Received CFTC 

Record'- Section 

SJ'Brb7 · 

May 7, 2007 

Ms. Eileen Donovan 

Acting Secretary, 

Commodity Future Trading Commission 

1155 21st Street, N.W. 

Washington,D.C. 20581 

Futures Industry Associotion 

2001 Pl•nnsyh·ania Avl'. i'IW 

Suile 600 

Washington, DC 20006-1823 

COMMENT .. 

202.-166.5460 

202.296.3184 l11:x 

www. iuture:;imlustry.org 

. . 

--

C) 

Re: 

;:;:J o 

Comment letter on "Exemption From Registration for Certain Forer.gn o-. 

Persons," Proposed Rule, 72 Fed. Reg. 15637 (April 2, 2007) - 1 

Dear Ms. Donovan: 

The Commodity Futures Trading Commission ("Commission") has requested public 

comment on its proposed "Exemption from Registration for Certain Foreign Persons" that would 

adopt a new definition of the term "foreign broker" and, subject to certain conditions, provide an 

exemption for a foreign broker, as newly defined, from registration as an futures commission 

merchant ("FCM"). The Commission noted that its proposal is intended to "codify past actions 

of the Commission or its staff permitting certain foreign firms that limit their customers to 

foreign customers to submit U.S. DCM and DTEF business on behalf of those customers for 

clearing on an omnibus basis through a registered [FCM], without the foreign firm having to 

register as an FCM pursuant to section 4d of the Commodity Exchange Act ("Act")." 72 Fed. 

Reg. 15637. As a general matter, the Futures Industry Association ("FIA'') supports the 

Commission's effort to codify the foreign broker exemption as a means of providing greater legal 

certainty, and is pleased to submit these comments on the proposed rules.' 

FIA agrees that the exemption for foreign brokers from FCM registration in proposed 

rule §3.1 0 (c)(2)(i) is sound as a matter of regulatory policy insofar as it codifies longstanding 

Commission exemptive relief. FIA is concerned, however, with the condition set forth in 

proposed rule §3.10 (c)(2)(ii), which provides that a foreign broker acting in accordance with the 

exemption "remains subject to all other provisions of the Act and of the rules, regulations and 

orders thereunder" (emphasis added). This provision, if read literally, could possibly be 

misconstrued as subjecting such exempt foreign brokers to Commission regulations that are 

intended to solely apply to registered FCMs, such as requirements regarding fitness, customer 

1 FIA is a principal spokesman for the commodity futures and option industry. Our regular membership is 

comprised of approximately 38 ofthe largest FCMs in the United States ("U.S."), many ofwhom have affiliates that 

are foreign brokers. Among our approximately !50 associate members are representatives of virtually all other 

segments of the futures industry, both national and international, including U.S. and international exchanges, banks, 

legal and accounting firms, introducing brokers, commodity trading advisors, commodity pool operators, other 

market participants, and information equipment providers. Reflecting the scope and diversity of our membership, 

FIA estimates that our members are responsible for more that 90 percent of all customer transactions executed on 

U.S. contract markets. 

::.-.:J :-.. P 1 

CJ ' . ; !~ ~ 

-: -::; 
funds segregation, and regulatory capital requirements. While FIA presumes that it is not the 

intent of the Commission to exempt a foreign broker from registration as an FCM and then 

subject the foreign broker to the full panoply of the requirements under the Act applicable to an 

FCM, we believe that the current wording of the proposed rule may inadvertently lead to 

confusion and regulatory uncertainty on the part of foreign brokers that wish to avail themselves 

of the exemption from registration. 

An interpretation of proposed rule 3.1 0( c )(2)(ii) applying the full breadth of the Act and 

Commission rules and regulations to exempt foreign brokers would not be consistent with prior 

Commission precedent, would not be sound regulatory policy, and is not necessary. As noted by 

the Commission in its release, the Commission has addressed the participation of foreign brokers 

on U.S. markets with respect to non-U.S. customers through a U.S. FCM on several occasions. 

In granting relief from registration to brokers located outside the U.S. which engage in 

commodity interest activities for or on behalf of foreign customers through a U.S. FCM, the 

Commission has previously conditioned the exemption on the foreign broker's compliance with 

certain limited provisions ofthe Act and regulations thereunder.2 In none of the exemptions 

cited, however, has the Commission required blanket compliance with the Act and Commission 

regulations, rather the Commission has required foreign brokers to comply with those provisions 

of the Act and the Commission's regulations "applicable to foreign brokers" or "applicable to 

conduct subject to regulation under the Act. "

3 Thus, for example, the position reporting 

requirements set forth in Parts 15-21 of the Commission's regulations are specifically cited by 

the Commission as applicable to foreign brokers. 72 Fed. Reg. 15637, at 15639. Additionally, 

the margin requirements of Commission regulation 1.58(a) specifically apply to a foreign broker 

that maintains a customer omnibus account with an FCM. 

The extent to which the Act applies to any person depends upon the nature of such 

person's conduct in the U~S or the effect of their conduct undertaken overseas on U.S. markets. 

Tamari v. Bache & Co., 730 F.2d 1103, 1108 (7th Cir. 1984). Extending the jurisdiction of the 

Act by rulemaking to conduct undertaken overseas between a foreign broker and its foreign 

customer, absent a substantial harm caused by such overseas conduct to interests in the U.S, 

would be inconsistent with principles of foreign relations law. Id., at footnote 6. Under the 

terms of the proposed exemption, a foreign broker may not be physically present in the U.S., it 

may not have U.S. customers for U.S. DCM or DTEF transactions, nor may it act in a selfclearing capacity. Its only contact with the U.S. in this context is that it carries a customer 

omnibus account with a registered U.S. FCM.4 A foreign broker that limits its activities in the 

2 CITC Staff Letter 89-07 [ 1987-1990 transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 24,479 (June 2, 1989); see 

also CFTC Staff Letter 92-19 [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 25,516 (Oct. 9, 1992) 

(granting a registration exemption as an IB to a foreign broker with U.S. branches with regard to foreign customers); 

CITC Staff Letter 93-113 [ 1992-1994 transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 25,930 (Oct. 29, 1993) 

(granting an exemption from registration to a foreign broker with U.S. branches where the foreign broker introduces 

its non-U.S. customer omnibus account to a U.S. FCM, or as an IB on a fully disclosed basis). 

3 CITC Staff Letter 89-07, ~ 24,479 at 36,097; CFTC Staff Letter 92-19 ~ 25,516; CITC Staff Letter 93-113, ~ 

25,930. 

4 Foreign brokers may have other contacts with the U.S. FCM such as maintaining an omnibus account for aU .S. 

FCM seeking access to non-U.S. markets, or maintaining a proprietary trading account. 
U.S. to carrying non-U.S. customer funds and positions in a customer omnibus account with a 

registered U.S. FCM is more properly viewed as a customer5 of the U.S. FCM. Thus, there is no 

need for the full range of regulations otherwise applicable to registered FCMs to apply to exempt 

foreign brokers. The Commission itself recognizes that a foreign broker holding a customer omnibus 

account with a registered FCM does not involve regulatory concerns, such as "requirements 

concerning fitness, capital, treatment of funds, recordkeeping, and ongoing reporting" that the 

Commission identified as implicated where the foreign broker would have more direct contact with 

U.S. markets if the foreign broker were engaged in remote clearing activities. 72 Fed. Reg. 15637, at 

15639. Accordingly, FIA recommends that the Commission amend proposed rule §3.10 (c)(2)(ii) to 

provide that "a foreign broker acting within the limitations of §3.10 (c)(2)(i) remains subject to those 

provisions of the Act and of the rules, regulations and orders thereunder applicable to a foreign 

broker in its capacity as an omnibus account customer of a futures commission merchant." 

Additionally, in its discussion of Commission precedent regarding the exemption for foreign 

brokers from registration under the Act, the Commission notes that "a foreign broker would generally 

not need to register as an introducing broker6

" if it solicits or accepts orders from persons located 

outside the U.S. !d. at 15638. The Commission further explained that it may be best for local 

authorities to regulate foreign brokers who solicit or accept orders only from persons located outside 

the U.S. 48 Fed. Reg. 35247, at 35261. Therefore, FIA encourages the Commission to codify this 

prior exemptive relief by including a provision specifically exempting brokers located outside of the 

U.S. when acting in the capacity of an m with respect to non-U.S. customers (in other words, when 

the foreign broker introduces non-U.S. customers on a fully disclosed basis to a registered FCM or 

IB) from registration as an IB or FCM. 

The clarifications to the proposed rule in this letter are consistent with prior Commission 

precedent regarding the exemption of foreign brokers from registration as an FCM or IB, 

Commission deference to the home country regulator of the foreign broker, and the Commission's 

stated desire to provide greater legal certainty to market participants. FIA again thanks the 

Commission for this opportunity to provide comments on the proposal. 

Very truly yours, 

John M. Damgard 

President 

5 The term customer is defined as a customer trading in any commodity as defined in the Act provided, however, an 

owner or holder of proprietary accounts as defined in the 17 C.F.R. § 1.3 (y) shall not be deemed a customer. 17 

C.F.R. § 1.3 {k). 

6 An introducing broker ("IB") is defined as a person engaged in soliciting or in accepting orders for futures and 

options contracts listed on any contract market or derivatives transaction execution facility that does not accept any 

money, securities, or property to margin any trades that result from such orders. 17 C.F.R. § 1.3(mm). 

7 CFTC Staff Letter 92-19, at~ 25,516; see also 48 Fed. Reg. 35247, 35261 (citing 45 Fed. Reg. 18356, at 18360 ); 

45 Fed. Reg. 80490 (Dec. 5, 1980); CFTC Staff Letter 75-12 [1975- 1977 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ~ 20,099 (Oct. 6, 1975).