will

continue to refer to the DTB in this release.

The DTB is headquartered in Frankfurt, Germany,

and is a fully automated international futures and

option exchange on which all trades are executed

and cleared electronically. Trading is conducted

solely via computer terminals. The market

participants’ computers and terminals are linked to

the DTB computer center by means of a wideranging telecommunications network. As noted

above, DTB and SOFFEX plan to merge to create

Eurex AG. Further, CBT, DTB and SOFFEX have

signed a letter of intent to form an electronic trading

link between CBT and Eurex with the eventual goal

of providing users of Eurex and Project A (the CBT’s

adjunct electronic trading system, discussed in

Section I.C.below) with access to both markets from

a single screen.

13A ‘‘principal’’ trade under DTB rules is limited

to a trade made by a DTB member for its own

account. DTB’s definition of ‘‘principal’’ is

narrower than the definition of ‘‘proprietary’’ in

Commission Rule 1.3(y). A proprietary trade under

Commission rules would include not only trades of

board of trade members for their own accounts, but

also those made by certain members’ affiliates and

insiders for the their respective accounts.

14See CFTC Interpretative Letter No. 96–28,

[1994–1996 Transfer Binder] Comm. Fut. L. Rep.

(CCH) ¶26,669 (Feb. 29, 1996). The Division’s letter

did not alter DTB’s obligations to: (a) request a noaction position from the Commission prior to

engaging in the offer or sale of any foreign stock

index futures in the U.S.; or (b) have any foreign

debt obligation first designated as an ‘‘exempt

security’’ by the Securities and Exchange

Commission (‘‘SEC’’) before engaging in the offer of

sale of any futures contract or option thereon in the

U.S. Section 2(a)(1)(B)(v) of the Act states generally

that no person shall offer or enter into a contract

of sale for future delivery of any security except an

‘‘exempt security’’ under Section 3 of the Securities

Act of 1933 or Section 3(a)(12) of the Securities

Exchange Act of 1934.

15The Commission has adopted principles

formulated by a working group of IOSCO for the

regulatory review of automated trading systems.

These principles address the following topics:

1. Compliance with applicable legal standards,

regulatory policies, and/or market custom or

practice where relevant;

2. The equitable availability of accurate and

timely trade and quotation information;

3. The order execution algorithm used by the

system;

4. Technical operation of the system that is

equitable to all market participants;

5. Periodic objective risk assessment of the

system and system interfaces;

6. Procedures to ensure the competence, integrity,

and authority of system users and to ensure fair

access to the system;

7. Consideration of any additional risk

management exposures pertinent to the system;

8. Mechanisms in place to ensure that the

information necessary to conduct adequate

surveillance of the system for supervisory and

enforcement purposes is available;

9. Adequacy of risk disclosure, including system

liability; and

10. Procedures to ensure that the system sponsor,

providers, and users are aware of and will be

responsive to relevant regulatory authorities.

See Policy Statement Concerning the Oversight of

Screen-Based Trading Systems, 55 FR 48670 (Nov.

21, 1990), in which the Commission adopted the

principles set forth in the IOSCO report entitled

‘‘Screen-Based Trading Systems for Derivative

Products’’ (June 1990).

16The BAWe carries out oversight of the German

securities and futures markets pursuant to the

German Securities Trading law and is the central

authority in Germany for cooperation with the

Commission in questions of futures trading

oversight and in matters that are subject to the

oversight of the German Federal States.

17 In this regard, DTB terminals located in the

U.S. have a systems capability to ‘‘time stamp’’ the

execution of customer orders so that an electronic

‘‘audit trail’’ is maintained.

18See note 14, supra.

2. Prior Staff Views Concerning the

Placement of Foreign Board of Trade

Terminals in the U.S.

The Deutsche Terminborse (‘‘DTB’’) 12

was the first foreign board of trade to

seek and receive a staff no-action letter

for U.S. placement of computer

terminals for execution of trades on its

market. The DTB sought a no-action

position from Commission staff

regarding placement of DTB computer

terminals in the U.S. officers of its

members for their principal trading

purposes 13 and, where the DTB member

is also an FCM registered under the Act,

on behalf of U.S. customers as well,

without obtaining designation as a

contract market. After analyzing, among

other things, the German regulatory

structure and DTB’s order processing

network, clearing process and trading

system integrity and architecture, the

Division issued a no-action letter subject

to the following conditions imposed

upon DTB and their U.S.-located

members who seek to place terminals in

their offices.14

1. DTB terminals will be located only

in the U.S. offices of DTB members;

2. Only DTB members that also are

U.S.-registered FCMs may trade for

customers—non-FCM DTB members are

limited to principal-only trading; 3. DTB members will (a) provide the

Commission and the National Futures

Association (‘‘NFA’’) with access to

their books and records and the

premises where DTB terminals are

installed, and (b) consent to U.S.

jurisdiction with respect to compliance

with relief provided in the no-action

letter;

4. All DTB members that will operate

pursuant to the relief granted will be

identified to the Commission and NFA;

5. Upon request, DTB (a) will provide

the Commission with information

received from its members regarding the

location of DTB terminals in the U.S.

and (b) will update the information on

a periodic basis; 6. DTB will continue to comply with

the International Organization of

Securities Commissions (‘‘IOSCO’’)

‘‘Principles for Oversight of ScreenBased Trading Systems for Derivative

Products’’;15

7. DTB will submit on at least a

quarterly basis information reflecting

the volume of trades from U.S.-based

computer terminals compared to DTB’s

overall trading volume; and 8. DTB will provide the Division with

prompt notice of all material changes to

any DTB rules or German laws that may

impact the provided relief. In analyzing DTB’s no-action request,

the Division reiterated the positions set

forth in the Globex letters discussed

above. The Division concluded that no

public interest would be affected

adversely by DTB members having

access to DTB terminals in the U.S.

because (1) no customer trading would

be permitted from U.S.-based terminals

unless the DTB member firm is

registered as an FCM and (2) the

Commission’s ability to inspect relevant

books and records and the premises

where DTB terminals are installed, in

combination with information-sharing

assurances received from the German

Federal Securities Supervisory Office

(‘‘BAWe’’),16 provided an adequate basis

for supervision of such trading. The

Division noted that the DTB and/or the

relevant German state or federal

regulatory authorities have rules,

systems, and compliance mechanisms

in place that address, among other

things, the processing of orders,

including prioritization and execution

(i.e., DTB’s order execution algorithm),

and the timely availability of

information necessary to conduct

adequate surveillance of the DTB system

for supervisory and enforce purposes.17

Further, DTB members located in the

U.S. are permitted to enter trades for,

and access trading screens of, only those

contracts permissible for trading by U.S.

persons.18 Finally, the Division also

emphasized the importance of DTB’s

agreement to provide information to the

Commission concerning the location of

terminals in the U.S. and the volume of

trades originating from the U.S.

The no-action position taken in the

DTB letter was based upon, among other

things, the premise that the DTB is a

‘‘bona fide foreign board of trade’’

whose main business activities take

place in Germany. By conditioning its

letter on the DTB providing the Division

with quarterly updates of DTB’s U.S.-

originated trading volume, the Division

intended to leave open the possibility

that at some point DTB’s activities in

the U.S. might rise to a level that would

necessitate greater Commission

regulation.

The initial DTB no-action letter was

modified in a no-action letter to the DTB

dated, May 9, 1997, in which the

Division agreed not to recommend

Commission enforcement action if DTB

terminals
39782 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules

19See Letter from Andrea M. Corcoran, Director,

Division of Trading and Markets, to Volker Potthoff,

Senior Vice President and Dr. Ekkehard Jaskulla,

Deutsche Borse AG (May 9, 1997).

20The Commission took this action pursuant to

the regulatory authority provided under Section

5a(12), now Section 5a(a)(12)(A), of the Act. See

Letter from Jean A. Webb, Secretary of the

Commission, to Eileen T. Flaherty, Associate

General Counsel, CME (Sep. 25, 1992).

21The responsibility for enforcing each

exchange’s Globex trading rules is shared between

the two exchanges. Surveillance for compliance

with these rules by those trading over the Globex

terminals is the responsibility of the exchange

whose contracts are traded. Each exchange

continues to carry out its own market surveillance

activities for all its contracts traded on a terminal,

and each exchange’s members continue to be

subject to their respective exchange’s financial and

sales practice requirements.

22See Letter and Order from Jean A. Webb,

Secretary of the Commission, to Paul J. Draths (May

6, 1997).

23 In 1995, the New York Mercantile Exchange

(‘‘NYMEX’’) established a linked access

arrangement with the Sydney Futures Exchange

(‘‘SFE’’) and linked SFE terminals located in

Sydney to the NYMEX ACCESS trading system. In

1997, a linked access arrangement between NYMEX

and the Hong Kong Futures Exchange (‘‘HKFE’’)

permitted HKFE members to trade NYMEX

contracts on NYMEX ACCESS terminals located in

Honk Kong.

24These arrangements are referred to in Section

I.C., below, which discusses foreign regulators’

treatment of U.S. terminals placed in their

jurisdictions. See note 27, infra.

25Although the Globex system originally was

intended as an after-hours system for trading

products otherwise traded on the floor of the CME,

the CME now trades E-mini Standard and Poor’s

500 contracts both on Globex and on the floor of

the CME, depending upon the size of the order,

during regular trading hours. The CME recently

announced that it intends to launch a new

electronic trading system, ‘‘GLOBEX2,’’ in

September 1998 in a joint venture with MATIF.

GLOBEX2 will use a new system architecture that

will replace that currently used by the Globex

system.

were placed in DTB member firm booths

at the CME, subject to compliance with

the terms and conditions of the original

DTB letter.19 Under the May 1997 letter,

no enforcement action would be

recommended if DTB terminals are

placed only at booths of firms that are

both CME and DTB members; only DTB

contracts authorized or permissible for

trading by U.S. persons are eligible to be

traded from the terminals; no CME

contracts are traded via the terminals;

and CME has no involvement in

clearance or settlement of the contracts.

Currently, there are no terminals in DTB

member firm booths at the CME.

Pursuant to the DTB no-action letters,

if a DTB member located in the U.S.

wishes to install a DTB terminal in its

office, the DTB itself must make a

written filing to the NFA on behalf of

that member. The DTB makes this filing

after a DTB member applies to the DTB

to place a DTB terminal in the U.S. The

filing identifies the member that intends

to operate a DTB terminal in the U.S.

and includes: (1) A Declaration signed

by the member whereby the member

declares that it acknowledges (a) the

terms and conditions of the division’s

no-action letter and that it will comply

therewith and (b) its obligation to

inform DTB in writing of any changes

regarding its DTB membership or the

placement of DTB terminals in the U.S.;

and (2) an Acknowledgment of

Jurisdiction signed by the member

whereby the member acknowledges that

(a) for purposes of the DTB no-action

letter it is subject to the Act and the

Commission’s regulations thereunder,

(b) it will provide upon request prompt

access to original books and records and

the premises where DTB terminals are

installed in the U.S., and (c) the person

signing the Acknowledgment on behalf

of the member is duly authorized to do

so. Under the terms of the Division’s noaction letter, the DTB member may

begin trading on its U.S.-based DTB

terminal five business days after the

DTB member is identified to the NFA

unless NFA or the Division informs DTB

otherwise. The DTB does not inform the

member of the approval of its

application until the five-day period has

passed.

B. Commission Approval of the Trading

of Products of Foreign Boards of Trade

in the U.S. Pursuant to Trading Link

Programs

As noted above, the Division issued

the MATIF Letter which, among other

things, enunciated the Division’s view

that the trading of MATIF products

through Globex terminals in the U.S.

should not cause MATIF to be deemed

a domestic board of trade. After the

issuance of the MATIF Letter, the

Commission approved a formal crossexchange access program between CME

and MATIF previously submitted by

CME, which allows CME and MATIF

members to enter orders through Globex

terminals located in the U.S. and

France, respectively, to buy and sell

each other’s products.20 Under the

program, the rules of the exchange

whose products are traded apply to the

members of the other exchange when

they trade those products. Accordingly,

CME members trading MATIF contracts

through Globex terminals located in the

U.S. are subject to MATIF’s Globex

trading rules, while MATIF members

trading CME contracts through Globex

terminals located in France are subject

to CME’s Globex trading rules. In approving the CME–MATIF

proposal, the Commission evaluated

MATIF’s Globex trading rules, CME and

MATIF rules regarding member

eligibility to participate in the crossexchange program, how each exchange

would monitor its members in trading

the other exchange’s contracts, and the

market surveillance and financial and

sales practice rules that would apply in

each instance.21 The Commission noted

and relied on the fact that MATIF’S

Globex trading rules governing trading

of MATIF contracts are generally the

same as the CME’s Globex trading rules.

Accordingly, all market participants

trading MATIF contracts through

Globex are subject to the same trading

rules whether they are CME members or

MATIF members.

Pursuant to its regulatory authority,

the Commission also approved last year

a reciprocal trading link between the

CBT and the London International

Financial Futures and Options

Exchange (‘‘LIFFE’’).22 The parties to

this linkage have determined not to

operate the linkage at this time, but the

Commission’s evaluation of the

proposal remains illustrative of the

Commission’s standards and

requirements for link arrangements

which allow products of foreign boards

of trade to be traded in the U.S. Under

the CBT–LIFFE trading link, each

exchange can list the other’s major

financial futures and option contracts

for trading on its floor by open outcry

during regular trading hours. In

evaluating this trading link, the

Commission compared the trading rules

and member eligibility rules of LIFFE

with those of the CBT and analyzed the

manner in which surveillance and

investigations related to contracts traded

over the link could be implemented

effectively at each board of trade. The

Commission approved this trading link

under the condition, inter alia, that

LIFFE-designated contracts traded on

CBT be subject to CBT rules. The Commission also has approved

other trading arrangements commonly

referred to as trading links whereby

products of U.S. designated contract

markets can be traded through

automated trading system terminals

located in foreign jurisdictions.23 These

arrangements do not, however, allow

the trading of the foreign exchanges’

products in the U.S.24

C. Foreign Regulators’ Treatment of U.S.

Terminals in Their Jurisdictions

Several U.S. futures exchanges have

developed automated trading systems

for exchange members and their

customers to trade in certain of the

exchanges’s futures and options

contracts after regular trading hours.

The CME’s Globex system, for example,

is an electronic trade execution system

developed by the CME and Reuters for

trading CME contracts, generally outside

regular business hours.25 Globex brings
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39783

26Certain CBT contracts initially were listed for

trading on Globex. However, CBT later withdrew

from participation in the Globex system to develop

its own automated trading system, Project A.

27As of the beginning of 1998, the CME had

placed Globex terminals in the U.K., Hong Kong,

Japan, France and Bermuda, NYMEX ACCESS

terminals were located in Australia, Hong Kong and

the U.K., and CBT’s Project A terminals were

located in the U.K.

In certain cases, a board of trade in the foreign

jurisdiction in which U.S. terminals are located has

formal business agreements or arrangements with

the U.S. exchange that has placed terminals in that

country. For example, agreements exist between

NYMEX and the SFE and the HKFE, respectively,

which permit SFE and HKFE members to trade

products on NYMEX ACCESS. Likewise, there is an

agreement in effect between the CME and MATIF

that permits, under certain circumstances, each

exchange to trade the contracts of the other through

Globex. As discussed above, the Commission has

approved the necessary CME and NYMEX rule

changes enabling these agreements and has

permitted the trading arrangements proposed by

these exchanges, subject to certain conditions. See

Letters from Jean A. Webb, Secretary of the

Commission, to Ronald S. Oppenheimer, Esq.,

Executive Vice President and General Counsel,

NYMEX (June 5, 1997); Letter from Jean A. Webb,

Secretary of the Commission, to Ronald S.

Oppenheimer, Esq., Executive Vice President and

General Counsel, NYMEX (Sep. 1, 1995); Letter

from Jean A. Webb, Secretary of the Commission,

to Eileen T. Flaherty, Associate General Counsel,

CME (Sep. 25, 1992).

28CME, NYMEX and CBT were designated as

ROIEs prior to placing computer terminals in the

U.K.

29On August 30, 1995, the Australian Federal

Attorney General signed a Declaration exempting

NYMEX ACCESS from regulation under the

Australian Corporations Law, subject to certain

conditions pertaining primarily to information

sharing between the SFE an NYMEX and

disciplinary procedures for breaches of NYMEX

ACCESS trading rules. With respect to the

placement of Globex and NYMEX ACCESS

terminals in Hong Kong, the Hong Kong Securities

and Futures Commission requested that it be kept

informed with respect to operations of terminals

with Hong Kong dealers and requested informationsharing arrangements with the CME and NYMEX.

30The Japanese Ministry of Finance informed the

CME of its approval with respect to the placement

of Globex terminals in Japan by letter to the CME

on February 8, 1993.

31 In general, under the Commission’s Part 30

rules, foreign brokerage firms may be exempted

from the registration requirements of the Act

provided that the Commission determines that the

firm is subject to comparable rules and regulations

in its home country. 17 CFR part 30.

32 If contact with U.S. customers is limited to

carrying the customer omnibus account of the U.S.

FCM for execution on the foreign exchange, the

foreign firm would not be required to register with

the Commission as an FCM or receive an exemption

under Part 30. See CFTC Interpretative Letter No.

87–7 [1987–1990 Transfer Binder] Comm. Fut. L.

Rep. (CCH) ¶ 23,972 (Nov. 17, 1987).

buy and sell orders together by linking

individual terminals to a central

computer where orders are processed.

NYMEX and the CBT also have

developed automated trading systems,

known as NYMEX ACCESS and Project

A, respectively.26

CME, NYMEX A and CBT each have

computer terminals located in certain

foreign countries on which trading for

foreign firms and customers is

conducted.27 CME Globex terminals are

located abroad in the offices of both

CME members and offshore affiliates of

those members. Similarly, NYMEX

ACCESS terminals are located in offices

of NYMEX members and affiliates

thereof. The CBT Project A terminals in

the U.K. are located in branch offices of

CBT members and in the offices of

affiliates of CBT members. CBT,

NYMEX and CME permit users of their

terminals in foreign countries to trade

for both proprietary and customer

accounts.

Foreign jurisdictions vary in their

approaches to reviewing requests by

U.S. boards of trade to place computer

terminals in their countries. A non-U.K.

board of trade that wishes to place

computer terminals in the U.K., for

example, must first become a

‘‘recognised overseas investment

exchange’’ (‘‘ROIE’’) under Section 40 of

the Financial Services Act (‘‘FSA’’).28

Under the FSA, an application by a nonU.K. board of trade for treatment as an

ROIE is reviewed to ensure, among

other things, that: (1) Investors in the

U.K. are afforded protections at least

equivalent to those provided by the FSA

for customers trading on or subject to

the rules of U.K. boards of trade; (2) the

applicant is willing to cooperate by

sharing information with U.K.

regulators; and (3) adequate

arrangements exist for information

sharing between the applicant’s

regulator and U.K. regulators. The FSA

also provides that, in determining

whether it is appropriate to ‘‘make a

recognition order,’’ a relevant

consideration is the extent to which

persons in the U.K. and the country of

the applicant have access to each other’s

financial markets.

The procedures for approval of U.S

board of trade terminal placement

appear somewhat less formal in other

foreign countries, although each

jurisdiction appears to require some

form of review by the jurisdiction’s

regulatory authorities prior to allowing

a U.S. board of trade to place computer

terminals in its country. Australia and

Hong Kong, for example, appear to

require foreign boards of trade to be

approved through an exemption

process.29 In France, the placement of

terminals must be recognized by the

Ministry of Finance. Prior to installing

terminals, the Commission des

Ope ́rations de Bourse (‘‘COB’’) must be

informed of the dates that screens will

be installed and the location of their

intended installation. Additionally, a

foreign firm operating a terminal must

comply with French rules governing

disclosure and solicitation of the public.

In Japan, approval by the Ministry of

Finance is necessary before trading may

take place through ‘‘foreign screenbased systems.’’30

D. Order Routing and Execution of U.S.

Customers Order on a Foreign Board of

Trade

In developing the Commission’s

policy with respect to the treatment of

foreign board of trade computer

terminals in the U.S., it is helpful to

review the basic methods by which a

U.S. customer traditionally placed

orders for products offered on a foreign

board of trade where computer

terminals of that exchange were not

located within the U.S.

U.S. customers traditionally have

transacted business on a foreign board

of trade by way of: (1) Communicating

through a U.S.-registered FCM or IB; or

(2) communicating with a foreign firm

that has received an exemption from

registration under Part 30 of the

Commission rules.31 U.S. customers

traditionally have placed orders via the

telephone. In the case of a

communication from a U.S. customer to

a U.S.-registered FCM or IB, the FCM or

IB generally would relay the customer’s

order for execution to a foreign member

of the foreign board of trade by

telephone or other means (e.g. facsimile

transmission). The trade would be

carried on the books of the foreign firm

on an omnibus basis.32 If the U.S.

customer communicated directly with a

foreign firm with a Part 30 exemption,

the foreign firm simply would execute

the customer’s trade either

electronically or on the floor of an

exchange, as appropriate. With

advances in available technology, many

intermediaries are implementing

automated order routing systems that

allow customers electronically to submit

their orders and that are intended to

pass these orders to a board of trade

with minimal, if any, human

intervention. Issues concerning such

automated systems are discussed in

Section II. C. 2., below.

II Request for Comment

The Commission solicits comment

from the public on the broad range of

issues related to providing electronic

access to a foreign board of trade from

within the United States. The

Commission notes that any action taken
39784 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules

33Commission Rule 30.10 is an exemptive

provision that allows the Commission to exempt

foreign firms from the application of certain CFTC

rules and regulations (e.g., those governing

registration and financial requirements) based upon

substituted compliance by a firm with comparable

regulatory requirements imposed by the firm’s

home-country regulator. In considering a request

from a foreign regulatory or self-regulatory authority

for Rule 30.10 comparability relief, the Commission

considers, among other things: (1) registration,

authorization or other form of licensing, fitness

review, or qualification of persons through whom

customer order are solicited and accepted; (2)

minimum financial requirements for those persons

that accept customer funds; (3) minimum sales

practice standards, including disclosure of risks and

the risk of transactions undertaken outside of the

U.S.; (4) procedures for auditing compliance with

the requirements of the regulatory program,

including recordkeeping and reporting

requirements; (5) protection of customer funds from

misapplication; and (6) the existence of appropriate

information-sharing arrangements. The Commission

has issued orders to permit certain foreign firms

that have comparability relief under Rule 30.10 to

engage in limited marketing activities of foreign

futures and option products from locations within

the U.S. See orders of October 28, 1992 and August

4, 1994. 57 FR 49644 (Nov. 3, 1992) and 59 FR

42156 (Aug. 17, 1994), respectively.

34 Given the type and scope of information

concerning the foreign board of trade and its

operations that likely would be required to be

provided to the Commission in a petition, it would

be most appropriate for the foreign board of trade

itself to submit such a petition. However, the

Commission requests comment as to whether it

would be feasible and appropriate to allow the

petition to be submitted on behalf of the foreign

board of trade by a member of the foreign board of

trade or an affiliate thereof or by the foreign board

of trade’s foreign regulatory authority.

35Requirements with respect to the offer and sale

of foreign stock index futures and futures and

option contracts on foreign debt obligations would

still be applicable if the Commission were to adopt

the procedure outlined herein. See also, note 14,

supra.

36The Commission could, upon the request of a

petitioner, limit the public availability of

information if it determined that such information

constituted a trade secret or that public disclosure

would result in material competitive harm to the

petitioner.

37 Information requested would be required to be

translated into English where appropriate.

in this area must ensure the

Commission’s ability to carry out its

obligations under the Act to maintain

the integrity of the U.S. markets and to

provide protection to U.S. customers. At

the same time, the Commission believes

that its regulatory approach should not

inhibit cross-border trading by imposing

unnecessary regulatory burdens.

As a means of raising relevant issues

and facilitating a discussion thereon,

this concept release provides a

framework that may form the basis for

a later rulemaking. For example,

Division staff has explored the

possibility of a new rule that might be

included among the Commission’s Part

30 rules (concerning foreign futures and

options transactions) and could

implement a two-step procedure similar

in some respects to that currently in

effect under Rule 30.10 with respect to

foreign firms that wish to obtain an

exemption from compliance with the

Commission’s part 30 regulations.33

Under the potential procedure

envisioned by the Division, a foreign

board to trade initially would petition

the Commission for an order to place its

computer terminals in the U.S. without

being designated as a U.S. contract

market. If the Commission issued the

requested order, a member of the board

of trade or an affiliate of a member

would then be permitted to request

confirmation of relief under the order to

allow the member or affiliate to place

and to operate a foreign board of trade

computer terminal in the U.S., subject to

appropriate conditions contained in the

order. The remainder of the concept

release describes this potential approach

more fully and raises a variety of issues

concerning foreign board of trade

terminal placement and use in the U.S.

generally. The following discussion

assumes that a foreign board of trade

wishes to place computer terminal in

the U.S. without being designated as a

contract market. Any foreign board of

trade, of course, may apply for

designation as a U.S. contract market

and, upon the Commission’s approval of

such designation, may offer its products

in the U.S. subject to rules for U.S.

contract markets.

A. A Possible Approach for Foreign

Terminal Placement and Use in the U.S.

1. Petition Procedure

As noted above, under the possible

approach envisioned by Division staff, a

foreign board of trade would be required

to petition for an order that would allow

the foreign board of trade to place its

computer terminals in the U.S.34 In

evaluating DTB’s request for a no-action

position to allow it to place computer

terminals in the U.S., the Division

reviewed, among other things the

following information provided by the

DTB: (1) An overview of the DTB,

including the regulatory structure

applicable to the operation of the DTB

and transactions thereon; (2) a

description of the order processing

network utilized by the DTB; (3) a

description of the DTB’s clearing

process; (4) a description of the system

integrity and architecture of the DTB

system, including security arrangements

and procedures regarding system

failures; and (5) a description of the

contracts which initially were to be

traded on the DTB through computer

terminals located in the U.S. and a

discussion of the rules and regulations

governing such contracts.35 The

Commission’s petition procedure could

set forth a specific list of items, similar

to the information reviewed as part of

the DTB’s no-action request. The

Commission could review all of the

information received from each

petitioner and, based upon the totality

of the information received, make a

determination as to whether an order of

exemption should be issued. Under

such an approach no particular piece of

information would necessarily be

dispositive. The Commission could

publish petitions in the Federal Register

for public comment.36 The Commission

requests comment as to whether specific

tests should be used to evaluate each

required item of information rather than

reviewing all of the information based

upon a ‘‘totality of the circumstances.’’

If so, what tests are appropriate for each

category of information discussed

below?

Six general categories of information

might be requested.37 (1) General

information concerning the petitioner

foreign board of trade and its products;

(2) information concerning the

petitioner’s rules and regulations, the

laws and regulations in effect in the

petitioner’s home country, and the

methods for monitoring compliance

therewith; (3) information related to the

petitioner’s technological system and

standards; (4) financial and accounting

information pertaining to the petitioner;

(5) information concerning the ability of

U.S. boards of trade to place and operate

computer terminals in the petitioner’s

home country; and (6) information

concerning the petitioner’s intended

U.S. activities and presence. More

specifically, the first category of

information discussed above (general

information concerning the petitioner

and its products) could include

information such as the petitioner’s

main business address, its address in

the U.S. for service of process, a copy

of the petitioner’s organizational

documents and a list of the contracts

that the petitioner desires to trade in the

U.S. through its terminals.

The next category of information

concerning the regulatory requirements

of the petitioner and its home regulatory

authority might include: (1) A copy of

the petitioner’s rules; (2) a list of the

persons responsible, and the

supervisory arrangements in place, for

monitoring compliance with respect to

those rules of the petitioner that apply

to activities conducted in the U.S.; and

(3) a comprehensive discussion of the

regulatory structure in the petitioner’s

home country. This last point might

include information on the following:

(a) the regulatory authorities to which

the petitioner is subject in its home
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39785

38 ‘‘Proprietary account’’ as used herein has the

same meaning as that contained in Commission

Rule 1.3(y).

39Comment is requested on whether to permit the

foreign board of trade to arrange for NFA or a U.S.

Continued

country and the petitioner’s status

under the laws of the country; (b)

applicable requirements established by

law or by regulatory and self-regulatory

authorities in the petitioner’s home

country regarding the protection of

customer funds (including in the event

of insolvency), recordkeeping, reporting,

timing of transactions, allocation of

orders, ability to obtain the identity of

customers, including rules concerning

entry of account numbers, and trade

practice standards, including any rules

concerning prearranged trading,

noncompetitive trading, ‘‘frontrunning,’’

trading ahead of customers, wash sales

and bucketing of transactions; (c)

procedures employed by the regulatory

and self-regulatory authorities in the

petitioner’s home country to ensure

compliance with their rules, including a

history of market failures and defaults

in the petitioner’s home country; (d)

information sharing arrangements in

effect among the relevant regulatory

authorities and the Commission,

including information concerning any

blocking statutes or data protection laws

in effect in the petitioner’s home

country which might impair the

Commission’s ability to obtain

information under such an arrangement;

and (e) a discussion of any disciplinary

action taken against the petitioner by its

home country regulatory authorities. For

petitioners that have received an

exemption under Commission Rule

30.10 or petitioners from a jurisdiction

where another entity has received such

an exemption, providing the

information discussed above concerning

the petitioner’s home country regulatory

requirements would likely prove

duplicative in some respects. The

Commission requests comment

generally on means by which the

Commission could prevent unnecessary

duplication of information.

Information concerning technological

systems and standards of the petitioner

might include a discussion of the order

processing system, its system integrity

and architecture and its clearing and

settlement process. A discussion of the

order processing system might include,

among other things, a complete

discussion of the order execution

algorithm for each contract traded (to

the extent the algorithm differs by

contract). The discussion of the system

integrity and architecture might include,

for example, the location of computer

servers (if appropriate), information

concerning the processing time for

executed transactions, security

arrangements and procedures regarding

system failures that govern U.S.-placed

computer terminals, including a

discussion of liability for market

interruptions, and a discussion as to

whether these features and procedures

differ (and, if so, how they differ) from

those used in the petitioner’s home

country or on petitioner’s computer

terminals located in other countries, if

any.

General financial information and

trading volume data might include the

petitioner’s most recent annual financial

statements and the total trading volume,

on a contract-by-contract basis and in

the aggregate, for its most recent year

and most recent quarter (or other period

if data is not maintained on an annual

and quarterly basis). The Commission

requests comment generally as to what

types of trading volume information are

maintained by foreign boards of trade

and how volume is calculated. More

specifically, the Commission requests

comment as to whether foreign boards

of trade maintain information such that

it would be feasible to provide the

Commission with information

concerning, for each contract traded and

in the aggregate, the percentage of

trading volume that originates from U.S.

registered FCMs, the percentage of

trading volume that originates from U.S.

customers, and the percentage of trading

volume that originates from each other

jurisdiction where trading activity

occurs.

Each petitioner might be required to

provide a statement from its home

country regulator as to any requirements

or restrictions placed by authorities in

its home country on U.S. boards of trade

with respect to the placement and

operation of computer terminals or the

sale of products in such country. If any

such requirements or restrictions exist,

the statement might include a

description of the restrictions or

regulations, be accompanied by copies

of any relevant statutes or other relevant

legal materials, and include a

description of the application process, if

any, required for a U.S. board of trade

and their members or affiliates of

members to place its computer

terminals and/or to sell products in the

petitioner’s home country.

Information concerning the

petitioner’s U.S. activities might

include, for example, information

concerning the location of any office,

delivery points or employees of the

foreign board of trade within the U.S.

and any marketing, educational or other

activities in the U.S. in which the

foreign board of trade engages. The

Commission requests comment

regarding the appropriateness of each of

these items of information and

encourages commenters to address what

additional information might prove

valuable for the Commission to consider

in evaluating a petition from a foreign

board of trade to place its terminals in

the U.S.

2. Conditions of an Order

Under Commission Rule 30.10, the

Commission may, upon request, grant a

petition of a foreign firm for an

exemption from certain Part 30

requirements ‘‘subject to such terms and

conditions as the Commission may find

appropriate.’’ In developing a rule

concerning foreign board of trade

terminal placement in the U.S., the

Commission could reserve for itself

similar flexibility to issue orders to a

foreign board of trade subject to

appropriate terms and conditions.

Moreover, the rule could set forth

certain conditions that the Commission

would include, at a minimum, in each

order allowing U.S. terminal placement

by a foreign board of trade. The Division

staff has urged that many of these

conditions should be similar to those

imposed upon the DTB in the Division’s

no-action letter, discussed above. The

Commission requests comment on the

following list of conditions that might

be included in a Commission order:

1. Computer terminals must be

located only in the offices of members

of the foreign board of trade and their

affiliates or in a member’s or affiliate’s

firm booth on the floor of a U.S. board

of trade;

2. Any member or affiliate thereof that

executes trades under an order must be

registered as an FCM unless it trades

solely for its proprietary account; 38

3. The foreign board of trade must

notify the Commission in writing

immediately of any material changes in

the information provided in its petition

to the Commission, in its rules, or in the

laws or rules of its home country;

4. The foreign board of trade must

notify the Commission immediately of

any Known violations of the order, the

Act, the Commission’s regulations, or

any other futures regulatory scheme by

the board of trade or by a member of

affiliate operating under a Commission

order;

5. The foreign board of trade, in order

to ensure compliance with the terms of

the Commission’s order, must conduct

an on-site review of the activities of

each member or affiliate operating

under the order at least every two years

or upon notice of a possible violation of

the order.39
39786 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules

self-regulatory organization to conduct the required

on-site review. The Commission also requests

comment as to whether the on-site review is

appropriate and, if so, whether it should be

conducted more or less frequently than biennially.

40The Commission requests comment concerning

whether its rules should specify particular elements

that would be required to be included in a

‘‘satisfactory’’ information sharing arrangement and,

if so, what elements are appropriate. Additionally,

the Commission requests comment as to who

should be a party to such an arrangement. Should

the arrangement be only between the Commission

and the relevant home country regulator, or should

the foreign board of trade itself be a party to the

arrangement?

41The Commission requests comment as to what

information foreign boards of trade currently

maintain concerning trading volume on a

jurisdiction by jurisdiction basis and, in particular,

whether foreign boards of trade currently maintain

information in a manner that would enable them to

provide the Commission with quarterly reports

indicating the percentage of its total volume that

originated from each foreign jurisdiction, whether

from terminals or otherwise.

42Such information would be required to be

updated when a change occurs. The Commission

requests comment as to whether ten business days

is a reasonable time period in which to update such

information. 43 In the case of an unregistered entity engaged

only in proprietary trading, the entity could keep

either its original books and records or a complete

copy of its books and records in its U.S. office.

However, if copies were kept rather than originals,

the member or affiliate thereof would be required

to: (1) state why it is necessary or beneficial to keep

the originals outside the U.S.; (2) provide the

address where they are kept; (3) agree to provide

the books and records in the U.S. within 72 hours

of a request of a Commission or NFA representative;

and (4) certify that no foreign laws would prevent

the Commission’s inspection of the books and

records.

44 If the member or affiliate is a registered FCM

that utilizes an automated order routing system for

transmitting trades submitted electronically from

customers, the FCM could be required to keep a list

of the names and addresses of each customer who

utilizes this system and make such list available to

the Commission or a Commission representative

upon request.

6. Satisfactory information sharing

arrangements must be in effect among

the appropriate regulatory authorities

and the Commission;40 and

7. The foreign board of trade must

provide the Commission with quarterly

reports indicating: (a) With respect to

each contract traded through U.S.

computer terminals, (i) the total trade

volume, and (ii) the trade volume

broken down by customer and

proprietary trades; (b) with respect to

each contract traded through computer

terminals in other jurisdictions, the total

trade volume by jurisdiction and in the

aggregate; and (c) with respect to all

contracts traded on the board of trade

(whether traded in the U.S. or

elsewhere), the total trading volume for

the period and by contract.41 If

applicable, the foreign board of trade

also would be required to provide

quarterly reports indicating the stocks

held as of the end of the quarter at any

warehouse maintained by in the U.S. for

products that require physical delivery; In addition to the conditions

discussed above, the Commission could

retain the authority to condition,

modify, suspend, terminate or otherwise

restrict an order that it issues, as applied

to a specific person operating

thereunder or with respect to the order

in its entirety. The Commission could

then take action, for example, if the

Commission determined that the foreign

board of trade that received and order,

or an entity operating in the U.S. based

on the order, ceased to comply with a

stated condition of the order or that

continuation of the order would be

contrary to public policy or the public

interest.

3. Request for Confirmation of Relief

from Members and Their Affiliates

Under the possible approach the

Division envisions, following the

issuance of an order, an entity that

desired to operate a computer terminal

in the U.S. under the order would

request confirmation of its ability to do

so by filing a confirmation request with

NFA. Such a procedure would be

similar to the current procedure

followed by DTB on behalf of its

members that wish to install DTB

terminals in the U.S. under the DTB’s

no-action letter.

Such a written confirmation request

would be signed by a duly authorized

representative of the foreign board of

trade member or affiliate, and the

member or affiliate would do the

following: (1) Certify that it is a member

or an affiliate of a member in good

standing of a foreign board of trade that

has received a Commission order; (2)

certify that it will take reasonable

precautions to safeguard access to

computer terminals operated by it under

the order; (3) agree to comply with all

applicable conditions of the order; (4)

provide the NFA with the address

where computer terminals are to be kept

and the number of terminals to be

placed in each location.42 (5)

acknowledge that is subject to the

jurisdiction of the Commission and the

U.S. with respect to its activities related

to the order; (6) agree to keep books and

records in accordance with the Act and

the Commission’s regulations, if the

member or affiliate is registered as an

FCM, or in accordance with Rule 1.3 if

not registered;43 (7) agree to provide the

Commission with prompt access to the

premises where computer terminals are

located;44 (8) indicate what type of

business it intends to operate in the U.S.

and whether it will be trading for its

proprietary account, for customer

accounts or both (and if the person

intends to engage in customer business,

certify that it is or will be registered as

an FCM and acknowledge that it is

subject to all applicable Commission

regulations); (9) provide a description of

any litigation, enforcement actions,

disciplinary proceedings or other civil,

criminal or administrative proceedings,

within the prior five years, involving the

requester or any principal of the

requester (as the term ‘‘principal’’ is

defined in Commission Rule 3.1(a)), in

which there was an allegation of fraud,

customer abuse, or violation of

applicable regulatory or board of trade

requirements; (10) agree to provide NFA

and the Commission with immediate

written notice of any material changes

in its structure, status or operations that

might impact the entity’s activities

under the order; (11) agree to provide

additional information as necessary; and

(12) make any other certifications that

may be required by the order. The

Commission requests comment as to the

appropriateness of these potential

requirements. Are any of these

requirements unduly burdensome? Are

there any additional certifications,

undertakings, or acknowledgments that

the Commission should consider

including?

Such a confirmation request could

become effective automatically ten

business days after its receipt by NFA

unless the requester was notified

otherwise. If contacted, the requester

would have to receive written

notification from the Commission or

NFA prior to placing any terminals in

the U.S.

B. Definitional Issues

As discussed above, the Division

envisions a regulatory approach that

would provide a means for a foreign

board of trade to petition the

Commission to place computer

terminals in the U.S. for use by its

members and their affiliates. Initially,

several definitional issues are raised by

such an approach. For example: (a) how

should the term ‘‘computer terminal’’ be

defined? (b) where in the U.S. may

computer terminals be placed; and (c)

who is an ‘‘affiliate’’ of a foreign board

of trade member? These issues are

discussed individually below, and the

Commission requests comment on them.

1. Definition of Computer Terminal

The Commission believes that the

term ‘‘computer terminal,’’ or some

similar term should be defined broadly

under any rule adopted regarding

foreign board of trade terminal

placement in the U.S. to anticipate, to

the extent practicable, the evolution of

electronic trading systems. By defining

such a term broadly to anticipate
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39787

45See also, discussion of automated order routing

and execution issues in section II.C.2, below.

46 In this regard, FutureCom, a U.S. exchange

owned by the Texas Beef Trading Co., Ltd., has

applied to the Commission for contract market

designation. If its application is approved,

FutureCom would be the first U.S. Internet-based

futures and option exchange.

changes in technology, the Commission

would hope to ensure that a person

could not circumvent any rules adopted

by the Commission simply by

contending that a particular device is

not a computer terminal even though

the device performs essentially the same

operation. Historically, the term

‘‘computer terminal’’ was thought to be

a dedicated proprietary computer

system that provided access to a board

of trade (e.g., a DTB computer terminal).

This perception is rapidly changing,

however, as new technologies enter the

marketplace. The Commission

anticipates that ‘‘computer terminal’’ or

some similar term would be defined for

purposes of proposed rules in such a

way as to contemplate such changes,

and would include not only proprietary

computer systems, but also any other

device that currently is being used or

may be used in the future to provide

access to a foreign board of trade in the

same manner and providing the same

functionality as a proprietary system.

Such devices might take the form of

specialized computer software, a

telephonic system, or Internet access to

a foreign board of trade through a

personal computer, telephone or similar

device which is provided in a manner

that makes Internet use the functional

equivalent of a proprietary terminal.

The Commission requests comment as

to whether a mechanism that enables a

customer order to be submitted

electronically to an FCM and

subsequently to a foreign board of trade

without the necessity for human

intervention at the FCM should be

considered a ‘‘computer terminal’’

under Commission rules.45

As new technology evolves, new

types of access to foreign markets likely

will develop. The Internet, which has

seen tremendous growth in recent years,

provides one likely source for such

development.46 The Commission

solicits comment on what types of

‘‘computer’’ or other technological

systems currently are in use or

anticipated that could provide access to

a foreign board of trade. To what extent

is Internet access to foreign futures and

options currently available? Is direct

Internet access (i.e., not conducted

through an intermediary) currently

available to any foreign board of trade?

To what extent is the Internet currently

being used for the placement of orders

for futures and option products with

U.S. or foreign FCMs? How should the

Commission define ‘‘computer

terminal’’ so as to be sufficiently

inclusive?

2. Where May Computer Terminals Be

Located in the U.S.?

The Division’s approach would

permit members of a foreign board of

trade and members’ affiliates to place

computer terminals in their U.S. offices

or in their firm booths on the floor of a

U.S. board of trade. The Division does

not currently contemplate that proposed

rules would permit the installation of a

foreign computer terminal that provides

a customer a direct link to a foreign

board of trade’s floor or computer

system without first flowing through a

registered FCM that is a member or

affiliate thereof of the foreign board of

trade. Neither does the Division

contemplate that the proposed rules

would permit any customer to utilize a

foreign board of trade’s computer

terminal maintained by a member of the

foreign board of trade or its affiliate to

achieve such direct access. The

Commission requests comment as to

these positions of the Division and as to

what safeguards might be required to

prevent improper access to a foreign

board of trade’s computer terminals in

the U.S.

3. Definition of an ‘‘Affiliate’’ of a

Foreign Board of Trade Member

The Division’s approach would allow

affiliates of members of a foreign board

of trade to operate foreign board to trade

computer terminals pursuant to a

Commission Order. This position raises

the issue of who is a bona fide affiliate

of a member. Arguably, only those

person who have a substantial

ownership connection to a member

should be permitted to have access to a

foreign board of trade’s U.S.-located

terminals, this preventing customers

from circumventing Commission rules

by becoming an ‘‘affiliate’’ in name

only. An affiliated of a foreign board of

trade member for those purposes could

be defined as: (1) A person that owns 50

percent or more of a member (i.e, a

foreign board of trade member’s parent

company with an ownership interest in

the member of 50 percent or more); (2)

a person owned 50 percent or more by

a member (i.e., a foreign board of trade

member’s 50 percent or more owned

subsidiary); (3) a person that is owned

50 percent or more by a third person

that also owns 50 percent or more of a

member (i.e., a member’s sister

company where both the member and

the sister company are owned 50

percent or more by a third person); or

(4) any person that otherwise has

control, is controlled by or is owned 50

percent or more by a third person that

has control of a member. The

Commission requests comments as to

the appropriateness of this definition.

Should the Commission permit affiliates

of foreign board of trade members to

operate computer terminals in the U.S.

absent the foreign board of trade’s

designation as a U.S. contract market? Is

a 50 percent threshold too high or too

low?

The Commission is also concerned

that foreign board of trade do not create

categories of membership without

creating meaningful distinctions

between a member of a foreign board of

trade and a customer thereof. The

Commission requests comment as to

whether the Commission should

consider imposing any requirements

that would enable the Commission to

ensure that a member of a foreign board

of trade is a bona fide member. If so,

what types of requirements are

appropriate?

C. Other Issues Concerning Foreign

Board of Trade Terminal Placements in

the U.S.

1. Bona Fide Foreign Board of Trade

The Division in the DTB letter took

the position that only a bona fide

foreign board of trade should be entitle

to place and operate computer terminals

in the U.S. without being designated as

a contract market. At some level of U.S.

activity, a board of trade can no longer

claim to be a board of trade located

outside the U.S. and would be required

to be designated as contract market. The

Division’s approach describe above

would establish a number of

requirements that are aimed specifically

at providing the Commission with

initial and ongoing information

concerning a foreign board of trade’s

U.S. presence. For example, as noted

above, the Commission could receive in

a petition from a foreign board of trade

information concerning: (1) Any

physical presence the board of trade has

in the U.S.; and (2) any marketing,

education or other activities that are

conducted by a foreign board of trade in

the U.S. or that otherwise are directed

toward U.S. customers. This

information could be required to be

updated in the event of a material

change. The Commission also could

receive in a foreign board of trade’s

petition certain information concerning

the foreign board of trade’s recent trade

volume originating from the U.S. and

the current quantity of stocks, if any,

held in any U.S.-located warehouses.

Such information could be required to
39788 Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules

47See S. Rep. 384, 97th Cong., 2d Sess. 45–47, 84–

85 (1982); H.R. Rep. No. 565, Part I, 97th Cong., 2d

Sess. 84–85 (1982).

48By letter to the CME dated August 14, 1997, the

Division, under authority delegated by the

Commission in Rule 1.41a(a)(3), informed the CME

that its proposal to permit customers to transmit

Globex orders to FCMs via the Internet did not

require Commission approval under Section

5a(a)(12) of the Act. Under CME’s proposal,

customers do not have direct access to Globex.

Rather, the proposal permits CME clearing members

to accept customer orders via the Internet. After

receipt of a customer order, the order is transmitted

to Globex via the clearing member’s order routing

system and CME’s computer-to-computer interface

(‘‘CTCI’’), which enables clearing members to

upload and download orders between the member’s

order routing system and Globex. A CME clearing

member may use CME’s CTCI only if (1) the

member’s order routing system contains automated

credit controls or position limits, or (2) customer

orders received by the member through its order

routing system are subject to manual review and

processing by a clearing member employee prior to

being entered into a Globex terminal. 49See, e.g., note 12, supra.

be provided quarterly. Information

about a foreign board of trade’s activities

and presence in the U.S. is relevant in

determining whether a board of trade

should be required to be designated as

a U.S. contract market. Likewise, the

percentage of a foreign board of trade’s

volume that originates from the U.S.

also is relevant in determining such

questions. The Commission solicits

public comment as to whether it should

define in its rules the level of U.S.

activity requiring contract market

designation. If so, how should the level

be defined? Additionally, the

Commission requests comment as to any

U.S. activities, other than those

discussed above, that might be relevant

to a determination as to whether a board

of trade that desires to place its

computer terminals in the U.S. is a bona

fide foreign board of trade.

The Division’s potential approach

describes above also assumes that any

foreign board of trade that would

petition the Commission for an order

under such procedures would be a bona

fide board of trade that is subject to an

established rulemaking structure. This

view is in keeping with Congressional

intent with respect to what is meant by

the term ‘‘foreign board of trade’’ under

the Act. In this regard, the legislative

history concerning the 1982

amendments to the Act suggests that,

when Congress amended the Act in

1982, it intended that the exclusion of

futures contracts traded on ‘‘a board of

trade, exchange or market located

outside the United States’’ form the offexchange ban in Section 4(a) of the Act,

as well as the limitation on the

Commission’s regulatory authority in

Section 4(b), apply only to ‘‘bona fide

foreign futures contracts’’ traded in a

regulated exchange environment.47

Consistent with Congressional intent,

the Commission made clear when

promulgating part 30 that the part 30

rules do not permit the offer and sale in

the U.S. of foreign futures or options

that are not executed on or subject to the

rules of a foreign board of trade.

2. Order Execution and Order Routing

Issues

Technological capabilities now exist

that would enable a customer, who is

not a member of a foreign board of trade,

to send orders to the foreign board of

trade through an automated order

routing system that is linked to the

board of trade through a member.

Through such a system, customers

could place orders on the foreign board

of trade with little, if any, human

intervention by the member. Execution

of the customer’s order could be

accomplished either through the foreign

board of trade’s system interface or on

the floor of an exchange.

To date, the Commission has not

opined on the appropriateness of an

FCM’s use of an automated order

routing system that would allow

customer orders that have been

submitted electronically to the FCM to

be transmitted into a foreign board of

trade computer system for placing

orders on the foreign board of trade.48

As discussed above, the Division’s

approach does not contemplate that the

Commission’s rules would permit

customers to have access to ‘‘computer

terminals’’ such that they would have

the functionality of a proprietary

terminal and could place a trade

directly on a foreign board of trade

without the use of an intermediary. The

Commission requests comment on

whether its rules should permit the use

of some type of automated process to be

employed by FCMs to allow customer

orders that have been submitted

electronically to the FCM to be

transmitted into a foreign board of trade

computer system. If so, what features

would the system have to include or

lack so that it would not be deemed a

computer terminal under Commission

rules? For example, should any

automated order transmission system

allowing a customer to transmit orders

to its FCM require an employee of the

FCM to review and to accept such

orders and to take some affirmative,

non-automated action to transmit such

order to the foreign board of trade, or

should fully automated intermediation

be permitted, in which a fully

computerized process would substitute

for acceptance and transmission of

orders by FCM employees? Should any

such system limit a customer’s view of

information to only a portion of that

otherwise available to a member of a

foreign board of trade that has a

computer terminal? If so, what types of

information should be permissible to be

viewed by the customer on such a

system and what information should be

inaccessible? Should automated systems

be required to provide, at a minimum,

credit and position limit checks? The

Commission requests comment as to

other safeguards that should be required

if automated verification, acceptance

and transmission of customer orders to

a foreign board of trade’s computer

system is permitted.

If the Commission were to permit an

FCM to use a fully automated process to

transmit electronically submitted

customer orders to a foreign board of

trade, should the FCM’s use of this

process be permitted only pursuant to

the requirements of a Commission order

to the foreign board of trade? That is,

should customer access through an

automated order routing system be

provided: (1) only to a foreign board of

trade that had received an order from

the Commission to place computer

terminals in the U.S. without being

designated as a contract market; and (2)

only through an FCM that is a member

or affiliate of a member of such foreign

board of trade and that had undergone

the appropriate confirmation process to

operate computer terminals under the

foreign board of trade’s order? Or should

fully automated order routing systems

allowed to provide access to all foreign

boards of trade even if they have not

received permission to place terminals

in the U.S.? How should foreign firms

that operate pursuant to an exemption

under Commission Rule 30.10 be

treated?

3. Linkages Between Boards of Trade

As electronic trading systems

continue to evolve, some boards of trade

are finding it advantageous to enter into

partnerships with other boards of trade

to make their products more widely

available.49 These partnerships raise

issues regarding how a Commission rule

should accommodate situations where

the products of one board of trade are

being made available through another

board of trade’s computer terminals

located in the U.S. or where two or more

boards of trade share the same

electronic trading platform. The

Division’s approach, described above,

would apply not only with respect to a

single foreign board of trade, but also in

circumstances where the products of

multiple foreign boards of trade are

traded from a single system. In such a
Federal Register / Vol. 63, No. 142 / Friday, July 24, 1998 / Proposed Rules 39789

50The Commission anticipates that a foreign

board of trade that currently is trading its products

through computer terminals in the U.S. would be

required to comply with any new rules eventually

adopted by the Commission, but would be provided

a transition period in which to come into

compliance.

case, each foreign board of trade whose

products would be made available

through U.S.-located computer

terminals would be required to comply

with any requirements adopted by the

Commission in its order. For example,

if two or more foreign boards of trade

share the same computer terminal

platform and each wished to place

computer terminals in the U.S. for the

use of its members (or members’

affiliates), each would be required to

receive an order from the Commission

and comply with the requirements in

that order under the approach described

above. The Division’s approach would

also arguably apply to a foreign board of

trade which trades through terminals

shared with a U.S. exchange that has

been designated as a U.S. contract

market.50 The Commission requests

comment as to whether different

requirements should apply to a foreign

board of trade’s products which are

traded on the computer terminals of a

U.S. contract market. If so, how should

such requirements differ and why?

III. Conclusion

The Commission believes that it is

appropriate to develop rules concerning

placement of foreign board of trade

terminals in the U.S. in light of the

growing interest among foreign boards

of trade to do so. The Commission

hopes to develop an approach to

address these issues that will provide

certainty to foreign exchanges that wish

to place their computer terminals in the

U.S. for trading purposes and will be

consistent with the Commission’s

obligations under the Act to maintain

the integrity and competitiveness of the

U.S. markets and to provide protection

to U.S. customers. To this end, the

Commission requests public comment

on the issues and the Division’s

approach, as discussed above.

Issued in Washington, D.C. on July 17,

1998 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98–19723 Filed 7–23–98; 8:45 am]

BILLING CODE 6351–01–M

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 808

[Docket No. 97N–0222]

Medical Devices; Preemption of State

Product Liability Claims

AGENCY: Food and Drug Administration,

HHS.

ACTION: Withdrawal of proposed rule.

SUMMARY: The Food and Drug

Administration (FDA) is announcing

that it is withdrawing a proposed rule

that published in the Federal Register of

December 12, 1997 (62 FR 65384),

relating to medical device preemption of

State product liability claims. FDA is

making this withdrawal because of

concerns that have been raised

regarding the interplay between the

FDA Modernization Act of 1997

(FDAMA) and the proposed rule.

DATES: The proposed rule is withdrawn

July 24, 1998.

ADDRESSES: Copies of the draft proposed

rule and its comments may be obtained

from the Dockets Management Branch

(HFA–305), Food and Drug

Administration, 5630 Fishers Lane, rm.

1061, Rockville, MD 20852.

FOR FURTHER INFORMATION CONTACT:

Joseph M. Sheehan, Center for Devices

and Radiological Health (HFZ–215),

Food and Drug Administration, 2094

Gaither Rd., Rockville, MD 20850, 301–

827–2974.

SUPPLEMENTARY INFORMATION: Section

521 of the Federal Food, Drug, and

Cosmetic Act (the act) (21 U.S.C. 360k)

contains an express preemption

provision applicable to medical devices

regulated by FDA. The Supreme Court

addressed whether section 521 of the act

preempts State common law tort claims

arising from allegedly defective medical

devices. (See Medtronic, Inc. v. Lohr

(Lohr), 116 S.Ct. 2240 (1996).) The Court

concluded that section 521 of the act

did not supplant the State law duties for

devices marketed pursuant to a

premarket clearance issued under

section 510(k) of the act (21 U.S.C.

360(k)). Since Lohr was decided, the

lower courts have interpreted section

521 of the act inconsistently and have

reached conflicting conclusions with

respect to whether section 521 of the act

preempts State law claims for injuries

allegedly resulting from medical devices

that have received premarket approval

under section 515 of the act (21 U.S.C.

360e), or have received an

investigational device exemption under

section 520(g) of the act (21 U.S.C.

360j(g)).

In light of the confusion among the

lower courts in interpreting section 521

of the act since Lohr, and in accordance

with the Supreme Court’s recognition

that FDA’s interpretation of the

preemptive effect of section 521 of the

act is entitled to substantial weight, the

agency issued the proposed rule in the

Federal Register of December 12, 1997

(62 FR 65384), addressing the

circumstances under which section 521

of the act preempts State common law

tort claims based on injury from

allegedly defective medical devices. The

proposal is consistent with the position

that the agency has historically taken on

issues related to device preemption. The

comment period on this proposed rule

was open until February 10, 1998. The

agency received 41 comments from a

variety of associations, law firms, and

individuals representing industry and

consumer interests.

FDA has decided to withdraw the

rulemaking to amend its regulations

regarding preemption of State and local

requirements applicable to medical

devices. FDA is taking this action

because, even though the proposed rule

was issued after the enactment of

FDAMA, it was conceptualized and

written prior to enactment.

Concerns have been raised by

industry and congressional

representatives that the agency did not

share its thinking on its interpretation of

section 521 of the act during FDAMA

deliberations, even though an early draft

of the proposed rule was shared during

the spring of 1997 with attorneys for

Public Citizen Litigation Group, who

represented Lohr in the Lohr case. The

remedy under FDA’s regulations for

disclosure of a draft regulation is

ordinarily to issue a notice in the

Federal Register making the draft

publicly available. See 21 CFR

10.80(b)(2). Such a contemporaneous

notice was not, however, provided in

this case.

Because of the great policy

significance of these preemption issues,

the concern that Congress was not aware

of the agency’s thinking during FDAMA

deliberations, and the potential

interplay between the FDAMA device

provisions and device preemption, the

agency believes that it is imperative for

all interested parties to have confidence

that the agency is addressing their

concerns in an impartial manner.

Therefore, the agency is taking the

unusual step of withdrawing the

proposed rule.

The early draft of the proposed rule

that was disclosed, the comments on it,

and the correspondence raising