U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5260 

Facsimile: (202) 418-5527

Division of 

Market Oversight

 

CFTC letter No. 06-21

September 22, 2006 

No-Action 

Division of Market Oversight 

Ms. Arul Ramiah 

Head of Regulatory Policy 

Singapore Exchange Limited 

2 Shenton Way, #19-00 

SGX Centre 1 

Singapore 068804 

 Re: Request of Singapore Exchange Ltd for Modification of No-Action Relief from 

(a) Contract Market Designation under Section 5 of the Commodity Exchange Act; and 

(b) Extension of Such No-Action Relief to Registration as a Derivatives Transaction 

Execution Facility under Section 5a of the Commodity Exchange Act 

Dear Ms. Ramiah: 

 On December 17, 1999, the Division of Trading and Markets (T&M) of the Commodity 

Futures Trading Commission (Commission) issued a no-action letter1 and confirmed that it 

would not recommend that the Commission institute enforcement action against the Singapore 

International Monetary Exchange Limited (SIMEX) or its members solely based upon SIMEX’s 

failure to obtain contract market designation pursuant to Sections 5 and 5a of the Commodity 

Exchange Act (Act) if: (i) SIMEX members trade for their proprietary accounts through 

SIMEX’s electronic trading and order matching system (SIMEX ETS) terminals in the United 

States; (ii) SIMEX members who are registered with the Commission as futures commission 

merchants (FCM) or who are exempt from such registration pursuant to Rule 30.10 (Rule 30.10 

firms) submit orders from U.S. customers for transmission to SIMEX ETS; and/or (iii) SIMEX 

members who are registered with the Commission as FCMs or who are Rule 30.10 firms accept 

orders through automated order routing systems (AORS) from U.S. customers for submission to 

SIMEX ETS. 

 The SIMEX no-action letter summarized various representations made by SIMEX in its 

request for no-action relief, including representations concerning the structure of SIMEX, its 

products, its membership criteria, the architecture, operation and trading requirements of SIMEX 

1

 CFTC Staff Letter No. 99-63 (December 17, 1999) (SIMEX no-action letter). On July 1, 2002, the Commission’s 

staff was reorganized. Requests for no-action relief from the contract market designation requirement or derivatives 

transaction execution facility (DTEF) registration requirement are now reviewed by the Division of Market 

Oversight (DMO or the Division).
Ms. Arul Ramiah 

Page 2 of 9 

 

ETS, the activities conducted by its representative office in the U.S., the regulatory regimes 

governing SIMEX, its members, and SIMEX ETS, and the relevant information-sharing 

arrangements. 

 By letter dated August 11, 2006, you notified DMO of material changes that have 

occurred since the SIMEX no-action relief was granted and requested that the relief be modified 

to reflect additional circumstances and arrangements that were not applicable at the time that the 

SIMEX no-action letter was issued and that the no-action relief be extended to include nonregistration as a DTEF under Section 5a of the Act.2

1. Existing No-action Relief. With respect to material developments since the no-action 

relief was granted to SIMEX, you represent that, among others, the following market and 

regulatory developments have taken place:3

 A. Demutualization & Reorganization. The securities and futures exchanges in 

Singapore have demutualized. The Singapore Exchange Ltd (Exchange) was formed and has 

become a holding company for the Stock Exchange of Singapore (SES) and SIMEX. SIMEX 

was renamed Singapore Exchange Derivatives Trading Ltd (SGX) and now operates as a wholly 

owned subsidiary of the Exchange. Effective October 2, 2006, SGX expects to operate a wholly 

electronic futures exchange. No contracts are expected to be traded on the floor, which would be 

closed on September 29, 2006. 

 B. Regulatory Regime. Since 1999 when the no-action relief was granted, the 

regulatory landscape governing exchanges in Singapore has undergone various changes. The 

Singapore Futures Trading Act (FTA), under which SIMEX was an approved futures exchange, 

was repealed and the laws and regulations applicable to the Exchange and its subsidiaries, 

including SGX, were consolidated into the Securities and Futures Act (SFA). The SFA, which 

came into effect on October 1, 2002, introduced a single licensing framework to regulate the 

carrying out of one or more regulated activities in either the securities or futures market and also 

introduced a risk-based capital regime, which required member companies to maintain levels of 

capital corresponding more closely with the risks arising from the business activity which they 

undertake. Pursuant to July 1, 2005, amendments to the SFA, the Exchange was approved as an 

Approved Holding Company4

 and SGX was approved as an Approved Exchange. As an 

Approved Exchange, SGX is required to, among other things, maintain a fair, orderly and 

transparent market and prohibit fraud, abuse and market manipulation in each market5

 it 

2

 The SIMEX no-action letter referred only to contract market designation because at that time there was no 

provision in the Act or rules thereunder governing a DTEF, a category of board of trade created by the Commodity 

Futures Modernization Act of 2000. 

3

 Many of these developments have already been highlighted to the Commission’s Office of General Counsel in 

requests to permit the sale of foreign stock index contracts traded on SGX and the offer of such products in the U.S. 

by futures brokerage firms located in Singapore. 

4

 An Approved Holding Company is one that owns either any approved exchanges or designated clearing houses. 

The Exchange owns and operates two approved exchanges and two designated clearing houses – each corresponding 

to the securities and the futures markets respectively. 

5

 SGX will operate two markets under its authority as an Approved Exchange. The first market, SGX-DT, is 

dedicated to financial futures and options; the second market, JADE, described below, will be dedicated to 

commodity futures and is the offspring of a joint venture between SGX and CBOT Holdings Inc. 
Ms. Arul Ramiah 

Page 3 of 9 

 

operates.6 The Exchange and its subsidiaries are regulated by the Monetary Authority of 

Singapore (MAS) under the SFA.7

 C. Revised Rules. In line with its conversion to a wholly electronic exchange, SGX, 

after public consultation and regulatory clearance from MAS, has completed a major revision of 

its Derivatives Trading Rulebook, now renamed the Futures Trading Rulebook, which addresses 

market and regulatory developments and is more specifically tailored to a screen-based and 

cross-border trading environment. Among other things, the revised rulebook (i) codifies the 

requirement that directors, chief executives and key personnel of a member are fit and proper;8

(ii) consolidates and streamlines the membership categories for individuals and firms into two 

main categories – clearing members and trading members; (iii) prohibits members from comingling or depositing the member’s own money and assets into their customers’ accounts; (iv) 

requires members to report all breaches of laws, rules or regulations, whether they occur in 

Singapore or overseas; and (v) clarifies the standard of proof in proceedings before the 

Disciplinary and Appeals Committees. SGX represents that to the extent that the prior rulebook 

contained certain fundamental market integrity rules relating to anti-manipulation and prudential 

measures, these are equally relevant in an electronic environment and will continue to be 

observed. 

 D. Trading Engine for SGX-DT Market. In August 2004 SGX, launched a new 

trading engine for the trading of derivatives, SGX Quotation and Execution System (SGX 

QUEST). SGX QUEST replaced the prior derivatives trading engine, SGX ETS, known as 

SIMEX ETS when the no-action relief was granted. SGX QUEST is the trading platform for 

SGX-DT, the market for SGX financial futures and options on futures contracts, and is based on 

the software, CLICK XTTM, developed by OMX. 

 Order placement, modification and cancellation are managed within the Central Trading 

System, which also stores stop limit orders and only places them in the order book when certain 

6

 The SFA has also been strengthened on other fronts and SGX is now subject to more stringent corporate 

governance and other requirements. For example, (i) rule-making and rule amendments by SGX are subject to a 

statutorily controlled process which incorporates public consultations; (ii) SGX’s key management is subject to 

certain fit and proper guidelines relating to character, honesty and integrity; (iii) SGX is subject to a more extensive 

financial reporting framework; and (iv) SGX is subject to mandatory corporate governance regulations which 

include heightened independence requirements for its independent directors serving on its board. 

7

 SIMEX was regulated by MAS at the time it was granted the no-action relief. The Division notes that the 

Commission had previously reviewed the regulatory regime administered and enforced by MAS in connection with 

relief it granted to SIMEX in 1989. On January 10, 1989, the Commission issued an order pursuant to Rule 30.10 

that granted exemptive relief to SIMEX members that allowed them to solicit and accept orders from U.S. customers 

for otherwise permitted transactions on SIMEX. 54 Fed. Reg. 806 (January 10, 1989). In the order, the 

Commission noted that the standards for relief set forth in Rule 30.10 generally had been satisfied by SIMEX and 

compliance by the Rule 30.10 Firms with applicable Singapore law and SIMEX Rules could be substituted for 

compliance with certain provisions of the Act and the Commission’s rules set forth in the order. Further, on 

September 16, 1999, the Commission issued an order pursuant to Rule 30.10 that granted exemptive relief to 

SIMEX members that allowed them to solicit and accept orders from U.S. customers for otherwise permitted 

transactions on Eurex Deutschland. 64 Fed. Reg. 50248 (September 16, 1999). 

8

 SGX represents that it would look to the Guidelines on Fit and Proper Criteria issued by MAS in July 2005 when 

determining whether an officer is fit and proper. 
Ms. Arul Ramiah 

Page 4 of 9 

 

trigger conditions are met. Information including best bid/offer, last execution price, and market 

and price depth is broadcast real-time when there are changes to the order book. All orders are 

queued and matched in accordance with price-time priority, although price point and pro-rata 

matching algorithms are also used for some products.9 When orders are matched, trade 

information is provided to the parties and transmitted real-time to SGX’s clearing system, 

discussed below. 

 SGX represents that it will not permit terminals or AORSs located in the U.S. to be used 

to trade any SGX financial futures contract or option thereon listed on SGX QUEST on any 

broad-based securities index, non-U.S. government debt security, individual stock or narrowbased securities index for which SGX has not received the necessary no-action relief or approval 

from the Commission or the U.S. Securities and Exchange Commission, as applicable. 

 E. Market Surveillance. In July 2005, SGX decided to upgrade to a more 

sophisticated market and trade practice surveillance system known as Securities Market 

Automated Research Trading and Surveillance (SMARTS)10. SMARTS integrates trading and 

other data sources and triggers alerts in the event of unusual trading activity. SMARTS is 

customized for use in the electronic markets, allows for real-time monitoring, and is designed to 

handle and process large volumes of order and trade data from SGX QUEST. In addition, it 

allows for the construction of trends and allows the SGX surveillance team to isolate the 

activities of a particular trader and replay his market activities. This feature allows for the 

detection of potential attempts to manipulate the market and potential trade practice violations. 

SGX QUEST audit trails capture trade data, order data, participant data and time and sales 

information, which are then fed into SMARTS for real-time monitoring and surveillance 

purposes. Audit trail logs are archived daily and maintained for seven years. 

 F. Clearing. Singapore Exchange Derivatives Clearing Limited (SGX-DC), 

formerly referred to as the SIMEX Clearing House, clears all futures and options on futures 

contracts traded on SGX. SGX-DC is a wholly-owned subsidiary of the Exchange and is 

regulated by MAS as a Designated Clearing House under the SFA. SGX-DC’s clearing 

procedures are substantially the same as those in existence when SIMEX was granted the noaction relief. As before, SGX-DC is substituted as the central counterparty on all cleared futures 

and options on futures transactions; it requires clearing members to maintain separate accounts 

for house and customer positions; it margins positions on a gross (not a net) basis (using SPAN 

methodology); and it applies daily mark-to-market to all open positions. It also has standardized 

procedures to address the default of a clearing member. Since the granting of the no-action 

relief, SGX-DC has expanded its services to provide clearing for over-the-counter derivatives 

contracts. 

9

 Under the price point maker allocation algorithm, orders which are the first to improve the prevailing bid/ask 

prices, known as orders with price point maker status, would receive priority over other orders at the same price. 

With the pro-rata order and matching allocation algorithm, orders entered at the same price would be matched based 

on the orders’ volume contribution to the aggregate volume of all resting orders at that price. 

10 SMARTS is a proprietary system developed by an Australian vendor and is also currently deployed by the 

Australian Stock Exchange, Helsinki Stock Exchange and Stock Exchange of Hong Kong. SMARTS has been 

successfully implemented in the securities market operated by the Exchange since the end of 2000. 
Ms. Arul Ramiah 

Page 5 of 9 

 

 G. Contracts. In addition to the contracts currently available for trading on SGX 

QUEST pursuant to the SIMEX no-action letter, you request, by letter dated September 15, 2006, 

to list for trading on SGX QUEST three index contracts for which SGX has previously received 

no-action relief from the Commission’s Office of General Counsel allowing the contracts to be 

offered and sold in the U.S.: the MSCI Singapore Free Stock Index futures contract,11 the MSCI 

Japan Index futures contract,12 and the S&P CNX Nifty Index futures contract.13

 H. Presence in the U.S.: SGX closed its U.S. office in June 2003 and no longer 

maintains an office or any staff in the U.S. SGX, however, does engage in general marketing 

activities in the U.S., including participation in industry conferences and expositions in the U.S. 

SGX does not, and represents that it will not, provide any investment advice to U.S. persons 

whatsoever or solicit, accept or direct trading of orders in the U.S. with respect to products 

traded on SGX. 

2. JADE. In your letter dated August 11, 2006, you also request that the no-action relief be 

amended to include the Joint Asian Derivatives Exchange (JADE), a joint venture of SGX and 

CBOT Holdings Inc., the parent of the Chicago Board of Trade (CBOT). 

 A. Overview. The JADE market is an electronic derivatives market for futures and 

options on futures contracts on physical commodities based in Asia and is operated as a division 

of SGX under its authority as an Approved Exchange in Singapore. SGX intends to provide 

access to JADE market contracts through terminals and AORS located in Asia, the U.S. and 

other geographic regions, and expects most of the trading volume will originate in Asia. The 

products listed on the JADE market would be made available for trading on the CBOT’s 

electronic trading and order matching system known as the e-cbot trading platform powered by 

LIFFE CONNECT (e-cbot System). The material changes previously discussed with respect to 

SGX QUEST are generally applicable to trading on the JADE market, with the following major 

exceptions. 

 B. Trading System. As stated above, JADE market products would be traded on the 

e-cbot System and not on SGX QUEST. Although DMO has not performed an independent 

assessment of the security or soundness of the e-cbot System for trading JADE futures and 

options on futures, it should be noted that that e-cbot System is virtually identical to the 

NASDAQ LIFFE electronic trading platform, using LIFFE CONNECT, and that NASDAQ 

LIFFE was previously designated as a contract market by the Commission.14 Furthermore, 

Commission staff undertook a thorough review of the e-cbot System in connection with the 

CBOT’s October 31, 2003, self-certification to the Commission of a set of rule changes to 

11 CFTC Staff Letter No. 00-77, June 21, 2000. 

12 CFTC Staff Letter No. 03-07, February 13, 2003. 

13 CFTC Staff Letter No. 04-02, January 7, 2004. 

14 The Commission approved NASDAQ LIFFE, LLC, a joint venture of the NASDAQ Stock Market and the 

London International Financial Futures Exchange (LIFFE) as a designated contract market (DCM) on August 22, 

2001. On July 24, 2003, NASDAQ LIFFE ended its relationship with NASDAQ and the Exchange was renamed 

NQLX. 
Ms. Arul Ramiah 

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replace its a/c/e electronic trading system with the e-cbot electronic trading system using LIFFE 

CONNECT. The e-cbot System is also used at the Winnipeg Commodity Exchange, which 

recently received foreign terminal no-action relief from DMO.15

 The trading algorithm used for trading on the JADE market is an order level pro-rata 

algorithm with priority order, a minimum volume requirement, and a maximum volume cap. 

With this algorithm, a priority flag is given to the order that was the first to enter the market at 

the best price if that order is above a certain volume (the “minimum volume”). When this 

priority flag is assigned, the order will gain all incoming volume up to a certain maximum 

volume (the “volume cap”). When this volume cap is reached, all remaining volume is divided 

pro-rata among this order and the other orders at the best price. 

 SGX represents that it believes that the CBOT’s oversight of the e-cbot System adheres 

to the principles expressed in the Principles for the Oversight of Screen-Based Trading Systems 

for Derivative Products published in 1990 by the International Organization of Securities 

Commissions (IOSCO Principles). Further, SGX represents that it will comply with the IOSCO 

Principles in its operation of the e-cbot System. 

 C. Market Surveillance. The SMARTS system would not be used for the real-time 

surveillance of the JADE market. Instead, SGX has contractually agreed to adopt the market and 

control tools of CBOT to conduct real-time surveillance for the JADE market. Audit trail data 

from the e-cbot System would be sent to SMARTS to generate exception reports for after-market 

surveillance by SGX. CBOT has undertaken to provide audit trail data captured by the e-cbot 

System relating to trade data, order data, participant data and time and sales information to the 

SGX surveillance department. The SGX surveillance officers would also have access to the 

LIFFE CONNECT Monitor and Control Tools, which provide a near real-time view into JADE 

market activity. 

 D. Clearing. SGX-DC will apply the same basic procedures to clearing JADE 

market futures and options on futures contracts that it does for the SGX-DT market, subject to 

certain rule amendments and additional procedures that are specific to the clearing of physicaldelivery contracts listed on the JADE market. 

 E. Contracts. In the JADE market, SGX intends to list futures and options on futures 

contracts of physical commodities of Asian origin. Thus, SGX rules addressing physical 

delivery apply only to JADE physical delivery contracts. The first contract to be launched on 

JADE is a physically delivered TSR 20 Rubber Futures Contract. 

 F. Miscellaneous. Separate error trade policies and dispute resolution rules will 

apply to contracts traded on the JADE market. 

15 CFTC Staff Letter No. 04-35, December 15, 2004. 
Ms. Arul Ramiah 

Page 7 of 9 

3. Request for Amendment of No-action Relief 

 You have requested that the SIMEX no-action relief be modified to reflect additional 

circumstances and arrangements that were not applicable at the time that the SIMEX no-action 

letter was issued and that the no-action relief be extended to include failure to register as a DTEF 

under Section 5a of the Act. Further, you have requested that DMO amend the no-action relief 

to permit SGX to make its two electronic trading and order matching systems available to SGX 

members in the U.S. without registering with the Commission as a DCM or a DTEF pursuant to 

Sections 5 and 5a of the Act, or comply with those Commission regulations that specifically 

relate to DCMs or DTEFs, in connection with the installation and use in the U.S. of terminals 

and/or AORSs that are used to submit orders to SGX. 

 Specifically, you request that the Division amend the no-action relief to: 

 A. Permit SGX to make (i) the e-cbot System available to U.S.-based participants to 

trade JADE market futures and options on futures contracts and (ii) SGX QUEST available to 

U.S.-based participants to trade SGX futures and options on futures contracts without in either 

case having to register with the Commission either as a DCM under Section 5 of the Act or as a 

DTEF under Section 5a of the Act or comply with Commission regulations that specifically 

relate to DCMs or DTEFs in connection with the installation and use in the U.S. of terminals 

providing direct access to SGX’s trading and order matching systems and/or AORS that are used 

to submit orders to SGX; and 

 B. Permit (i) SGX members to use terminals or AORSs located in the U.S. giving 

them access to the e-cbot System to trade JADE market futures and options on futures contracts 

on SGX for their proprietary accounts; (ii) SGX members who are registered with the 

Commission as FCMs to use terminals or AORSs located in the U.S. giving them access to the ecbot System to submit and transmit orders from U.S. customers to trade JADE market contracts 

on SGX; and (iii) SGX members who are registered as FCMs or who are Rule 30.10 firms to 

accept orders through AORS from U.S. customers submitted to the e-cbot System to trade JADE 

market contracts on SGX; and 

 C. Permit (i) SGX members to use terminals or AORSs located in the U.S. giving 

them access to SGX QUEST to trade financial futures and options on futures contracts on SGX 

for their proprietary accounts; (ii) SGX members who are registered with the Commission as 

FCMs to use terminals or AORSs located in the U.S. giving them access to SGX QUEST to 

submit and transmit orders from U.S. customers to trade such contracts on SGX; and (iii) SGX 

members who are registered as FCMs or who are Rule 30.10 firms to accept orders through 

AORSs from U.S. customers submitted to SGX QUEST to trade such contracts on SGX. 

4. Conclusion 

 DMO has reviewed the requested amendment and supporting documentation and the 

earlier no-action letter and has determined that granting the amendment should not have a 

significant impact on the no-action relief as granted and would not be contrary to public policy. 

Accordingly, DMO confirms that it will not recommend that the Commission institute 
Ms. Arul Ramiah 

Page 8 of 9 

 

enforcement action against SGX or its members solely based upon SGX’s failure to obtain 

contract market designation or DTEF registration pursuant to Section 5 or 5a, respectively, of the 

Act, or to comply with those Commission regulations that specifically relate to DCMs or DTEFs, 

if: (i) SGX members located in the U.S. trade futures and options on futures contracts for their 

proprietary accounts on SGX-DT or the JADE market through SGX QUEST or the e-cbot 

System; (ii) SGX members who are registered with the Commission as FCMs submit orders by 

or on behalf of U.S. customers to SGX-DT or the JADE market through SGX QUEST or the ecbot System; and (iii) SGX members who are registered with the Commission as FCMs or who 

are Rule 30.10 Firms accept orders from U.S. customers transmitted via AORS for submission to 

SGX-DT or the JADE market through SGX QUEST or the e-cbot System. 

This Division’s no-action position is applicable only to the futures and option contracts 

previously identified in the SIMEX no-action letter (for SGX-DT), the three index contracts for 

which, subsequent to the date of the SIMEX no-action letter, SGX received no-action relief from 

the Commission’s Office of General Counsel allowing the contracts to be offered and sold in the 

U.S. (SGX-DT), and to the physically delivered TSR 20 Rubber Futures Contract (the JADE 

market). If additional futures and options on futures contracts become available for trading 

through SGX QUEST or the e-cbot System, SGX may make such futures and options on futures 

contracts available for trading through its trading systems from the U.S. in accordance with the 

provisions of the Commission's Notice of Revision of Commission Policy Regarding the Listing 

of New Futures and Option Contracts by Foreign Boards of Trade that have Received Staff NoAction Relief to Provide Direct Access to their Automated Trading Systems from Locations in 

the United States.16

The Division notes that its no-action position does not relieve SGX from compliance with 

the terms and conditions set forth in the SIMEX no-action letter.17 As with all no-action letters, 

DMO retains the authority to condition further, modify, suspend, terminate, or otherwise restrict 

the terms of the no-action relief provided herein, in its discretion. This amendment to the 

Division’s no-action position applies only to the additional circumstances and arrangements 

identified in your letter of August 11, 2006, and discussed herein, and should not be construed to 

express any opinion as to the effect of any other change in circumstances that may have occurred 

or may occur in the future. 

The no-action position taken herein is taken by the Division only and does not necessarily 

reflect the views of the Commission or any other unit or member of the Commission’s staff. It is 

based upon the information and representations contained in SGX’s request for modification and 

extension of the no-action relief. Any materially different, changed, or omitted facts or 

circumstances may render this letter void. 

16 71 Fed. Reg. 19877 (April 18, 2006); corrected at 71 Fed. Reg. 21003 (April 24, 2006). 

17 Among those conditions are requirements that SGX continue to adhere to the IOSCO Principles and that 

satisfactory information-sharing arrangements between the Commission and MAS remain in effect. 
Ms. Arul Ramiah 

Page 9 of 9 

 If you have any questions regarding this correspondence, please contact Duane C. 

Andresen, Special Counsel, Division of Market Oversight, at (202) 418-5492. 

 Very truly yours, 

 Richard A. Shilts 

 Director 

cc Gregory C. Prusik, Vice-President, Registration, NFA 

Branch Chief, Audit and Financial Review Unit, Division of Clearing and Intermediary 

Oversight, Chicago Regional Office