1

COMMODITY FUTURES TRADING COMMISSION

FORM FBOT

FOREIGN BOARD OF TRADE APPLICATION FOR REGISTRATION (IN ORDER TO

PERMIT DIRECT ACCESS TO MEMBERS AND OTHER PARTICIPANTS)

London Stock Exchange plc.

Name of applicant as specified in organizational documents

10 Paternoster Square London, EC4M 7LS

Address of principal executive office

 If this Form FBOT is a new application for registration, complete in full and check here.

 If this Form FBOT is an amendment to a pending application or to a final application that

resulted in the issuance of an Order of Registration, list and/or describe all items that are

amended or otherwise updated and check here.

When appropriate, please attach additional page(s) containing a list and explanatory

statement of amendment(s) or update(s).

GENERAL INFORMATION

1. Name under which the business of the foreign board of trade will be conducted, if different

than name specified above:

London Stock Exchange Derivatives (“LSE Derivatives”)

2. List of principal office(s) where foreign board of trade activities are/will be conducted (please

use multiple entries, when applicable):

Office (name and/or location): London Stock Exchange plc.

Address: 10 Paternoster Square

London, EC4M 7LS

United Kingdom

Phone Number: + 44 (0) 207 797 1000

Website Address: www.lseg.com

3. Contact Information.

3a. Primary Contact for Form FBOT (i.e., the person authorized to receive Commission

correspondence in connection with this Form FBOT and to whom questions regarding the

submission should be directed):

Name: Nikhil Rathi

Title: Chief Executive Officer, London Stock Exchange

plc.

Email Address:
2

Mailing Address: 10 Paternoster Square

London, EC4M 7LS

United Kingdom

Phone Number:

3b. If different than above, primary contact at the foreign board of trade that is authorized to

receive all forms of Commission correspondence:

Name: Michael Philipp

Title: Attorney

Email Address: mphilipp@morganlewis.com

Mailing Address: 77 West Wacker Drive

Chicago, IL

60601, USA

Phone Number: +1 312 324 1905

Fax Number: +1 312 324 1001

BUSINESS ORGANIZATION

Describe organizational history, including date and, if applicable, location of filing of original

organizational documentation, and describe all substantial amendments or changes thereto. For

example:

Response:

London Stock Exchange plc. (also referred to herein as “LSE”) is a public limited

company registered in England and Wales with registration number 02075721. London

Stock Exchange plc. was incorporated on 19 November 1986 as The International Stock

Exchange of the United Kingdom and The Republic of Ireland Limited, a private limited

company, and changed its name to London Stock Exchange Limited on 9 December

1995. On 8 June 2000, London Stock Exchange Limited re-registered as a public limited

company under the Companies Act 1985 to become London Stock Exchange plc. On 30

September 2013, LSE acquired the derivatives business and assets (the “Derivatives

Business”) of Turquoise Global Holdings Limited (“TGHL”) (a 51.36% owned

subsidiary of London Stock Exchange Group or “LSEG”) and merged the Derivatives

Business into the existing business of LSE to create London Stock Exchange Derivatives

(“LSE Derivatives”). LSE Derivatives is therefore a division of LSE.

4

INSTRUCTIONS FOR EXHIBITS TO FORM FBOT

1. The following exhibits must be filed with the Commission by any foreign board of trade (1)

seeking registration for purposes of granting direct access to its members and other

participants or (2) amending a previously submitted application, pursuant to CEA section

4(b) and part 48 of the Commission’s regulations. The information and documentation

requested relates to the activities of the foreign board of trade, unless otherwise stated.

2. The exhibits should be filed in accordance with the General Instructions to this Form FBOT

and labeled as specified herein. If any exhibit is not applicable, please specify the exhibit

letter and number and indicate by marking “none” or “N/A”. If any exhibit may be satisfied

by documentation or information submitted in a different exhibit, the documentation or

information need not be submitted more than once – please use internal cross-references

where appropriate.

GENERAL REQUIREMENTS

A foreign board of trade applying for registration must submit sufficient information and

documentation to successfully demonstrate to Commission staff that the foreign board of trade

and its clearing organization satisfy all of the requirements of Commission regulation 48.7. With

respect to its review of the foreign board of trade, the Commission anticipates that such

information and documentation would necessarily include, but not be limited to, the following:

EXHIBIT A – GENERAL INFORMATION AND DOCUMENTATION

Attach as Exhibit A-1, a description of the following for the foreign board of trade:

Location, history, size, ownership and corporate structure, governance and committee

structure, current or anticipated presence of offices or staff in the United States, and

anticipated volume of business emanating from members and other participants that will be

provided direct access to the foreign board of trade’s trading system.

Response:

1. Location: LSE is located at 10 Paternoster Square, London, EC4M 7LS, United Kingdom.

2. History/Ownership/Corporate Structure: LSE’s sole shareholder is London Stock

Exchange Group plc. (“LSEG”). LSEG was incorporated and registered in England and

Wales on 18 February 2005 under the Companies Act 1985 as a private company limited

by shares with registered number 05369106 and with the name Milescreen Limited. On

16 November 2005, it changed its name to London Stock Exchange Group Limited. On 7

December 2005, it re-registered as a public limited company pursuant to section 43 of the

Companies Act 1985 and changed its name to London Stock Exchange Group plc.

LSEG’s registered and head office is 10 Paternoster Square, London, EC4M 7LS, United

Kingdom.
5

3. LSE was incorporated on 19 November 1986 as The International Stock Exchange of the

United Kingdom and The Republic of Ireland Limited, a private limited company, and

changed its name to London Stock Exchange Limited on 9 December 1995. On 8 June

2000, London Stock Exchange Limited re-registered as a public limited company under

the Companies Act 1985 to become London Stock Exchange plc. On 15 May 2006, LSEG

became the holding company of LSE pursuant to a scheme of arrangement made under

section 425 of the Companies Act 1986 and replaced LSE as the listed entity.

4. LSE is registered as a Recognised Investment Exchange and is regulated by the UK

Financial Conduct Authority (the “FCA”). On 30 September 2013, LSE acquired the

derivatives business and assets (the “Derivatives Business”) of TGHL (a 51.36% owned

subsidiary of LSEG) and merged the Derivatives Business into LSE to create LSE

Derivatives, a division of LSE.

5. LCH.Clearnet Ltd (“LCH”) is the central counterparty for the clearing of contracts

transacted on LSE Derivatives. LCH is a 57.8% majority owned subsidiary of London

Stock Exchange (C) Limited, which is in turn a wholly owned subsidiary of London

Stock Exchange Group plc. LCH is registered with the Bank of England as a Recognised

Clearing House and is registered with the Commission as a derivatives clearing

organization (“DCO”).

6. Governance and Committee Structure:

The Board of Directors of LSE currently consists of eight directors, five of whom,

including the chairman, are non-executive. Five LSE directors are also directors of LSEG.

The LSEG Audit Committee and Risk Committee consider all of the significant audit and

risk matters arising within the Group, including in relation to LSE. As a major subsidiary

of LSEG, LSE matters are given appropriate focus by each committee.

Attach, as Exhibit A-2, the following:

Articles of association, constitution, or other similar organizational documents.
6

Response:

10. Attached as Exhibit A-2-I are the Articles of Association of LSE.

Attach, as Exhibit A-3, the following:

(1) Membership and trading participant agreement.

(2) Clearing agreements.

Response:

11. Attached as Exhibit A-3-I is the LSE Membership Application Form. Furthermore,

attached as Exhibit A-3-II is the current form of the LSE Trading Services Agreement for

members accessing LSE Derivatives from the United States.

12. LSE Derivatives does not require a separate clearing agreement. As described in Exhibit

B, LSE Derivatives members must be a clearing member of LCH or clear its business

through a general clearing member of LCH. The clearing arrangements of a new

participant are specified in the LSE Membership Application Form.

Attach, as Exhibit A-4, the following:

Terms and Conditions of Futures contracts to be available through direct access (as specified

in Exhibit E).

Response:

13. Attached as Exhibit A-4 are the contract specifications for the FTSE 100 UK Index

Futures contract, the FTSE UK Large Cap Super Liquid Index Future contract, and the

BIST 30 Index Futures contract.

Attach, as Exhibit A-5, the following:

The national statutes, laws and regulations governing the activities of the foreign board of

trade and its respective participants.

Response:

14. Attached as Exhibit A-5-I is a copy of the Financial Services and Markets Act 2000

(“FSMA”).

15. Attached as Exhibit A-5-II is a copy of FSMA (Regulated Activities) Order 2001.
7

16. Attached as Exhibit A-5-III-A is a copy of the FSMA (Recognition requirements for

Investment Exchanges and Clearing Houses) Regulation 2001.

17. Attached as Exhibit A-5-III-B is a copy of the Recognised Investment Exchanges

Sourcebook (“REC”) section of the FCA Handbook. A web-based version of the entire

FCA Handbook is available at: http://fshandbook.info/FS/html/FCA.

18. Attached as Exhibit A-5-IV is a copy of the Criminal Justice Act 2003.

19. Attached as Exhibit A-5-V is a copy of Proceeds of Crime Act 2002.

Attach, as Exhibit A-6, the following:

The current rules, regulations, guidelines and bylaws of the foreign board of trade.

Response:

20. Attached as Exhibit A-6 is a copy of the LSE Derivatives Rulebook (also referred to

herein as the “Rules”).

Attach, as Exhibit A-7, the following:

Evidence of the authorization, licensure or registration of the foreign board of trade pursuant

to the regulatory regime in its home country jurisdiction and a representation by its

regulator(s) that it is in good regulatory standing in the capacity in which it is authorized,

licensed or registered.

Response:

21. Attached as Exhibit A-7-I is an excerpt of the FCA Financial Services Register which

confirms LSE’s status as a Recognised Investment Exchange (“RIE”) since 22 November

2001. The Financial Services Authority (“FSA”) is the predecessor of the FCA.

Attach, as Exhibit A-8, the following document:

A summary of any disciplinary or enforcement actions or proceedings that have been brought

against the foreign board of trade, or any of the senior officers thereof, in the past five years

and the resolution of those actions or proceedings.
8

Attach, as Exhibit A-9, the following document:

An undertaking by the chief executive officer(s) (or functional equivalent[s]) of the foreign

board of trade to notify Commission staff promptly if any of the representations made in

connection with or related to the foreign board of trade’s application for registration cease to

be true or correct, or become incomplete or misleading.
9

EXHIBIT B – MEMBERSHIP CRITERIA

Attach, as Exhibit B, the following, separately labelling each description:

(1) A description of the categories of membership and participation in the foreign board of

trade and the access and trading privileges provided by the foreign board of trade. The

description should include any restrictions applicable to members and other participants to

which the foreign board of trade intends to grant direct access to its trading system.

Response:

26. The LSE Derivatives business allows 4 different categories of market participants to

become members and trade on the platform, these being:

 Brokers for agency business;

 Market Makers;

 Proprietary traders; and

 Reporting Brokers.

27. Only LSE member firms that have been approved to access LSE Derivatives can access

the trading platform. Members are permitted to provide their customers with access to the

trading system via the member’s systems (“Direct Market Access” or “DMA”) using the

member’s trading codes as long as they have adequate controls in place as per the LSE

Derivatives Rules. LSE intends to offer Sponsored Access to members at some point in

the future. If and when available, Sponsored Access will allow non-member firms to trade

on the system under the “sponsorship” of a member firm and subject to platform level

controls.

28. With the sole exception of Reporting Brokers (see paragraph 29 below), a LSE

Derivatives member can participate under one of the following arrangements:

 General Clearing Member (also referred to as “GCM”) – A GCM is a member of

LSE Derivatives and has a direct membership with LCH with respect to LSE

Derivatives and is also approved to act in a clearing capacity on behalf of NonClearing Participant;

 Individual Clearing Member (also referred to as “ICM”) – An ICM is a member

of LSE Derivatives and has a direct membership with LCH with respect to LSE

Derivatives. Unlike a GCM, an ICM may only clear its own business; and

 Non-Clearing Participant (also referred to as “NCP”) – A NCP is a member of

LSE Derivatives, but has no direct membership with LCH with respect to LSE

Derivatives. NCPs must have a relationship with a GCM to clear their business.

29. Members must at all times maintain clearing arrangements with LCH, either directly or

through a GCM (see Rule 1.2.2 of the Rules). Members acting in a Reporting Broker

capacity only are not required to have clearing arrangements in place (see Rule 1.2.1 of

the Rules). This is because Members acting in such capacity are never party to any trade

as they can only arrange a trade between two Members and initiate trade reporting on

such Members’ behalf.
10

30. Potential members must complete an LSE Membership Application Form, a copy of

which is attached as Exhibit A-3-I and a LSE Trading Services Agreement, a copy of

which is attached as Exhibit A-3-II. Within the Membership Application Form, a

potential member identifies the accounts in which they would like to trade. Members

establish a “Proprietary” account, if they trade for their own account, or an “Agency”

account, if they act on behalf of their customers.

(2) A description of all requirements for each category of membership and participation on

the trading system and the manner in which members and other participants are required to

demonstrate their compliance with these requirements. The description should include, but not

be limited to, the following:

(i) Professional Qualification. A description of the specific professional requirements,

qualifications, and/or competencies required of members or other participants and/or their

staff and a description of the process by which the foreign board of trade confirms

compliance with such requirements.
11

(ii) Authorization, Licensure and Registration. A description of any regulatory and selfregulatory authorization, licensure or registration requirements that the foreign board of

trade imposes upon, or enforces against, its members and other participants including, but

not limited to any authorization, licensure or registration requirements imposed by the

regulatory regime/authority in the home country jurisdiction(s) of the foreign board of trade.

Please also include a description of the process by which the foreign board of trade confirms

compliance with such requirements.
12
13

(iii) Financial Integrity. A description of the following:

(A) The financial resource requirements, standards, guides or thresholds required of

members and other participants.

(B) The manner in which the foreign board of trade evaluates the financial

resources/holdings of its members or participants.

Response:

(C) The process by which applicants demonstrate compliance with financial

requirements for membership or participation including, as applicable:

(i) Working capital and collateral requirements, and

(ii) Risk management mechanisms for members allowing customers to

place orders.
14

49. LSE Derivatives monitors positions and may also impose position limits in accordance

with Rule 4.8.1. From a clearing standpoint, LCH will request margin on all positions and

it is each member’s responsibility to meet their margin requirements.

(iv) Fit and Proper Standards. A description of how the foreign board of trade ensures that

potential members/other participants meet fit and proper standards.
15

EXHIBIT C – BOARD AND/OR COMMITTEE MEMBERSHIP

Attach, as Exhibit C, the following:

(1) A description of the requirements applicable to membership on the governing board and

significant committees of the foreign board of trade.

Response:

53. In assessing whether the LSE is a fit and proper person to operate a RIE, the FCA takes

account of various factors, including those listed in the Suitability1and Systems and

Controls2sections of REC and the requirements below relating to membership on the

governing board and significant committees:

 The integrity and competence of the governing body and Key Individuals;

 Connections that the RIE, its governing body or Key Individuals have with other

entities;

 Breaches of any law, regulation or code of practice by the RIE or its Key

Individuals;

 Its arrangements for ensuring that it employs individuals who are honest and

demonstrate high standards of integrity; and

 The effectiveness of its arrangements to control conflicts of interest in particular

securing the independence of the regulatory department from its commercial and

marketing departments.

54. The definition of a Key Individual includes persons who, under the operational or

managerial arrangements of the UK recognised body, are appointed to manage the

departments responsible for carrying out its relevant functions, whether or not they are

members of its governing body. A person appointed to carry out specific tasks, such as to

conduct a particular investigation into a specific set of facts, would not usually be a Key

Individual3. According to the definition provided by the FCA, a Key Individual4(in

relation to a UK recognised body) is:

 Its chairman or president;

 Its chief executive;

 A member of its governing body;

 A person who, alone or jointly with one or more others, is responsible under the

immediate authority of a person in (a), (b) or (c) or a committee of the governing

body for the conduct of any relevant function.

1

FCA Handbook, REC 2.4.

2

FCA Handbook, REC 2.5.

3

FCA Handbook, REC 3.4.3.

4

FCA Handbook, Glossary.
16

55. REC 2.4 - Suitability requires that “the persons who effectively direct the business and

operations of the UK RIE are of sufficiently good repute and sufficiently experienced to

ensure the sound and prudent management and operation of the financial markets

operated by it” and also that “the persons who are in a position to exercise significant

influence over the management of the UK RIE whether directly or indirectly must be

suitable”.

(2) A description of the process by which the foreign board of trade ensures that potential

governing board and committee members/other participants meet these standards.

Response:

56. LSE has a number of notification requirements to the FCA to enable it to monitor changes

in the arrangements of LSE for the carrying out of its relevant functions or for overseeing

the work of Key Individuals or departments responsible for its relevant functions. This

includes a requirement to notify the FCA of the appointment or election of a Key

Individual or alternatively the resignation or removal of a Key Individual5or major

changes to a Key Individual’s responsibilities6. In addition, the FCA must be notified

where a Key Individual is the subject of disciplinary action, resigns as a result of an

investigation into alleged misconduct or is dismissed for misconduct, or is served with a

petition for bankruptcy or enters into a voluntary arrangement with creditors7.

57. In assessing a Key Individual the FCA will consider the requirements described in (1)

above.

58. In considering the appointment of a member of the governing board, committee member

or senior management LSE undertakes its own checks, selection process and including

where appropriate the involvement of a nomination committee.

(3) A description of the provisions to minimize and resolve conflicts of interest with respect

to membership on the governing board and significant committees of the foreign board of

trade.

Response:

59. The Companies Act 2006 sets out the duties of a director of a UK incorporated company

including in relation to conflicts of interest. The Board of LSE maintains a Conflicts of

Interest policy which reflects these requirements.

60. The relevant provisions of the Companies Act 2006 are summarised below:

5

FCA Handbook, REC 3.4.2.

6

FCA Handbook, REC 3.4.3 (4).

7

FCA Handbook, REC 3.5.
17

 A director of a company must avoid a situation in which he has, or can have, a direct or

indirect interest that conflicts, or possibly may conflict, with the interests of the

company. The board of the company is able to authorise such situational conflicts,

provided that: i) any quorum requirement is met without counting the interested

director; and (ii) the matter is agreed without counting any vote cast by the interested

director. Under the terms of the board of LSE’s Conflicts of Interest Policy, the Board

may attach terms to any authorised conflict, for example to exclude a director from a

meeting or to withhold Board papers; and

 Duty to declare any direct or indirect interest in a proposed transaction or arrangement

with the company and a separate duty to disclose any interest in an existing

transaction or arrangement.

61. As described in Exhibit C-1 above, the FCA also considers the effectiveness of LSE

arrangements to control conflicts of interest.

(4) A description of the rules with respect to the disclosure of material non-public

information obtained as a result of a member’s or other participant’s performance on the

governing board or significant committee.
18

EXHIBIT D – THE AUTOMATED TRADING SYSTEM

Attach, as Exhibit D-1, a description of (or where appropriate, documentation addressing) the

following, separately labelling each description:

(1) The order matching/trade execution system, including a complete description of all

permitted ways in which trading participants connect to the trade matching/execution system

and the related requirements (for example, authorization agreements).
19

(2) The architecture of the systems, including hardware and distribution network, as well as

any pre- and post-trade risk-management controls that are made available to system users.

8 LSEDM Connectivity Guide 2.2.2.

9 LSEDM Connectivity Guide 2.3.
20
21
22

(3) The security features of the systems.
(4) The length of time such systems have been operating.

(5) Any significant system failures or interruptions.

(6) The nature of any technical review of the order matching/trade execution system

performed by the foreign board of trade, the home country regulator, or a third party.
24

(7) Trading hours.

Response:

94. Orders may be placed and trades may be executed during the hours in which LSE

Derivatives is open for trading. LSE Derivative’s normal trading hours for each product is

set out in the individual contract specifications in the Rules. The trading platform for

FTSE 100 Index futures contract and the FTSE UK Large Cap Super Liquid Index

Futures contract (for trading on the orderbook) is open from 08:00 am to 5:00pm London

time each UK trading day. The trading platform for BIST 30 Index Futures contract (for

trading on the orderbook) is open from 07:10 am to 3:45pm London time each UK trading

day. The normal trading hours may be varied by LSE Derivatives in conjunction with

public holidays or in exceptional circumstances. LSE Derivatives gives notice in writing

to members of any variation in its normal trading hours.

(8) Types and duration of orders accepted.

Response:

95. LSE Derivatives supports the following order types;

 By Price type: (Limit order, Market order, Top order, Stop (loss order), If Touched

order);

 By Quantity type: (Minimum quantity order, Iceberg Order); and

 By Duration type: (Day order, Good Till Day (GTD), Good Till Cancelled (GTC),

Immediate order (FAK/IOC), While-Connected).

(9) Information that must be included on orders.

Response:

97. On placing, cancelling or varying an order by way of the electronic trading system, a

member must provide the following information:

 The Series, Type, Class and the Listed Product in question;

 The Expiration Month;

 Whether the order is to buy or to sell;

 In the case of an Options Contract, whether it is a Call or a Put;

 The price for the Order;

 The Order’s volume;

 Whether it is a Limit Order, Market Order or a Combination Order;
25

 The Account to which the transaction, if executed, is to be allocated; and

 If appropriate, the identification code of the client for whom the Order has been

placed.

(10) Trade confirmation and error trade procedures.

100.Error trade procedures

Any trade cancellation requests are performed through LSE Market Operations team

following a decision by the LSE Market Supervision team. In accordance with Rule 4.5.1

of the Rules, LSE Derivatives reserves the right to forcibly cancel any trade without the

permission of either counterparty to the trade. Circumstances under which this can occur

may include, but are not limited to:

 An error (technical or operational) on the part of LSE Derivatives or its systems;

 Material breach of any law, any Rule of LSE Derivatives or any Rule of an

affiliate company of LSE Derivatives (such as LCH);

 LSE Derivatives judges that cancellation of the trade would be in the interests of

the market; and

 For Dividend derivatives, where a trade occurs on the basis of material or

erroneous information.

101.LSE Derivatives can be contacted by a member to request cancellation of a transaction to

which they are counterparty due to an error on their part.

102.The cancellation of futures contracts is covered by Rule 4.6.2 of the Rules. In accordance

with this rule, a request to cancel a trade must be received within 30 minutes of execution

of the trade. No trade will usually be considered for cancellation or adjustment if the

request is received more than 30 minutes after the trade has taken place.

103.The cancellation of trades that have been trade reported are covered by Rules 5.2.1 –

5.2.5 of the Rules. In accordance with these rules, no trade that has been trade reported

will usually be considered for cancellation if the request to cancel is received by LSE

Market Operations team after the close of business on the business day following the

trade day. On receiving a request from a member to cancel a trade that has been trade
26

reported, LSE Derivatives will contact the other counterparty and request that the trade be

cancelled. Should the counterparty not agree, the trade will not usually be cancelled.

104.For further details on the trade cancellation procedure please refer to the Cancellation of

incorrect trades sections of the Rules (Rules 4.5.1 to 4.7.4).

(11) Anonymity of participants.

(12) Trading system connectivity with clearing system.

(13) Response time.
27

(14) Ability to determine depth of market.

(15) Market continuity provisions.
28

(16) Reporting and recordkeeping requirements.
DB1/ 86321961.2 29

124.LSE publishes real time derivatives trading information to market participants, vendors

and ISVs via its HSVF data feed. LSE also published end-of-day volume information on

its website. Monthly volumes and open interest are published on the LSE Derivatives

website as well.

125.LSE also has reporting obligations to the FCA in respect of suspension of services and

inability to operate its facilities (including trading systems)11 and in respect of the

business continuity plans for its technology systems or a failure of aspects of such

systems12.

Attach, as Exhibit D-2, a description of the manner in which the foreign board of trade

assures the following with respect to the trading system, separately labelling each description:

(1) Algorithm. The trade matching algorithm matches trades fairly and timely.

(2) IOSCO Principles. The trading system complies with the Principles for the Oversight of

Screen-Based Trading Systems for Derivative Products developed by the Technical

Committee of the International Organization of Securities Commissions (IOSCO

Principles). Provide a copy of any independent certification received or self-certification

performed and identify any system deficiencies with respect to IOSCO Principles.

Response:

127.LSE’s adherence to the IOSCO Principles demonstrated by the fact that it has developed,

deployed and operated SOLA under the supervision of, and to the satisfaction of, the

FCA. The FSA (predecessor to the FCA), like the CFTC, has endorsed the IOSCO

Principles.

(3) Audit Trail.

(i) The audit trail timely captures all relevant data, including changes to orders.

11 FCA Handbook, REC 3.15.

12 FCA Handbook, REC 3.16.
30

(ii) Audit trail data is securely maintained and available for an adequate time period.

(4) Public Data. Adequate and appropriate trade data is available to users and the public.

Response:

131.The LSE Derivatives system provides electronic market data information through the

HSVF, which is “broadcast” to all market subscribers. Members typically will have a

direct connection to the HSVF to receive market data and additionally market data

vendors are connected to the HSVF and deliver data to their customers.

(5) Reliability. The trading system has demonstrated reliability.
31

(6) Secure Access. Access to the trading system is secure and protected.

(7) Emergency Provisions. There are adequate provisions for emergency operations and

disaster recovery.
(8) Data Loss Prevention. Trading data is backed up to prevent loss of data.

(9) Contracts Available. Mechanisms are available to ensure that only those futures, option or

swap contracts that have been identified to the Commission as part of the application or

permitted to be made available for trading by direct access pursuant to the procedures set forth

in § 48.10 are made available for trading by direct access.
33

(10)Predominance of the Centralized Market. Mechanisms are available that ensure a

competitive, open, and efficient market and mechanism for executing transactions.

Response:

147.LSE Derivatives supports on screen matching through the SOLA Orderbook with

dedicated Market Makers and qualified liquidity providers building the book and

providing two-way prices.

148.LSE Derivatives supports a Trade Reporting service, where market participants can

report their trades for clearing purposes. In practice, FTSE 100 UK Index Futures

contracts, FTSE UK Large Cap Super Liquid Index Futures contracts, and BIST 30 Index

Futures contracts are either traded on the Centralized Orderbook or through Block trades.
34

EXHIBIT E – THE TERMS AND CONDITIONS OF CONTRACTS PROPOSED TO BE

MADE AVAILABLE IN THE UNITED STATES

Attach, as Exhibit E-1, a description of the terms and conditions of futures, option or swap

contracts intended to be made available for direct access. With respect to each contract,

indicate whether the contract is regulated or otherwise treated as a future, option or swap

contract in the regulatory regime(s) of the foreign board of trade’s home country.

Response:

149.LSE Derivatives initially intends to provide direct access to LSE Derivatives for the

trading of futures on the FTSE 100 UK Index Futures contract, the FTSE UK Large Cap

Super Liquid Index Futures contract, and the BIST 30 Index Futures contract.

150.FTSE 100 UK Index futures contracts, the FTSE UK Large Cap Super Liquid Index

futures contracts, and the BIST 30 Index futures contracts have received non objection by

the FCA. Attached as Exhibit A-4 are the contract specifications for the FTSE 100 UK

Index Futures contract, the FTSE UK Large Cap Super Liquid Index Futures contracts,

and the BIST 30 Index Futures contracts.

As Exhibit E-2, demonstrate that the contracts are not prohibited from being traded by United

States persons, i.e., the contracts are not prohibited security futures or single stock contracts or

narrow-based index contracts. For non-narrow based stock index futures contracts,

demonstrate that the contracts have received Commission certification pursuant to the

procedures set forth in § 30.13 and Appendix D to part 30 of this chapter.

Response:

151.On 1 June 2012, in accordance with CFTC Regulation 30.13, the Commission certified

that the FTSE 100 UK Index Futures contract offered by TGHL conformed to the

requirements of section 2(a)(1)(C)(ii) of the Act and, therefore, could be offered or sold to

persons located within the United States in accordance with section 2(a)(1)(C)(iv) of the

Commodity Exchange Act. The FTSE 100 UK Index Futures contract was offered

pursuant to no-action relief (which was subsequently withdrawn upon the request of

TGHL).

152.LSE, having subsequently acquired the Derivatives Business on 30 September 2013,

received Commission certification pursuant to the procedures set forth in § 30.13 and

Appendix D to part 30 of this chapter on 28 August 2014 for the FTSE 100 Futures

contract and the FTSE UK Large Cap Super Liquid Index Futures contract. The CFTC

letter is attached as Exhibit E-2-I. LSE also received Commission certification pursuant

to the procedures set forth in § 30.13 and Appendix D to part 30 of this chapter on 6

October 2015 for the BIST 30 Index Futures contracts. The CFTC letter is attached as

Exhibit E-2-II.

As Exhibit E-3, demonstrate that the contracts are required to be cleared.
35

Response:

153.Rule 7.1.1 of the Rules requires that LCH act as the central counterparty for all registered

contracts which result from transactions executed through the LSE Derivatives platform

or otherwise reported to LSE Derivatives. All trades executed and registered on LSE

Derivatives are automatically sent to LCH for clearing.

As Exhibit E-4, identify any contracts that are linked to a contract listed for trading on a

United States-registered entity, as defined in section 1a(40) of the Act. A linked contract is a

contract that settles against any price (including the daily or final settlement price) of one or

more contracts listed for trading on such registered entity.

As Exhibit E-5, identify any contracts that have any other relationship with a contract listed

for trading on a registered entity, i.e., both the foreign board of trade’s and the registered

entity’s contract settle to the price of the same third party-constructed index.

As Exhibit E-6, demonstrate that the contracts are not readily susceptible to manipulation. In

addition, for each contract to be listed, describe each investigation, action, proceeding or case

involving manipulation and involving such contract in the three years preceding the

application date, whether initiated by the foreign board of trade, a regulatory or self-regulatory

authority or agency or other government or prosecutorial agency. For each such action,
36

proceeding or case, describe the alleged manipulative activity and the current status or

resolution thereof.
37
38

EXHIBIT F – THE REGULATORY REGIME GOVERNING THE FOREIGN BOARD

OF TRADE IN ITS HOME COUNTRY OR COUNTRIES

With respect to each relevant regulatory regime or authority governing the foreign board of

trade, attach, as Exhibit F, the following (including, where appropriate, an indication as to

whether the applicable regulatory regime is dependent on the home country’s classification of

the product being traded on the foreign board of trade as a future, option, swap, or otherwise,

and a description of any difference between the applicable regulatory regime for each product

classification type):

(1) A description of the regulatory regime/authority’s structure, resources, staff, and scope of

authority; the regulatory regime/authority’s authorizing statutes, including the source of its

authority to supervise the foreign board of trade; the rules and policy statements issued by the

regulator with respect to the authorization and continuing oversight of markets, electronic

trading systems, and clearing organizations; and the financial protections afforded customer

funds.

Response:

162.The regulatory authority with primary supervisory authority over LSE is the FCA.

163.Authorizing statute and source of authority to supervise LSE

The FCA’s scope of authority, statutory objectives, structure, and regulatory powers are

founded in FSMA (as subsequently amended by the Financial Services Act 2012),

attached as Exhibit A-5-I.

164.FCA structure

The FCA is a private company limited by guarantee, exempt from the requirements of the

UK Companies Act 2006 relating to the use of “limited” as part of its name (see Schedule

1ZA. Paragraphs 17 and 18 of FSMA 2000). The FCA must comply with the

requirements as to its constitution set out in Schedule 1ZA to FSMA.

165.In terms of the FCA structure, FSMA imposes an obligation on the FCA to have regard to

generally accepted principles of good corporate governance as it is reasonable to regard as

applicable to it (see section 1A(4), 1A(5) and 3 of schedule 1ZA to FSMA).

166.In this respect, FSMA mandates certain requirements in relation to the FCA’s Board

composition, which will be made up of:

 Chair appointed by Her Majesty’s Treasury (“Treasury”);

 Chief Executive appointed by the Treasury;

 The Bank of England’s Deputy Governor for prudential regulation;

 2 directors appointed jointly by the Secretary of State for the UK government and

Treasury; and

 At least one additional member appointed by the Treasury.
39

167.A majority of the Board, including the Chair, must be non-executive. The terms of

service of an appointed member must be so as to secure that the appointee is not subject

to direction by the Treasury, Secretary of State or any other person.

168.The FCA will determine the remuneration of executive members and the Treasury will

determine the remuneration of non-executive members.

169.Schedule 1ZA of FSMA includes further provisions on the FCA’s governance and

accountability structure, which includes the requirement to produce an annual report to

the Treasury, which the Treasury must lay before UK Parliament. Within three months,

the FCA must hold a public meeting (the annual meeting) to enable the annual report to

be considered. The FCA must publish a report of the proceedings of the annual meeting.

The FCA is funded through fees charged to the authorised firms that it regulates. The

FCA’s general powers to raise fees are set out in paragraph 23 of Part 3 of FSMA.

170.Scope of FCA authority

The scope of the FCA responsibilities as set out in FSMA 2000 are far-reaching and

include:

 Policing the perimeter of regulated activities;

 Conduct of business regulation for all firms in both retail and wholesale markets

(including the firms authorised by the Prudential Regulation Authority or “PRA”);

 Responsibility for prudential supervision of all firms not prudentially supervised

by the PRA;

 Supervision of trading infrastructure, including RIEs;

 Regulation of client money and assets, including in relation to firms authorised by

the PRA;

 Being the UK competent authority for listings under Part 6 of FSMA; and

 Monitoring, investigation and prosecution of insider dealing and market abuse.

171.In carrying out its supervisory activity, FSMA has set the FCA three operational

objectives:

 Securing an appropriate degree of protection to consumers;

 Protecting and enhancing the integrity of the UK financial system; and

 Promoting effective competition in the interests of consumers in the markets for

financial services or services provided by a recognized investment exchange.

172.Part II of FSMA provides for the so called “general prohibition”, which states that no

person can carry on a regulated activity in the UK, or purport to do so, unless he is either

authorized or exempt by the FCA. Regulated activities are set out in the FSMA 2000

(Regulated Activities) Order 2001, which is enclosed as Exhibit A-5-II.

173.LSE is a UK RIE and, as such, is considered an exempt person under section 285 of

FSMA (Exemption for recognised investment exchanges and clearing houses).

174.As an RIE, LSE is required to comply with a set of recognition requirements which are

set forth, with FCA Guidance, in REC.
40

175.FCA has in place a client protection regime, governed by the Client Assets Sourcebook

(“CASS”), and has, in fact, recently proposed regulations pertaining to accounts holding

customer funds, including a required template acknowledgment letter, similar to the

CFTC’s recent amendments to its customer protection rules (see, e.g., FCA Consultation

Paper 13/5, July 2013, at http://www.fca.org.uk/static/documents/consultationpapers/cp13-05.pdf). However, it is important to note that LSE does not hold client funds

because, in operating a regulated market, LSE does not have clearing capabilities. All

trades on LSE are novated to LCH.

176.Responsibilities and Staff

With respect to how the FCA intends to meet its objectives, including from a resources

and staff standpoint, the FCA has published its business plan 2015/2016, which can be

accessed here: http://www.fca.org.uk/static/documents/corporate/business-plan-2015-

16.pdf

(2) A description of and, where applicable, copies of the laws, rules, regulations and policies

applicable to:

(i) The authorization, licensure or registration of the foreign board of trade.

Response:

177.LSE is a UK RIE and, as such, is considered an exempt person under section 285 of

FSMA (Exemption for recognized investment exchanges and clearing houses). Attached

as Exhibit A-7-I is an excerpt of the FCA Financial Services Register which confirms

LSE’s status as a RIE. As an RIE, LSE is required to comply with a set of recognition

requirements which are set forth, with FCA Guidance, in the REC section of the FCA

Handbook. A copy of the FCA Handbook is attached as Exhibit A-5-III-B.

(ii) The regulatory regime/authority’s program for the ongoing supervision and oversight of

the foreign board of trade and the enforcement of its trading rules.

Response:

178.The FCA regulates the LSE as a RIE. Its regulatory objectives are codified in FSMA (see

Exhibit F-1). The FCA operates a yearly firm evaluation review of the LSE (and, more

broadly, the LSEG). Through this firm evaluation, as applied to RIEs, the FCA identifies

any risks posed to its statutory objectives by the operations of the RIE, considers their

likelihood and, if necessary, sets a risk mitigation programme for the entity.

179.The firm evaluation is complemented by a relationship management system.

180.In addition to firm evaluation and regular meetings, the FCA is kept informed by various

reports and notifications a RIE is required to submit (including financial submissions). In
41

this respect, LSE has to comply with certain notification obligations as specified in part 3

of REC.

181.In addition, the FCA conducts regular thematic reviews and could resort to, if deemed

necessary, a skilled persons report (Section 166 of FSMA), which grants the FCA the

authority to commission reviews by Skilled Persons13. These powers can be used by the

FCA to obtain an independent view of aspects of a firm’s activities that cause concern to

the FCA or where the FCA requires further analysis. Please refer to Supervision (“SUP”)

section of the FCA Handbook for an overview and brief description of these regulatory

tools.

182.In the process, the FCA could direct the firm to take corrective action, but could also

decide to discipline the firm. For a description of the disciplinary processes and penalties

the FCA could impose, please refer to the Decision Procedure and Penalties Manual

(“DEPP”) section of the FCA Handbook.

183.LSE Derivatives keeps a close and continuous relationship with the FCA: it informs the

FCA of relevant business initiatives, including as required under its notification

obligations14, and may seek a letter of non-objection for certain initiatives.

(iii) The financial resource requirements applicable to the authorization, licensure or

registration of the foreign board of trade and the continued operations thereof.

Response:

185.REC 2.3.1 requires LSE to have financial resources sufficient for the proper performance

of its relevant functions as a UK RIE. The FCA has set guidance on how LSE should

comply with this requirement in REC 2.3.3 – 2.3.22.

13 The FCA Handbook Glossary defines “skilled person” as “a person appointed to make a report required by section

166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information)

of the Act for provision to the appropriate regulator and who must be a person: (a) nominated, approved or

appointed by the appropriate regulator; and (b) appearing to the appropriate regulator to have the skills necessary to

make a report on the matter concerned,” available at http://fshandbook.info/FS/html/FCA/Glossary/S.

14 For example FCA Handbook, REC 3.14.
42

Response:

187.In July 2011, the International Monetary Found (“IMF”) completed a detailed assessment

of the implementation of the IOSCO Objectives and Principles of Securities Regulation

by the United Kingdom. In the final report, the IMF recognized that the U.K.’s

supervisory framework demonstrates a very high level of compliance with the IOSCO

Principles of Securities Regulation and is well placed to manage the challenging task of

supervising U.K.’s deep and complex markets and associated activities15. In particular,

the IMF noted the success of the FSA’s enhanced enforcement program, which has

delivered a credible deterrence to improper market behaviour.

(v) The extent to which the regulatory regime/authority reviews and/or approves the trading

rules of the foreign board of trade prior to their implementation.

Response:

188.REC 2.14 sets out certain obligations on LSE in relation to consultation with member

firms on changes to the trading or other rules. Furthermore, LSE is required to notify the

FCA of rule changes prior to their implementation16 and the FCA has the power to disallow rule changes. As a matter of course, the LSE discusses substantive rule changes

with the FCA in advance of adopting such rule changes.

(vi) The extent to which the regulatory regime/authority reviews and/or approves futures,

option or swap contracts prior to their being listed for trading.

Response:

189.LSE keeps a close and continuous relationship with the FCA. It informs the FCA of

relevant business initiatives and may seek a letter of non-objection for some of them.

Where LSE Derivatives, as part of a UK RIE, proposes to admit to trading futures or swap

contracts or types of security or types of options in relation to a security, it is required to

notify the FCA17. LSE Derivatives discusses substantive product initiatives with the FCA

15 United Kingdom: IOSCO Objectives and Principles of Securities Regulation: Detailed Assessment of

Implementation, July 2011. http://www.imf.org/external/pubs/ft/scr/2011/cr11232.pdf

16 FSMA s293(5) and FCA Handbook, REC 3.26.

17 See, for example, FCA Handbook, REC 3.14.
43

and may be required to provide the FCA with information such as a description and

business rationale of the new initiatives, a regulatory analysis, contract specifications and

proposed changes (if needed) to the Rules.

(vii) The regulatory regime/authority’s approach to the detection and deterrence of abusive

trading practices, market manipulation, and other unfair trading practices or disruptions of

the market.

Response:

190.Section 123 of FSMA gives the FCA the power to impose unlimited “civil” fines on

individuals and firms that commit market abuse. The market abuse regime applies to both

authorized firms and unauthorized persons, including customers and end-users of the

market. The regime also applies to persons outside the UK if their conduct is capable of

affecting markets or investment traded within the UK.

191.FSMA 2000 defines market abuse in very broad terms, and the definition applies to seven

major types of abusive conduct:

 Insider dealing;

 Improper disclosure;

 Misuse of information;

 Manipulating transactions;

 Manipulating devices;

 Dissemination of information likely to give a false or misleading impression; and

 Conduct likely to distort or mislead the market.

192.The market abuse regime supplements (but is not co-extensive with) the criminal

offences of insider dealing (Part 5 of the Criminal Justice Act 1993; see Exhibit A-5-IV)

and market manipulation (sections 89 to 95 of the Financial Services Act 2012 which has

repealed section 397 of FSMA).

193.The FCA has issued further guidance to determine if a certain behavior amounts to

market abuse in the Code of Market Conduct (“MAR”) of the FCA Handbook18.

194.Furthermore, under REC, LSE is required to ensure that:

 Trading on its facilities is conducted in a fair and orderly manner, and so as to

afford proper protection to investors (see REC 2.6.1); and

 Appropriate measures are adopted, including the monitoring of transactions

effected on the UK RIE, to reduce the extent to which the UK RIE’s facilities can

be used for a purpose connected with market abuse or financial crime, and to

facilitate their detection and monitor their incidence (see REC 2.10).

18 FCA Handbook, MAR 1.
44

(3) A description of the laws, rules, regulations and policies that govern the authorization and

ongoing supervision and oversight of market intermediaries who may deal with members and

other participants located in the United States participants, including:

Response:

195.The following responses cover the arrangements applicable in the United Kingdom for

market intermediaries. These arrangements are largely derived from EU financial services

directives and, as such, similar arrangements will be in place in other EU member states.

(i) Recordkeeping requirements.

Response:

196.Types of records to be retained

Under section 9 of the Senior Management Arrangements, Systems and Controls

(“SYSC”) section of the FCA Handbook, a firm must arrange for records to be kept of its

business and internal organization, including all services and transactions undertaken by

it, which must be sufficient to enable the regulator or any other relevant competent

authority under the EU Commission Directive 2004/39/EC (“MiFID” or “MiFID

Directive”) and European Parliament and Council Directive 2009/65/EC (“UCITS

Directive”) to monitor the firm’s compliance with the requirements under the regulatory

system, and in particular to ascertain that the firm has complied with all obligations with

respect to clients.

197.The ESMA Guidelines provide additional requirements regarding document retention. A

list of recommended minimum records is available on the ESMA website.

198.Length of retention

Record must be kept in relation to MiFID business for at least five years. These records

must be maintained in a medium that allows the storage of information in a way

accessible for future reference by the regulator or any other relevant competent authority

under MiFID and so that the following conditions are met:

 The record is able to be reconstituted into each key stage of the processing of each

transaction;

 It must be possible for any corrections to amendments, and the contents of the

records prior to such corrections and amendments, to be easily ascertained; and

 It must not be possible for the records otherwise to be manipulated or altered.

199.For non-MiFID business, under SYSC 9.1.5G, a firm should have appropriate systems

and controls in place with respect to the adequacy of, access to, and the security of its

records so that the firm may fulfil its regulatory and statutory obligations. With respect to

retention periods, the general principle is that records should be retained for as long as is

relevant for the purposes for which they are made.

(ii) The protection of customer funds.
45

Response:

200.The rules relating to the custody and safeguarding of client money and client assets are

contained in CASS. The full list of these requirements can be accessed here:

http://www.fshandbook.info/FS/html/FCA/CASS

201.Among the key provisions, CASS 6 contains the custody rules that apply when a firm

holds financial instruments for a client in the course of MiFID business and when it is

safeguarding and administering investments in the course of non-MiFID business.

This rule includes an obligation for such firms to:

 Make adequate arrangements so as to safeguard clients' ownership rights,

especially in the event of the firm's insolvency, and to prevent the use of safe

custody assets belonging to a client on the firm's own account except with the

client's express consent (see CASS 6.2.1); and

 Introduce adequate organisational arrangements to minimise the risk of the loss or

diminution of clients' safe custody assets, or the rights in connection with those

safe custody assets, as a result of the misuse of the safe custody assets, fraud, poor

administration, inadequate record-keeping or negligence (see CASS 6.2.2).

202.Another key provision is CASS 7, which provides for client money rules. According to

this provision, firms must take the necessary steps to ensure that client money deposited

in accordance with the requirement of CASS 7.4.1 – Depositing client money is held in a

account or accounts identified separately from any accounts used to hold money

belonging to the firm. CASS 7.4.1 states that a firm, on receiving any client money, must

promptly place this money into one or more accounts opened with any of the following:

(i) a central bank; (ii) a Banking Co-ordination Directive credit institution; (iii) a bank

authorized in a third country; and (iv) a qualifying money market fund. Firms that do not

deposit client money with a central bank must exercise all due skill, care and diligence in

the selection, appointment and periodic review of the credit institution, bank or qualifying

money market fund where the money is deposited, and the arrangements for the holding

of this money.

203.Other requirements include internal and external reconciliation requirements for clients

assets (CASS 6.5) and client money (see CASS 7.6); and rules on prime brokerage (see

CASS 9) and resolution (see CASS 10).

204.Finally, for all FCA-regulated firms holding client money and/or assets, a firm must

appoint a CASS operational oversight approved person controlled function (also refereed

to as “CF10a”).

(iii) Procedures for dealing with the failure of a market intermediary in order to minimize

damage and loss to investors and to contain systemic risk.

Response:
46

205.Several procedures exist in the UK for dealing with a failure of a market intermediary.

206.The Banking Act 2009 created a Special Resolution Regime (“SRR”) which gives the

UK authorities (the Treasury, the Bank of England, the PRA and the FCA) a permanent

framework providing tools for dealing with failing UK banks and building societies. The

SRR gives the Bank of England a key role in implementing a resolution using the

statutory resolution tools. The SRR powers are carried out by the Special Resolution Unit

(http://www.bankofengland.co.uk/financialstability/Pages/role/risk_reduction/srr/SpecialResolution-Unit.aspx) which leads in the work required to select and implement a

resolution tool.

207.The SRR powers allow authorities to:

 Transfer of all or part of a bank to a private sector purchaser;

 Transfer of all or part of a bank to a bridge bank owned by the Bank of England

pending a future sale; and

 Transfer of a bank, or a bank holding company, into temporary public ownership.

208.The Banking Act also provides for two new insolvency procedures for failing banks: the

bank insolvency procedure (which is designed to allow for rapid payments to Financial

Services Compensation Scheme (“FSCS” – see description below) insured depositors or

transfer of their accounts to a healthy bank) and the bank administration procedure (which

is used to deal with a part of a bank that is not transferred and is instead put into

administration).The SRR gives the authorities the power to apply to put a bank into the

Bank Insolvency Procedure or apply for the use of the Bank Administration Procedure.

209.The Treasury has consulted on mechanisms available for dealing with the failure of

systemically important non-bank in August 2012. This consultation regarded investment

firms and parent undertakings, CCPs, non-CCP financial market infrastructure and

insurers. The Treasury implemented certain of its proposals through the Financial

Services Act 2012, which amends the Banking Act 2009 to extend the special resolution

regime introduced for banks to systemically important investment firms, parent

undertakings and CCPs.

210.With respect to investor compensation, FSMA originally created the FSCS. The FSCS

implements the UK’s obligations under various EU Directives and is designed to provide

compensation to depositors, investors and policyholders where a regulated firm is unable

to meet its obligations. No protection is provided in respect of un-authorised firms

unlawfully engaging in regulated activities. Although there is a single compensation

scheme, the level of coverage varies depending on the type of business engaged in. The

FSCS is funded by the financial services industry. Broad powers exist to determine the

FSCS funding, including the level of levies paid by firms carrying on different classes of

regulated activities (see section 214 of FSMA). Compensation is, broadly speaking,

available to private individuals and small businesses. Rules regarding eligibility under,

and levies for, the FSCS are detailed in the Compensation section of the FCA Handbook.

211.LSE and LCH Risk Management Protocols
47

LSE Derivatives requires that members maintain the necessary clearing arrangements

either directly with LCH or a GCM acting on their behalf (see Exhibit B-1).

212.In accordance with Rule 1.1.10 of the LSE Derivatives Rules, where LSE Derivatives has

reason to believe that a member firm is not conducting, or may not conduct, its operations

in a business like manner, and that requirements or restrictions are reasonably necessary

to ensure that it does so, LSE Derivatives may at any time suspend, either in full or in

part, the member firm’s membership of LSE Derivatives or its access to any of the LSE’s

services.

213.In the event that either LSE Derivatives or LCH decides to suspend a member, LSE

Derivatives will take appropriate action to exclude the member from further participation

in trading in eligible products until the member satisfies LCH and LSE Derivatives that it

has made alternative arrangements to satisfy the requirements and obligations that have

been breached.

214.LCH may declare a clearing member in default if it breaches any of the terms of the

clearing house rulebook, any of its regulatory requirements or following the

commencement of insolvency proceedings. In accordance with Rules 7.1.9 and 7.1.10 of

the Rules, member firms are responsible for settling trades executed on LSE Derivatives

and are bound by the rules and procedures of the designated clearing house in the event of

a settlement default. Where a designated clearing house declares a member firm to be a

defaulter, LSE Derivatives shall terminate the membership of that firm. In the event that

the designated clearing house ceases to accept registered contracts or suspends its

services, LSE Derivatives will suspend trading on the derivatives market.

(4) A description of the regulatory regime/authority’s inspection, investigation and

surveillance powers; and the program pursuant to which the regulatory regime/authority uses

those powers to inspect, investigate, and enforce rules applicable to the foreign board of trade.

Response:

215.See Exhibit F-2-II.

(5) For both the foreign board of trade and the clearing organization (unless addressed in

Supplement S-1), a report confirming that the foreign board of trade and clearing organization

are in regulatory good standing, which report should be prepared subsequent to consulting

with the regulatory regime/authority governing the activities of the foreign board of trade and

any associated clearing organization. The report should include:

 Confirmation of regulatory status (including proper authorization, licensure and

registration) of the foreign board of trade and clearing organization;

 Any recent oversight reports generated by the regulatory regime/authority that are,

in the judgment of the regulatory regime/authority, relevant to the foreign board of

trade’s status as a registered foreign board of trade;

 Disclosure of any significant regulatory concerns, inquiries or investigations by the

regulatory regime/authority, including any concerns, inquiries or investigations
48

with regard to the foreign board of trade’s arrangements to monitor trading by

Members or other participants located in the United States or the adequacy of the

risk management controls of the trading or of the clearing system; and

 A description of any investigations (formal or informal) or disciplinary actions

initiated by the regulatory regime/authority or any other self-regulatory, regulatory

or governmental entity against the foreign board of trade, the clearing organization

or any of their respective senior officers during the past year.

(6) For both the foreign board of trade and the clearing organization (unless addressed in

Supplement S-1), a confirmation that the regulatory regime/authority governing the activities

of the foreign board of trade and the clearing organization agree to cooperate with a

Commission staff visit subsequent to submission of the application on an “as needed basis,”

the objectives of which will be to, among other things, familiarize Commission staff with

supervisory staff of the regulatory regime/authority; discuss the laws, rules and regulations

that formed the basis of the application and any changes thereto; discuss the cooperation and

coordination between the authorities, including, without limitation, information sharing

arrangements; and discuss issues of concern as they may develop from time to time (for

example, linked contracts or unusual trading that may be of concern to Commission

surveillance staff).
49

EXHIBIT G – THE RULES OF THE FOREIGN BOARD OF TRADE AND

ENFORCEMENT THEREOF

Attach, as Exhibit G-1, the following:

A description of the foreign board of trade’s regulatory or compliance department, including

its size, experience level, competencies, duties and responsibilities.
50

Attach, as Exhibit G-2, the following:

A description of the foreign board of trade’s trade practice rules, including but not limited to

rules that address the following –

(1) Capacity of the foreign board of trade to detect, investigate, and sanction persons who

violate foreign board of trade rules.

Response:

223.The Rules provide for the power of the LSE to investigate and commence disciplinary

action against its members and to impose sanctions. In particular, Rule 1.1.39 provides for

the capacity of the LSE to request information and conduct interviews of member firms.

224.Full details on disciplinary proceedings and the power to impose sanctions are included

in the Compliance Procedures section of the Rules.

(2) Prohibition of fraud and abuse, as well as abusive trading practices including, but not

limited to, wash sales and trading ahead, and other market abuses.

Response:

226.The Rules set forth market conduct rules (see, e.g., 1.3.1-1.3.8) governing matters

relating to market manipulation as well as order submission and collusion. One such rule,

Rule 1.3.1, provides that a member firm shall not:

 Do any act or engage in any course of conduct which creates or is likely to create a

false or misleading impression as to the market in, or the price or value of, any

contract;

 Cause a fictitious trade or a false price to be input into LSE Derivatives systems;

 Effect a trade at any price which differs to an unreasonable extent from any firm

price displayed on the trading system in that contract, or the theoretical fair value

for tailor-made contracts;
51

 Do any act or engage in any course of conduct which is likely to damage the

fairness or integrity of LSE Derivatives; or

 Do any act or engage in any course of conduct which causes, or contributes to, a

breach of these rules by another member Firm.

(3) A trade surveillance system appropriate to the foreign board of trade and capable of

detecting and investigating potential trade practice violations.
(4) An audit trail that captures and retains sufficient order and trade-related data to allow the

compliance staff to detect trading and market abuses and to reconstruct all transactions within

a reasonable period of time.

(5) Appropriate resources to conduct real-time supervision of trading.

(6) Sufficient compliance staff and resources, including those outsourced or delegated to third

parties, to fulfill regulatory responsibilities.
53

(7) Rules that authorize compliance staff to obtain, from market participants, information and

cooperation necessary to conduct effective rule enforcement and investigations.

(8) Staff investigations and investigation reports demonstrating that the compliance staff

investigates suspected rule violations and prepares reports of their finding and

recommendations.

(9) Rules determining access requirements with respect to the persons that may trade on the

foreign board of trade, and the means by which they connect to it.
54

(10) The requirement that market participants submit to the foreign board of trade’s

jurisdiction as a condition of access to the market.

Attach, as Exhibit G-3, the following:

A description of the foreign board of trade’s disciplinary rules, including but not limited to

rules that address the following –

(1) Disciplinary authority and procedures that empower staff to recommend and prosecute

disciplinary actions for suspected rule violations and that provide the authority to fine,

suspend, or expel any market participant pursuant to fair and clear standards.

Response:

240.The Compliance Procedures section of the Rules states that where LSE believes there has

been a breach of the Rules by a member firm, LSE may commence disciplinary action

against such member firm. LSE may impose a fixed penalty, issue a warning notice

and/or refer disciplinary matters to either the LSE Executive Panel or the Disciplinary

Committee (both of which are described in more detail below). In appropriate cases

(including where a greater sanction than the Executive Panel is authorised to impose is

deemed appropriate by the Executive Panel), the Executive Panel may refer the case to

the Disciplinary Committee. Among the available sanctions available, the Disciplinary

Committee may expel any market participant.

241.There are a number of factors which LSE takes into account when considering what

disciplinary action to take in relation to a rule breach. These are set out below:

 The seriousness, size and nature of the rule breach;

 How the rule breach came to light;

 The actual or potential market impact of the rule breach, and any other

repercussions;

 The extent to which the rule breach was deliberate or reckless;
55

 The general compliance history of the member firm, and specific history regarding

the rule breach in question;

 Consistent and fair application of the rules (any precedents of previous similar rule

breaches); and

 The responsiveness and conduct of the member firm in relation to the matter under

investigation.

242.LSE’s approach to regulation is aimed at maintaining the integrity, orderliness,

transparency and good reputation of its markets and changing member firms’ behaviour in

those markets where necessary. LSE will investigate the facts of each case, seeking to

understand why the rule breach occurred and will assess whether any remedial action the

member firm has taken is adequate to prevent similar future occurrence.

243.The Executive Panel is a panel comprised of appropriately experienced senior LSE staff.

The procedures followed by the Executive Panel are set out in Rules 8.2.1 to 8.2.34. The

Executive Panel also considers appeals against fixed penalties. Any final decision of the

Executive Panel may be appealed to the Appeals Committee. There is however no appeal

against a decision to refer a matter to the Executive Panel or the Disciplinary Committee.

There is also no appeal against a decision where the reversal of that decision would lead

to market instability or disorder (e.g. there is no appeal against the Exchange’s decision to

halt trading in a stock where the halt has been invoked to safeguard the integrity of the

market in that stock).

244.The Disciplinary Committee is drawn from a pool of appropriately experienced (nonLSE) persons and its members are appointed by the Exchange. The Disciplinary

Committee may impose a wider range of sanctions than the Executive Panel and has

discretion to publicise its findings. Any final decision of the Disciplinary Committee may

be appealed to the Appeals Committee.

245.The Appeals Committee is also drawn from a pool of appropriately experienced (nonLSE) persons and hears appeals against the findings of both the Executive Panel and the

Disciplinary Committee. The procedures followed by the appeals committee are set out in

rules 8.4.1 to 8.4.35. The appeals committee may uphold, quash or vary any decision it is

asked to consider.

246.Members of the Disciplinary and Appeals Committee must notify the Secretary or the

Chairman of any possible conflict of interest at the earliest opportunity and before the

hearing. If any party to the disciplinary proceedings believes that a potential conflict of

interest exists, it shall also notify the Chairman at the earliest opportunity. In both cases,

the Chairman will take appropriate action.

247.Full details regarding procedures and sanctions available to LSE staff are given in the

Rules (Rules 8.1.1. to 8.5.4). A summary of the disciplinary process operated by the LSE

is provided below:
56

Process Normal use Constitution Appellate body

Warning

Notices

• Rule breaches (no hearing)

Fixed penalties • Rule breaches where a

fixed penalty notice is in

issue

(no hearing) Executive Panel

Executive Panel •Disciplinary matters

•Appeals against fixed

penalties

Senior Exchange staff Appeals

Committee

Disciplinary

Committee

•Disciplinary matters Appropriately

experienced (nonExchange) persons

Appeals

Committee

Appeals

Committee

•Disciplinary appeals

against Executive Panel

findings

•Disciplinary appeals

against Disciplinary

Committee findings

Appropriately

experienced (nonExchange) persons

(2) The issuance of warning letters and/or summary fines for specified rule violations.

Response:

248.As specified in the Rules, LSE may issue warning notices. The Rules do not refer to

specific rule violations for which warning notices may be issued.

249.The table below summarises the sanctions available to the Exchange for any breach of

these rules.

Process Available sanctions Appellate body

Warning Notices

• May stipulate corrective action required

• Formal record of action for member firm’s

case history

Fixed Penalty • As set out in any applicable fixed penalty

notice Executive Panel

Executive Panel

One of:

• Private censure

• Fine up to £50,000 per breach

• Referral to Disciplinary Committee

Appeals

Committee

Disciplinary

Committee

One or more of:

• Private censure

• Public censure

• Unlimited fine

• Suspension of activities

• Restitution

• Expulsion from membership

Appeals

Committee

Appeals

Committee

Executive Panel referrals:

• Any sanction available to the Executive Panel

Disciplinary Committee referrals:

•Any sanction available to the Disciplinary

Committee
57

250.Rule 8.1.5 provides for the definition of a fixed penalty. A fixed penalty notice would be

used in cases where the behaviour of the member was not egregious enough to warrant

referral to the Executive Panel, but serious enough for LSE to consider warranting some

form of penalty. This may be used in cases where the behaviour of the member is not

likely to have a serious market impact and does not pose a significant risk to the integrity

of the market (e.g. minor trade reporting issues). There is no tariff of fixed penalties as the

size of the penalty would be based on the circumstances of each case and would be

determined by Market Supervision and senior management from UK Regulation. The size

of any fixed penalty would also likely to be considerably less than the £50,000 limit that

may be imposed by the Executive Panel and would be based on precedents to ensure

consistency of application.

(3) The review of investigation reports by a disciplinary panel or other authority for issuance

of charges or instructions to investigate further, or findings that an insufficient basis exists

to issue charges.

Response:

251.The LSE’s approach to regulation is aimed at maintaining the integrity, orderliness,

transparency and good reputation of its markets and changing member firms’ behaviour in

those markets where necessary. LSE will investigate the facts of each case, seeking to

understand why the rule breach occurred and will assess whether any remedial action the

member firm has taken is adequate to prevent similar future occurrence. When

appropriate, LSE Derivatives will refer a case to the FCA.

252.There are different processes available depending upon the type of penalty to be imposed.

Full details are given in the Rules (Rules 8.1.1. to 8.5.4). A summary of the disciplinary

process operated by the LSE is provided below:

Process Normal use Constitution Appellate body

Warning

Notices

• Rule breaches (no hearing)

Fixed

penalties

• Rule breaches where a

fixed penalty notice is in

issue

(no hearing) Executive Panel

Executive

Panel

•Disciplinary matters

•Appeals against fixed

penalties

Senior Exchange staff Appeals

Committee

Disciplinary

Committee

•Disciplinary matters Appropriately

experienced (nonExchange) persons

Appeals

Committee

Appeals

Committee

•Disciplinary appeals

against Executive Panel

findings

•Disciplinary appeals

against Disciplinary

Committee findings

Appropriately

experienced (nonExchange) persons
58

(4) Disciplinary committees of the foreign board of trade that take disciplinary action via

formal disciplinary processes.

Response:

Please see response in Exhibit G-3-1.

(5) Whether and how the foreign board of trade articulates its rationale for disciplinary

decisions.

Response:

253.LSE articulates the rationale for its decisions and notifies the parties in writing in

accordance with Rules 8.2.28 (decision of Executive Panel), 8.3.34 (decision of

Disciplinary Committee) and 8.4.31 (decision of Appeal Committee) of the Rules.

(6) The sanctions for particular violations and a discussion of the adequacy of sanctions with

respect to the violations committed and their effectiveness as a deterrent to future violations.

Response:

254.Please see the response to Exhibit G-3-1, G-3-2 and G-3-5 above.

Attach, as Exhibit G-4, the following:

A description of the market surveillance program (and any related rules), addressing the

following –

The dedicated market surveillance department or the delegation or outsourcing of that

function, including a general description of the staff; the data collected on traders’ market

activity; data collected to determine whether prices are responding to supply and demand; data

on the size and ownership of deliverable supplies; a description of the manner in which the

foreign board of trade detects and deters market manipulation; for cash-settled contracts,

methods of monitoring the settlement price or value; and any foreign board of trade position

limit, position management, large trader or other position reporting system.
59
60

EXHIBIT H – INFORMATION SHARING AGREEMENTS AMONG THE

COMMISSION, THE FOREIGN BOARD OF TRADE, THE CLEARING

ORGANIZATION, AND RELEVANT REGULATORY AUTHORITIES

Attach, as Exhibit H, the following:

(1) A description of the arrangements among the Commission, the foreign board of trade, the

clearing organization, and the relevant foreign regulatory authorities that govern the sharing of

information regarding the transactions that will be executed pursuant to the foreign board of

trade’s registration with the Commission and the clearing and settlement of those transactions.

This description should address or identify whether and how the foreign board of trade,

clearing organization, and the regulatory authorities governing the activities of the foreign

board of trade and clearing organization agree to provide directly to the Commission

information and documentation requested by Commission staff that Commission staff

determines is needed:

(i) To evaluate the continued eligibility of the foreign board of trade for registration.

(ii) To enforce compliance with the specified conditions of the registration.

(iii) To enable the CFTC to carry out its duties under the Act and Commission regulations

and to provide adequate protection to the public or registered entities.

(iv) To respond to potential market abuse associated with trading by direct access on the

registered foreign board of trade.

(v) To enable Commission staff to effectively accomplish its surveillance responsibilities

with respect to a registered entity where Commission staff, in its discretion, determines that

a contract traded on a registered foreign board of trade may affect such ability.
61

257.The Commission and the FSA (predecessor to the FCA) are each parties to the

Memorandum of Understanding on Mutual Assistance and Exchange Information, dated

September 25, 1991. Furthermore, the FSA and the Commission are each signatories to

the Declaration on the Cooperation and Supervision of International Futures Exchanges

and Clearing Organizations (“Boca Declaration”) and the IOSCO Multilateral

memorandum of Understanding (“MMOU”) Concerning Consultation and Cooperation

and the Exchange of Information.

(2) A statement as to whether and how the foreign board of trade has executed the

International Information Sharing Memorandum of Understanding and Agreement.

(3) A statement as to whether the regulatory authorities governing the activities of the foreign

board of trade and clearing organization are signatories to the International Organization of

Securities Commissions Multilateral Memorandum of Understanding. If not, describe any

substitute information-sharing arrangements that are in place.

Response:

261.The FSA (predecessor to the FCA) is a signatory to the International Organization of

Securities Commissions Multilateral Memorandum of Understanding.

(4) A statement as to whether the regulatory authorities governing the activities of the foreign

board of trade and clearing organization are signatories to the Declaration on Cooperation and

Supervision of International Futures Exchanges and Clearing Organizations. If not, a

statement as to whether and how they have committed to share the types of information

contemplated by the International Information Sharing Memorandum of Understanding and

Agreement with the Commission, whether pursuant to an existing memorandum of

understanding or some other arrangement.
62

Response:

262.The FSA (predecessor to the FCA) is a signatory to the Declaration on Cooperation and

Supervision of International Futures Exchanges and Clearing Organizations.
63

EXHIBIT I – ADDITIONAL INFORMATION AND DOCUMENTATION

Attach, as EXHIBIT I, any additional information or documentation necessary to

demonstrate that the requirements for registration applicable to the foreign board of trade set

forth in Commission regulation 48.7 are satisfied.
64

Exhibit Index

Exhibit No. Description

Exhibit A-2-I Articles of Association of LSE

Exhibit A-3-I LSE Membership Application Form

Exhibit A-3-II Form of LSE Trading Services Agreement

Exhibit A-4 Contract specifications for the FTSE 100 UK Index Futures contract, the

FTSE UK Large Cap Super Liquid Index Future contract, and the BIST

30 Index Futures contract

Exhibit A-5-I Financial Services and Markets Act 2000

Exhibit A-5-II FSMA (Regulated Activities) Order 2001

Exhibit A-5-III-A FSMA (Recognition requirements for Investment Exchanges and

Clearing Houses) Regulation 2001

Exhibit A-5-III-B FCA Handbook - Recognized Investment Exchanges Sourcebook (REC)

Exhibit A-5-IV Criminal Justice Act 2003

Exhibit A-5-V Proceeds of Crime Act 2002

Exhibit A-6 LSE Derivatives Rulebook

Exhibit A-7-I FCA Scope of Permission Notice

Exhibit B-2 LSE Market Maker Agreement

Exhibit D-1 LSE Derivatives Trading Service Description

Exhibit D-2 LSE Derivatives Connectivity Guide

Exhibit E-2-I Commission Certification Letter for the FTSE 100 and FTSE UK SLQ

Index Futures

Exhibit E-2-II Commission Certification Letter for the BIST 30 Index Futures
65

COMMODITY FUTURES TRADING COMMISSION

SUPPLEMENT S-1 to FORM FBOT

CLEARING ORGANIZATION SUPPLEMENT TO

FOREIGN BOARD OF TRADE APPLICATION FOR REGISTRATION

LCH.CLEARNET

Name of clearing organization as specified in organizational documents

Aldgate House, 33 Aldgate High Street, London EC3N 1EA

Address of principal executive office

London Stock Exchange plc.

Name of the foreign board of trade on associated Form FBOT

 If this Supplement S-1 is accompanying a new application for registration, please complete in

full and check here.

 If this Supplement S-1 is an amendment to a pending application for registration, or to a final

application that resulted in the issuance of an Order of Registration, please list all items that

are amended or otherwise updated and check here.

When appropriate, please attach additional page(s) containing a list and explanatory

statement of amendment(s) or update(s).

REGISTERED DERIVATIVES CLEARING ORGANIZATIONS

If the clearing organization is registered with the Commission in good standing as a

derivatives clearing organization (DCO), please indicate by checking here:

 CFTC-registered DCO.

If the clearing organization is registered with the Commission in good standing as a DCO,

the clearing organization need not complete the remainder of the Supplement S-1.

GENERAL INFORMATION

1. Name under which the business of the clearing organization will be conducted, if different

than name specified above:

2. List of principal office(s) where clearing organization activities are/will be conducted (please

use multiple entries, when applicable):

Office (name and/or location):
66

Address:

Phone Number:

Fax Number:

Website Address:

3. Contact Information.

3a. Primary Contact for Supplement S-1 (i.e., the person authorized to receive Commission

correspondence in connection with this Supplement S-1 and to whom questions regarding the

submission should be directed):

Name:

Title:

Email Address:

Mailing Address:

Phone Number:

Fax Number:

3b. If different than above, primary contact at the clearing organization that is authorized to

receive all forms of Commission correspondence:

Name:

Title:

Email Address:

Mailing Address:

Phone Number:

Fax Number:

BUSINESS ORGANIZATION

Describe organization history, including date and, if applicable, location of filing of original

organizational documentation, and describe all substantial amendments or changes thereto. For

example:

[Clearing organization] is a [corporation, partnership, limited liability company, or other

applicable organizational designation], having filed its [articles of incorporation, certificate of

formation, articles of organization, other applicable organizational formation document] with the

[applicable regulatory body] in [city, state/province, country] on [applicable date].

SIGNATURES
67

By signing and submitting this Supplement S-1, the clearing organization agrees to and consents

that the notice of any proceeding before the Commission in connection with the associated

foreign board of trade’s application for registration or registration with the Commission may be

given by sending such notice by certified mail or similar secured correspondence to the persons

specified in sections 3a and 3b above.

[Name of the Clearing Organization] has duly caused this Supplement S-1

to be signed on its behalf by the undersigned, hereunto duly authorized, this ___________

[Number] day of _______________________________ [Month], _______ [Year].

[Name of the Clearing Organization] and the undersigned represent that

all information and representations contained in this Supplement S-1 (and exhibits) are true,

current, and complete. It is understood that all information, documentation, and exhibits are

considered integral parts of this Supplement S-1. The submission of any amendment to a

Supplement S-1 represents that all items and exhibits not so amended remain true, current, and

complete as previously filed.

Signature of Chief Executive Officer (or functional equivalent), on behalf of the Clearing

Organization

Title

Name of Clearing Organization