U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5260 

Facsimile: (202) 418-5527 

www.cftc.gov

Division of 

Market Oversight 

CFTC letter No. 07-02 

March 6, 2007 

No-Action 

Division of Market Oversight

Paul M. Architzel, Esq. 

Alston & Bird LLP 

The Atlantic Building 

950 F Street, NW 

Washington, DC 20004-1404 

 Re: Tokyo Financial Exchange, Inc., Request for No-Action Relief from Contract 

Market Designation and Derivatives Transaction Execution Facility Registration 

Requirements

Dear Mr. Architzel: 

 This is in response to your letter dated January 12, 2007 to the Division of Market 

Oversight (Division) of the Commodity Futures Trading Commission (CFTC or Commission).1

 

By this correspondence, you request, on behalf of the Tokyo Financial Exchange, Inc., (TFX or 

the Exchange) that the Division confirm that it will not recommend that the Commission take 

enforcement action against TFX or its members2

 if TFX does not seek designation as a contract 

market (DCM) pursuant to Section 5 of the Commodity Exchange Act (CEA or Act) or as a 

derivative transaction execution facility (DTEF) pursuant to Section 5a of the Act, or 

Commission rules thereunder, in connection with the installation and use by TFX members in the 

United States3

 of the Exchange’s electronic trading and order matching system, as well as its 

Application Program Interface (API) (referred to hereafter as its trading system or LIFFE 

CONNECTTM). (No-action request). 

 

1

 Letter from Paul M. Architzel, Esq., Alston & Bird LLP, to Richard A. Shilts, Director, Division of Market 

Oversight, Commodity Futures Trading Commission (January 12, 2007). 

2

 For purposes of this letter and the relief provided herein, references to the members of TFX shall include any 

“affiliate” of any TFX member that has been granted access by the TFX member to the Exchange’s trading system. 

An “affiliate” of a TFX member shall mean any person, as that term is defined in Section 1a(28) of the Act, that: (i) 

owns 50% or more of the member; (ii) is owned 50% or more by the member; or (iii) is owned 50% or more by a 

third person that also owns 50% or more of the member. TFX represents that, as a condition of access to the trading 

system, such affiliates would be required to comply with TFX Rules and that TFX members remain responsible to 

TFX for ensuring their affiliates' compliance. 

3

 For purposes of this letter and the relief provided herein, the term “United States” shall include the United 

States, its territories and possessions. 
Paul M. Architzel, Esq. 

Page 2 

 Specifically, TFX wishes to make its trading system available through direct access4 to 

TFX members in the U.S. that: 

(1) trade for their own accounts; 

(2) are registered with the Commission as Futures Commission Merchants (FCM) or that 

are exempt from such registration pursuant to Commission Rule 30.10 (Rule 30.10 

Firms)5

 and that submit orders for U.S. customers6 to the trading system for execution; 

(3) are registered with the Commission as commodity pool operators (CPO) or 

commodity trading advisors (CTA), or are exempt from such registration pursuant to 

Commission Rules 4.13 or 4.14, and that submit orders for execution on behalf of U.S. 

pools they operate or U.S. customer accounts for which they have discretionary authority, 

respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm and 

guarantees without limitation all such trades of the CPO or CTA effected through 

submission of orders on the trading system; and 

(4) are registered with the Commission as FCMs or are Rule 30.10 Firms and that accept 

orders through automated order routing systems (AORS)7 from U.S. customers for 

transmission to the trading system. 

 

4

 For purposes of this letter and the relief provided herein, the term “direct access” refers to the explicit grant of 

authority by TFX to a TFX member to enter trades directly into TFX’s trading system. 

5

 Rule 30.10 permits a person affected by the requirements contained in Part 30 of the Commission's rules to 

petition the Commission for an exemption from such requirements. Appendix A to the Part 30 rules provides an 

interpretative statement that clarifies that a foreign regulator or self-regulatory organization (SRO) can petition the 

Commission under Rule 30.10 for an order to permit firms that are members of the SRO and subject to regulation by 

the foreign regulator to conduct business from locations outside of the United States for United States persons on 

non-United States boards of trade without registering under the Act, based upon the person's substituted compliance 

with a foreign regulatory structure found comparable to that administered by the Commission under the Act. 

Among the issues considered by the Commission in determining whether to grant Rule 30.10 relief to a foreign 

regulatory or self-regulatory authority are the authority's: (i) requirements relating to the registration, authorization, 

or other form of licensing, fitness review, or qualification of persons through whom customer orders are solicited 

and accepted; (ii) minimum financial requirements for those persons that accept customer funds; (iii) minimum sales 

practice standards, including risk disclosures, and the risk of transactions undertaken outside of the United States; 

(iv) procedures for auditing compliance with the requirements of the regulatory program, including recordkeeping 

and reporting requirements; (v) standards for the protection of customer funds from misapplication; and (vi) 

arrangements for the sharing of information with the United States. Interpretative Statement with Respect to the 

Commission's Exemptive Authority Under § 30.10 of its Rules, 17 C.F.R. Part 30, Appendix A (2006). 

6

 For purposes of this letter and the relief provided herein, the term “United States customers” shall have the 

same meaning as the term “foreign futures or foreign options customers” as it is defined in Rule 30.1(c). 

7

 For purposes of this letter and the relief provided herein, the term “AORS” shall be defined to include any 

system of computers, software or other devices that allows entry of orders through another party (an intermediary) 

that has been granted direct access for transmission to the trading system where, without substantial human 

intervention, trade matching or execution takes place. 
Paul M. Architzel, Esq. 

Page 3 

 As you know, the Commission, on October 27, 2006, issued a policy statement that 

affirmed the use of the no-action process to permit foreign boards of trade to provide direct 

access to their electronic trading systems from the U.S. (Policy Statement).8

 The Division has 

reviewed TFX’s No-action request and the materials submitted in support thereof in accordance 

with the Policy Statement and the June 2, 1999, Commission Order (June 2 Order) which first 

directed the Commission staff to consider requests from foreign exchanges for interim no-action 

relief to allow them to provide direct access to their trading systems from the U.S.9

 In connection with its No-action request, TFX has forwarded the following information 

to the Division: 

• General information about TFX, including its history, location and organization; 

• Information about membership criteria,; 

• Information about various aspects of TFX’s trading system (including the order-matching 

system, the audit trail, response time, reliability, security, and adherence to the IOSCO 

Principles) and information about settlement and clearing; 

• Information about TFX’s home country regulatory regime and information regarding 

TFX’s status in its home jurisdiction and its rules and enforcement thereof (including market 

surveillance and trade practice surveillance); 

• A description of current information–sharing agreements to which TFX and its regulators 

are parties; 

• TFX’s Articles of Incorporation; 

• TFX’s regulations; 

• Lists of TFX’s Trading and Clearing Members; 

• Japan’s Financial Futures Trading Law; 

• Japan’s Financial Instruments and Exchange Law; 

• Certification of an authorized representative of TFX as to the truth and completeness of 

the material facts set forth in the No-action request; and 

 

8

 Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement to Become a 

Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. Reg. 64443 (November 2, 

2006). 

9

 Order of the CFTC Withdrawing Proposed Rules Regarding Access to Automated Boards of Trade, 64 FR 

32829, 32830 (June 18, 1999). 
Paul M. Architzel, Esq. 

Page 4 

• Undertaking of an authorized representative of TFX to notify the Commission staff if, 

prior to the issuance of no-action relief requested in the No-action request, any material 

representation made in such request ceases to be true and complete. 

 The Division also received separately from the Financial Services Agency of Japan 

(FSA), TFX’s regulatory authority, a representation regarding the existing information-sharing 

arrangement between the FSA and the CFTC. This representation is described below in section 

VII. 

 Representations made by TFX regarding the structure of TFX, TFX's activities in the 

U.S., TFX's membership criteria, TFX’s electronic trading and order matching system, the 

relevant regulatory regime in Japan, and the information-sharing arrangements applicable to TFX 

and its regulator are summarized in Sections I - VII below. For purposes of this response to the 

No-action request, the Division has relied upon TFX's representations and information provided 

by TFX and has not conducted an independent review to confirm their accuracy.10

I. GENERAL INFORMATION REGARDING TFX 

A. History and Organization 

 TFX was first established in April 1989 as the Tokyo International Financial Futures 

Exchange (TIFFE) under Japan’s Financial Futures Trading Law and was licensed to trade 

interest rate and other financial futures contracts. In June 1989, TIFFE began trading in the 

Three-month Euroyen futures contract, Three-month Eurodollar futures contract and Japanese 

Yen-US Dollar currency futures contract. Initially, TIFFE members placed orders by telephone 

with Exchange operators who would then input those orders into an electronic matching engine. 

In 1991, TIFFE installed a fully electronic trading system, listed Three-month Euroyen option 

contracts, and began an evening trading session. In April 1996, the TIFFE-SPAN®11 Margin 

System was introduced and in November 1998, segregation of customer funds was instituted. In 

April, 2003, TIFFE, in collaboration with the London International Financial Futures and 

Options Exchange (LIFFE), implemented the LIFFE CONNECTTM trading system and its new 

clearing system developed by Fujitsu. In April 2004, TIFFE demutualized, becoming a 

shareholder-owned, for-profit company. In July 2005, TIFFE, Inc., was renamed the Tokyo 

Financial Exchange, Inc. TFX currently has 72 shareholders and, as of December 31, 2006, was 

capitalized in the amount of ¥5,844,650,000.12

 

10 As stated below, the no-action relief provided herein is contingent upon the accuracy of the representations 

made by TFX in support of its No-action request. Any materially different, changed, or omitted facts or 

circumstances may render the no-action relief void or cause the Division, in its discretion, to condition further, 

modify, suspend, terminate, or otherwise restrict the relief. 

11 SPAN® is the margin calculation system developed in 1988 by the Chicago Mercantile Exchange (CME). 

SPAN® is a registered trademark of the CME and used by TFX with permission of the CME. 

12 As of February 14, 2007, ¥5,844,650,000=$48,119,458. 
Paul M. Architzel, Esq. 

Page 5 

 TFX is overseen by a seven-member Board of Directors (Board). Three Board members 

are officers of the company-- the president and chief executive officer, the senior managing 

director and chief operating officer, and the managing director. The Board is assisted in its 

operations by three standing Advisory Committees which study various proposals and 

recommend policies to be adopted and actions to be taken by the Board. The standing Advisory 

Committees include the Market Operation Committee for Interest Rate Futures Transactions, 

composed of a Chairperson, a Vice Chairperson and seven members, the Market Operation 

Committee for Exchange FX Margin Transactions, composed of a Chairperson and four 

members, and the Discipline Committee, also composed of a Chairperson and four members. In 

addition, TFX is required under the Company Act of Japan to provide for a Board of Statutory 

Auditors, which is comprised of a standing statutory auditor and two outside independent 

statutory auditors. The Board of Statutory Auditors provides independent oversight with regard 

to the operations of the company. 

 TFX has a staff of 72 people as of December 31, 2006. The staff of the Exchange is 

divided into four departments and two independent offices--the Compliance Office and the 

Inspection Office. The four departments include the General Administration Department, which 

handles general corporate functions, including budget and accounting. The Market Promotion 

Department includes those offices and groups that promote use of the Exchange and the contracts 

traded thereon. The System Department is responsible for operation of the trading system and 

allied IT systems. The Business Operation Department includes the clearing and settlement 

group and the market surveillance group and, in conjunction with two offices, the Administration 

Office and the Inspection Office, oversees members’ trading and activities and takes disciplinary 

measures as appropriate in fulfilling TFX’s responsibilities as a self-regulatory organization. 

B. Products 

 TFX proposes to make the following contracts available for trading via direct access: 

o Three-month Euroyen futures contract (Euroyen futures contract) 

o Three-month option of Euroyen futures contract (Euroyen options contract) 

 You represent that the Euroyen futures contract is the preeminent futures contract traded 

in relation to Japanese interest rates and as such, is a tool to hedge fluctuations in Japanese 

interest rates. The currency in which it is traded and cash settled is Japanese Yen, payable 

through settlement banks in Japan. The Euroyen options contract is an American-style option 

that is exercised into Euroyen futures contracts. You represent that the terms of these contracts 

have no nexus to the United States, nor do they raise any particular U.S. regulatory interest. 

C. Presence in the United States 

 TFX currently does not have a representative office in the U.S. Its activities in the U.S. 

are limited to participating in widely-attended industry conferences and trade shows to acquaint 

the futures industry generally with TFX, representing TFX at such events with respect to 

inquiries from the press, providing information of a general nature to prospective members and 
Paul M. Architzel, Esq. 

Page 6 

industry groups and responding to inquiries from the public. TFX may also conduct seminars 

and other educational programs relating to trading on the Exchange. TFX does not provide 

investment services or accept, solicit, receive or direct orders in the U.S. with respect to products 

traded on the Exchange, and no trade processing or clearance functions are performed by TFX in 

the U.S. TFX’s English-language website is located at: http://www.tfx.co.jp/en/.

13

 You represent that although TFX does not have any immediate plans to open a 

representative office in the U.S., it may do so in the future for the purposes of promoting and 

developing TFX’s products in the U.S., carrying out representational activities with the 

Commission and the press, and providing information to existing and prospective members and 

others. If TFX does open a U.S. representative office, it would limit its activities to those 

discussed above. It would not provide investment advice or technical support from the U.S., nor 

would it solicit, receive or direct orders for the products traded on TFX.14

II. MEMBERSHIP

A. Introduction 

 In order to ensure fair and efficient financial futures transactions and the financial 

integrity of its market, TFX permits only TFX members to access the TFX market directly. Nonmember market participants may access the TFX trading system only through a TFX member 

that, in order to act as an agent for such customers, must be a licensed financial futures broker. 

TFX has two types of members, trading members and clearing members. Trading members may 

execute trades on the exchange for their own accounts or if appropriately licensed, for the 

accounts of others. Clearing members are permitted to conduct clearing operations on behalf of 

others. They are also required to be licensed as financial futures brokers. Non-clearing members 

must enter into a clearing agreement with a clearing member that agrees to guarantee the nonclearing members’ positions and are required to clear the positions they execute through a 

clearing member. 

TFX requires that its members be fit and meet financial soundness requirements, as 

discussed below. In order to become a TFX trading member, an applicant must file an 

application and must be a financial institution. Accordingly, it must be licensed under the 

Banking Law, the Securities and Exchange Law, or have a similar business license and engage in 

a financial futures business. Thus, TFX members cover a broad range of financial sectors such 

 

13 TFX’s website includes general information relating to the Exchange, its corporate organization, the contracts 

traded thereon, and the operation of the trading system and of the market. In addition, TFX’s website includes a 

complete set of the Exchange’s regulations and provides the public with access to various market data, including 

daily volume, open interest and settlement prices and monthly volume and open interest data. It also provides the 

public with access to historical data dating as far back as 1989. 

14 Accordingly, you request that the Commission not treat it as a change in the facts or circumstances represented 

in the No-action request if TFX opens such a representative office in the future as long as the operation of such an 

office is only for the purposes stated above. You represent that if TFX does open such an office, it will not be used 

to conduct trade matching or operate a clearing facility in the U.S. 
Paul M. Architzel, Esq. 

Page 7 

as banks, securities companies, insurance companies, credit associations, futures brokers and 

foreign financial institutions. 

B. Trading Members 

Legal entities wishing to become TFX trading members must apply for membership for 

each category of product traded, i.e., an applicant must apply for membership to trade specific 

instruments or classes of instruments. For example, a separate admission as a trading member is 

required to trade Interest-Rate Financial Futures or Exchange FX Margin contracts. Trading 

member applicants must meet fitness and competence standards and are required to have 

substantial financial resources. Applicants for membership to trade interest rate futures are 

required to have at least ¥5billion15 of net assets, a net assets-capital ratio of 100 percent or 

greater, and to expect to maintain stable profitability.16 In addition, applicants must demonstrate 

their competence to act in the capacity of trading member by employing knowledgeable 

personnel and are currently required to have an office or branch within Japan.17

 Further, the Financial Futures Trading Law sets forth various criteria that would 

disqualify an entity from becoming an exchange member. These statutory disqualifications 

include, among others: having been fined under the Financial Futures Trading Law or under 

analogous laws of foreign jurisdictions; having been expelled or having had trading rights 

rescinded under the law; having among its officers or principals a person that is not legally 

competent, a person who has filed for bankruptcy, a person who has been subject to 

imprisonment, a person fined under the Financial Futures Trading Law or a similar foreign 

statute; having had its license revoked under the Financial Futures Trading Law or an analogous 

law of a foreign jurisdiction; or having been expelled from membership. 

In addition to the above requirements, trading members must meet certain operational 

requirements. For example, they must nominate responsible employees to be accountable for 

various vital functions, including the security and safekeeping of trading IDs and other trade 

security functions, the reporting of positions and the performance of various back-office and 

clearing-related business functions. Trading members must also be able to meet the requisite 

technical requirements to connect to the Exchange’s trading system and their personnel must 

demonstrate competence by passing a Market Entry Test. Finally, trading members must report 

 

15 As of February 14, 2007, ¥5billion=$41,165,389. 

16 Applicants to trade interest rate futures must pay a trading registration fee of ¥50million ($411,654). 

17 You represent that TFX will revise this requirement, in response to the Commission staff’s granting of the noaction relief, in order to permit members from the U.S. to join TFX. When it adopts remote membership, TFX will 

consider other membership requirements for such remote members, such as minimum net asset levels. You 

represent that TFX undertakes through the No-action request to provide the Commission with notice of all material 

changes to its rules made subsequent to any grant by Commission staff of the no-action relief requested, including 

specifically, amendments to its rules permitting U.S. entities to become TFX members. 
Paul M. Architzel, Esq. 

Page 8 

their financial condition to the Exchange periodically and are subject to inspection for continuing 

compliance with these various requirements by the Exchange’s Office of Inspection.18

C. Clearing Members 

 Clearing members must satisfy the criteria set forth in the TFX Clearing Regulations, 

which include the requirement that they possess at least one trading membership license and 

thereby meet the criteria described above.19 Clearing member applicants must also demonstrate 

to the satisfaction of TFX that they have the requisite capability to undertake clearing operations 

for others. As discussed in greater detail below, clearing members must also make a contribution 

to the guaranty fund. The amount of this clearing deposit varies based upon the volume of 

contracts cleared by the clearing member but does not exceed ¥150million.20

III. OVERVIEW OF THE TFX TRADING SYSTEM

 At the outset, the Division notes that the description of TFX’s trading system, LIFFE 

CONNECTTM, set forth herein is based upon representations made by TFX or its representatives. 

The Division has not performed an independent assessment of the security or soundness of 

LIFFE CONNECTTM in connection with this request. Nonetheless, it should be noted that 

LIFFE CONNECTTM, as the trading system used by NASDAQ LIFFE, was thoroughly 

examined by the Division and the Commission’s Office of Information Resources Management 

in connection with NASDAQ LIFFE’s application to become a DCM.21 Furthermore, 

Commission staff undertook an examination of LIFFE CONNECTTM during its review of the ecbot System in connection with the Chicago Board of Trade’s October 31, 2003, selfcertification to the Commission of a set of rule changes to replace its a/c/e electronic trading 

system with the e-cbot electronic trading system using LIFFE CONNECTTM. Finally, 

Commission staff has previously described LIFFE CONNECTTM in connection with the granting 

of direct access no-action relief to LIFFE and Euronext Amsterdam22 and described the e-cbot 

electronic trading system using LIFFE CONNECTTM in connection with the granting of noaction relief to the Winnipeg Commodity Exchange, Inc.23

 

18 Trading members must also pay per-contract Exchange fees based upon trading volume, a monthly Exchange 

fee of ¥50,000 ($412), and a market entry deposit in the event of the member’s default which, for a licensed 

financial futures broker, is ¥10million ($82,331). 

19 In addition, Article 5 of the TFX Clearing Regulations requires, among other things, that the clearing member is 

a financial institution licensed under the Banking Law, the Securities and Exchange Law or is otherwise 

appropriately licensed, that it have knowledgeable personnel, that it have an office or branch office in Japan, and 

that it have adequate financial resources. 

20 As of February 14, 2007, ¥150million=$1,234,962. 

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

as a DCM on August 22, 2001. On July 24, 2003, NASDAQ LIFFE ended its relationship with NASDAQ and the 

DCM was renamed NQLX. 

22 CFTC Staff Letters No. 99-31 (July 23, 1999) and 05-16 (August 26, 2005) respectively. 

23 CFTC Staff Letter 04-35 (December 15, 2004). 
Paul M. Architzel, Esq. 

Page 9 

A. Introduction 

In April 2003, TFX began using the LIFFE CONNECTTM trading system and, since then, 

TFX’s trading system has operated using LIFFE CONNECTTM and API. As previously noted, 

LIFFE CONNECTTM is used by a number of other markets, including LIFFE, which introduced 

it on November 30, 1998 to replace LIFFE's floor-based market for individual equity option 

contracts. LIFFE subsequently enhanced the system to enable it to support trading in financial 

futures and equity index futures contracts. You represent that operation of LIFFE CONNECTTM 

by TFX is the same in all material respects as operation of the trading system on the LIFFE 

market. 

TFX provides the central order processing facilities for its trading system, the "Trading 

Host," in Tokyo. It also provides the network and Application Program Interface, known as API, 

through which a member's front-end trading application communicates with the Trading Host. 

Members are required to supply their own workstations. They may use TFX trading application 

software, use front-end software supplied by an independent software vendor (ISV) or supply 

their own front-end trading application software. Members are able to link their workstations 

directly to other systems (e.g., those dealing with trade capture and order management) to 

facilitate more efficient processing of business. 

B. The Trading Host 

 The Trading Host, which is validated using a process that requires, among other things, 

comprehensive business and technical testing before the system may be declared operational, 

provides the order matching service. Access to the Trading Host is limited to TFX members 

holding a relevant trading subscription which determines which contracts the member’s traders 

may trade. In this way, TFX is able to provide a filter, and represents that it will do so, to 

preclude U.S. members from trading contracts from the U.S. that are not authorized to be traded 

in the U.S.24 Non-members of TFX may not transmit orders directly to the Trading Host, and 

may transmit orders only using the AORS of a TFX member. The trading system requires that 

members providing or using an AORS must comply with certain order validation and recording 

requirements. 

 Orders processed by the Trading Host generally are for two price types: (i) limit orders25

and (ii) market orders.26 Market-on-open (MOO) orders are also permitted to be entered during 

the Pre-Open period and are executed at the calculated opening price.27 Contingent multiple 

 

24 Contracts not authorized to be traded in the U.S. include, e.g., unapproved stock index contracts. 

25 Limit orders trade at the price stated in the order or better. Unfilled volume is maintained in the central order 

book until filled, withdrawn or cancelled. 

26 Market orders are executed consecutively at the best price available until all volume at that price has been 

traded and until all the order volume has been filled. Any unfilled volume from an incomplete market order is 

immediately cancelled. 

27 Unfilled volume converts to a limit order. If no bid or offer exists at market open, the MOO order is cancelled. 
Paul M. Architzel, Esq. 

Page 10 

orders (CMO) are also permitted.28 Order volume parameters may also be specified. Complete 

volume orders are executed only if there is sufficient volume available for them to execute fully. 

Minimum volume orders are cancelled if the minimum volume cannot be executed immediately. 

For limit orders, cancellation parameters also may be specified. Good Till Cancelled (GTC) 

orders are held until a specified date, the contract expires or they are withdrawn by the trader. 

Immediate and cancel orders are executed against any existing orders, and any unfilled portion of 

the order is immediately cancelled. The variables relating to resting orders may be modified, and 

orders may be withdrawn at any time prior to execution. 

 Orders on TFX are matched by price/time priority. As described in TFX rules, lower 

offers take precedence over higher offers and higher bids take precedence over lower bids. In 

the case of multiple bids or offers at the same price, earlier bids and offers take precedence over 

later bids and offers respectively. Thus, under price/time priority of marker orders, a bid (offer) 

is filled at the best price by the earliest entered offer (bid) at that price. If additional contract 

units are needed to fill the bid (offer), then the next oldest offer (bid) at that price is matched 

until all of the liquidity at that price has been exhausted. Then matches would commence at the 

next best price until the order is filled. TFX is also able to switch the algorithm to pro-rata. 

Under TFX’s pro-rata algorithm, after the priority order29 is fully allocated, unfilled order 

volume is allocated on a pro-rata basis against all resting orders at the best bid/offer. Fractional 

allocations are rounded down to the nearest integer for all allocations greater than one and 

rounded up to one for all fractional allocations less than one. For equally-sized fractional 

allocations, priority is granted to the oldest order. Remaining volume derived from the rounding 

process is allocated on a pro-rata basis. 

The time assigned to an order is the time that it arrives at the Trading Host. The Trading 

Host calculates and adopts dynamic price limits throughout the trading day for each futures 

contract month and options series, and price limits may be updated by TFX market control 

officials. The Trading Host normally will reject attempts to enter orders for prices outside these 

limits. Following trade execution, traders are notified by the host that their orders have been 

executed and trade details automatically are input into the TFX clearing system. 

C. The Trading Application 

The Trading Application is the application software that runs on members' workstations. 

As previously noted, members may develop their own trading application, purchase an 

application from an ISV or use the TFX trading application software. The Trading Application 

 

28 CMO orders contain two or more component orders. Trading of any one component is contingent on being able 

to execute all component orders within the CMO. The CMO order is cancelled in its entirety, immediately and 

automatically, unless all of the designated components are matched. CMO orders enable intra- and inter-contract 

spread trading without legging risk because none of the related orders will execute if the criteria for any of the 

orders cannot be met. 

29 An order achieves status as the priority order if it improves the market with order volume equal to or greater 

than a stated minimum volume threshold. The unfilled portion of a partially filled priority order maintains its 

priority even if less than the minimum threshold. 
Paul M. Architzel, Esq. 

Page 11 

communicates with the Trading Host through API software provided by TFX through its 

licensing agreement with regard to LIFFE CONNECTTM. 

D. Distribution Network 

 The TFX distribution network connects the Trading Host in Tokyo to its Japanese 

members. When TFX admits remote members, the distribution network will be expanded to 

connect members outside of Japan to the Trading Host. Hubs in major financial centers, 

including hubs located in the U.S., will connect to the Trading Host located in Japan. Orders 

from remote members arriving at the Trading Host from the new hubs, including those from 

members located in the U.S., will not be treated any differently or disadvantaged by the Trading 

Host from those of TFX’s members located in Japan. 

TFX will have two data centers, the main (live) and disaster recovery (back-up) sites. 

Dedicated local redundant lines in Japan will connect both the main site at TFX and the disaster 

recovery site and the network. To provide a connection point for members in the U.S., TFX will 

place U.S. access points (Point of presence or Pop) and connect the Exchange and U.S. Pop via 

the network. Another dedicated local line in the U.S. will be used to connect U.S. members and 

U.S. Pop. 

E. Audit Trail 

 The TFX trading system captures a complete audit trail of all orders entered into the 

trading system and all trades that are executed. In this regard, the following information is 

required to be included on orders submitted to the trading system: (i) commodity; (ii) contract 

month; (iii) purchase or sale; (iv) account identifier (proprietary or customer); (v) quantity; (vi) 

limit price (except for market orders, MOO orders and other similar order types); and (vii) strike 

prices, put or call (for options). The trading system automatically records the time of, and retains 

a record of, each entry into the system, including the entry and withdrawal of resting orders that 

have not resulted in an executed trade. Thus, the trading system captures and retains a complete 

and accurate audit trail of all activity on the trading system. All relevant data are retained in 

perpetuity and audit trail records are maintained in an electronic storage medium. 

Confirmations of orders successfully entered into the trading system are automatically 

generated and sent to members as are confirmations with respect to all matched trades. These 

confirmations are also captured automatically and retained as part of the permanent audit trail. 

F. Data Dissemination 

 TFX disseminates trading data (prices/quotes) to members via the trading system and 

more generally through third party vendors, such as Bloomberg and Reuters. The trading system 

also makes available to TFX members a summary of the member’s activity during that session, 

including the member’s orders entered during the current trading session and completed trades. 

Additional information, such as daily high, low, open interest and volume, is distributed publicly 

by TFX. Such information is also available in an archived form on TFX’s website. 
Paul M. Architzel, Esq. 

Page 12 

G. System Reliability 

The reliability of the Trading Host server is grounded in the hardware specifications. As 

necessary, the Trading Host can control the number of messages received per second and the log 

on status from the API. Thus, the trading system is able to make necessary adjustments to 

remain operational in the face of varying computational demands. The TFX trading system is 

operated to strict service levels and has demonstrated its reliability since its deployment. The 

LIFFE CONNECTTM system has been designed to exacting specifications and has been in use by 

TFX for over three years. During that period, the TFX trading system has been operated with a 

Trading Host availability of 100 percent. 

H. System Security 

 The trading system includes a security system that provides for authentication and 

confidentiality and ensures the integrity by using features embedded in the API that cannot be 

accessed externally. The security system is responsible for: (i) maintaining the database of 

currently certified users; (ii) authenticating certified users as they log on; (iii) distributing session 

keys as part of the login process; and (iv) maintaining a list of currently logged-on trading 

applications. All entities using the TFX’s LIFFE CONNECTTM trading system must first log in 

to the security system. Encryption is used for user security login and for user authentication, and 

ensures that the sender cannot be identified by entities outside of the system. Communication is 

permitted only between the Trading Host and the trading applications. 

 Each member must implement suitable security measures to ensure that only those 

persons specifically authorized by the member to trade have access to passwords and security 

keys. Each member has an ID Administrator who is responsible for managing access to the 

trading system and who is required to submit a form to TFX for each trader that the member 

wishes to register with the Exchange and thereby be granted direct access to the trading system. 

The form, which must be signed by ID Administrator, includes, among other things, details of 

the ID Administrator and the number and type of trading access rights granted. Once a trader has 

been registered by TFX, the access keys and passwords are made available to the ID 

Administrator via a website. 

Each member has a member’s CONNECT Administrator (MCA), who is responsible for 

the competence and suitability of the member’s traders and must have the authority to adjust or 

withdraw any orders submitted by them. The MCA also must ensure, as far as possible, that all 

business thus conducted is in accordance with TFX Rules and must know and be willing to 

disclose to TFX the immediate source of all orders. 

I. Disaster Recovery 

 With respect to disaster recovery, TFX currently makes and updates operational and 

system back-up data every second day and saves that data in a building that is geographically 

separate from TFX. Operational data includes databases with respect to the Trading Host, 

Archives Server, Clearing Server, and Market Configuration Server. System data includes OS 
Paul M. Architzel, Esq. 

Page 13 

and Operational applications. Back up of the data is made via magnetic tape recording process. 

TFX will maintain two data centers, one at the main site and the other at the geographicallyseparate disaster recovery site. Both centers are able to execute all the necessary services for 

operation of the market. Data is streamed from the live center to the backup center at a regular 

interval and a switch-over between the two centers at any time is possible. 

 TFX has established general policies to respond to incidents affecting operation of the 

trading system. These policies constitute the trading system’s support line and respond to 

possible operational problems by assigning responsibility to address various issues and by 

establishing well-understood escalation policies. These are divided into first-, second- and thirdline functions and responsibilities. TFX takes charge of the first-line response. When an 

incident or problem is detected, TFX initiates administrative action and administers the incident 

until closed. Fujitsu, the network and clearing systems provider, takes charge of the second-line 

response. Fujitsu monitors system status and reports to TFX when an incident is detected, starts 

the investigation to identify the root cause and, with TFX’s approval, takes measures to solve the 

problem. LIFFE has the responsibility to address third-line functions. LIFFE provides expert 

support to cope with and address identified problems and problematic circumstances arising in 

connection with operation of LIFFE CONNECTTM. 

TFX has in place a business continuity plan which would enable the Exchange to 

implement recovery procedures in the face of a disaster. This plan stresses the ability of TFX to 

resume operations within a commercially acceptable time frame. This plan is continually 

reviewed and updated. In addition, TFX periodically conducts disaster recovery tests to evaluate 

the adequacy of its procedures and contingency planning. 

J. Adherence to IOSCO Principles 

TFX represents that the Exchange has adhered to, and will continue to adhere to, 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) 30 and adopted by the Commission on November 21, 1990.31 In this regard, 

TFX has licensed the LIFFE CONNECTTM trading system, which Commission staff previously 

 

30 Japan was one of eight jurisdictions that participated in Working Party 7 of IOSCO (Working Party), whose 

mandate included, among other things, the identification of issues related to screen-based trading systems for 

derivative products. In considering the special concerns for screen-based trading systems, the Working Party 

identified and addressed the following issues: transparency, order execution algorithms, operational issues, security 

and system vulnerability, access, financial integrity, disclosure, and the role of system providers. The Working 

Party considered these issues and articulated for each a broad principle to assist regulatory authorities in overseeing 

screen-based trading systems. The IOSCO Principles were adopted by IOSCO on November 15, 1990 and set out in 

broad terms the international consensus as to the regulatory considerations to be addressed in reviewing mechanisms 

for cross-border screen-based trading. 

31 The Commission adopted the IOSCO Principles as a statement of regulatory policy for the oversight of screenbased trading systems for derivative products. “Policy Statement Concerning the Oversight of Screen-Based 

Trading Systems,” 55 Fed. Reg. 48670 (Nov. 21, 1990). 
Paul M. Architzel, Esq. 

Page 14 

has found to comply with the IOSCO Principles.32 Moreover, TFX represents that in adapting 

LIFFE CONNECTTM as the TFX trading system it has employed the expertise of industry 

specialists to ensure that the resulting system infrastructure follows best industry practice and 

quality standards. TFX represents that the Exchange has satisfied the FSA, which has endorsed 

the IOSCO Principles, that TFX satisfies the IOSCO Principles in connection with its operation 

of the TFX trading system. 

IV. SETTLEMENT AND CLEARING

A. Introduction 

 TFX is a financial futures clearing facility pursuant to the Financial Futures Trading Law 

and operates as the clearing house for the Exchange. As such, TFX is the universal counterparty 

to all transactions on the Exchange and provides a guarantee against counterparty credit risk. To 

provide credit support, it operates a margining system under which each party to a contract 

deposits a good faith performance bond to assure that the party will fulfill its obligations under 

the contract. This margining system requires that original margin be deposited and that positions 

be marked-to-market on a daily basis in order to maintain required minimum margin levels. 

Moreover, customers are protected through the segregation of their funds from the proprietary 

funds of TFX members. In addition, TFX maintains a guaranty fund that, as of December 31, 

2006, contained ¥9.9 billion.33 You represent that TFX provides for procedures, comparable to 

those used by U.S. contract markets, to ensure the financial integrity of transactions entered into 

through its facilities. 

B. Systems 

 Fujitsu provides the TFX Clearing Host, located in Tokyo, and other related clearing and 

data processing systems. Clearing data are transmitted via a dedicated network which meets 

hardware specifications similar to those met by the LIFFE CONNECTTM system. Trading data 

from the TFX trading system are uploaded automatically into the TFX Clearing Host. Certain 

clearing-related information can be included with submission of an order. Accordingly, TFX 

members, as a Trading Host function, can designate trade give-ups/take-ups and designate 

position open/off-set instructions by account by means of including relevant information in an 

order. Such clearing-relating instructions are automatically transmitted from the Trading Host to 

the Clearing Host upon trade execution and subsequently will be transmitted to the designated 

clearing member. This automated process will assist clearing members in Japan with respect to 

clearing positions for their remote trading members. TFX provides a browser-based application 

tool known as “TFX Clearing Web.” 

 

 

32 See CFTC Staff Letters No. 99-31 (July 23, 1999) and 05-16 (August 26, 2005). The Financial Services 

Authority of the United Kingdom, LIFFE’s regulatory authority, also has examined LIFFE CONNECTTM, in 

connection with its oversight of LIFFE as a Recognized Investment Exchange, to determine that it complies with the 

IOSCO Principles. 

33 As of February 14, 2007, ¥9.9billion=$81,507,470. 
Paul M. Architzel, Esq. 

Page 15 

C. Clearing and Settlement Procedures 

 The clearing process is initiated by the trading system’s automatic entry into the clearing 

system of details of an executed trade. As discussed in greater detail below, certain positionrelated functions, such as open/close or give-up/take-up instructions, can also be entered by 

members through the clearing system.34 In addition to access to information via TFX Clearing 

Web, TFX members in Japan (both clearing and non-clearing members) can access the clearing 

system and provide and receive necessary information through an interface of clearing operations 

provided by TFX. Non-clearing members that are located outside of Japan will be able to obtain 

relevant clearing information and services through their Japanese clearing members.35 As a 

convenience for members’ internal clearing operations, trades executed during the evening 

trading session, which begins at 3:30 p.m. Tokyo time, are cleared on the next trade day. A daily 

settlement price is calculated by the TFX market surveillance group immediately after the end of 

the day session and members are so notified. 

 Either at the time of order submission to the trading system or later during the clearing 

process, traders must provide instructions with respect to whether newly established positions 

should off-set previously established positions. Instructions not to off-set will result in 

maintenance of both open positions by the trader until the last trading day for final settlement. 

The volume of positions that are maintained as open interest, or long/short position(s), is taken 

into consideration in margin calculations. Instructions may be given on a per trade basis or at 

once for all trades in an account. 

 The TFX clearing system requires that all accounts be designated as either a house or 

customer account and orders submitted to the trading system are required to include the accounttype designation. This information is then automatically transferred from the trading to the 

clearing system. In addition, members may include a number of optional account designations 

beneath the house/customer account designations, including designating sub-accounts by 

customer and by strategy-type (hedge, non-hedge). This assists in account management with 

respect to trading, positions and margins. 

 The TFX clearing system also accommodates give-up/take-up relationships. Give-ups 

can be designated at the time of order entry through the trading system or, after trade execution, 

through the clearing system. Upon designation that a trade is to be given-up, the clearing 

member must accept the trade subject to prior terms and conditions agreed upon. Give-up 

relationships can be registered on TFX’s clearing system so that trades are given-up. Give-up 

 

34 Clearing operations which require updating of Clearing Host data, such as give-ups and reporting of position 

status, are allowed only during clearing operational hours, which are from 8:30 a.m. to 6:30 p.m. Tokyo time. 

However, clearing and back-office operations which do not require updating of Clearing Host data, such as 

displaying pages and extracting transaction data in PDF and CSV file format, are possible throughout the clearing 

system’s on-line hours of 8:00 a.m. to 10:00 p.m. Tokyo time. 

35 Remote members, if they so wish, will be able to develop their own systems interface for clearing operations. 
Paul M. Architzel, Esq. 

Page 16 

relationships require that an agreement be entered into among the customer, the broker giving-up 

a trade and the broker taking-up the trade.36

D. Risk Management and Margining Systems 

 TFX has developed and implemented procedures to measure the risk parameters of the 

products listed for trading on the Exchange. Exchange staff also monitors price trends in the 

futures and the underlying cash markets, monitors price volatility and conducts simulations of 

the affect of these risks on accounts carried by members. Using these risk management 

procedures and analyses, TFX determines the appropriate level of margins which should be 

required and whether extraordinary intra-day margin calls are appropriate. Margin is required to 

guarantee fulfillment of obligations associated with contracts executed on the Exchange and TFX 

requires that such margin be deposited with the Exchange when a position is opened. Thereafter, 

TFX marks such positions to market on a daily basis using a daily settlement price which, as 

noted above, is calculated by the TFX Market Surveillance Group immediately after the end of 

day session. Generally, variation margin is due the following day. 

In addition to the routine collection and payment of variation margin, TFX may, as 

circumstances warrant, require that additional amounts of margin be deposited on an intra-day 

basis. Generally, members will be notified of intra-day margin calls by notice posted to the 

trading and clearing screens, generally around 11:30 a.m. Tokyo time. Margins are calculated 

using SPAN® methodology. Apart from the collection of funds as Exchange margin, members 

may require customers to post additional margin to cover unrealized losses in the customers’ 

accounts. 

E. Segregation of Customer Funds 

 Beginning in 1998, TFX members have been required to segregate customer funds from 

their proprietary funds, so a TFX member must segregate margin for customers' positions from 

the margins supporting its proprietary positions. TFX Regulations for Margin and Unsettled 

Financial Futures Contracts provides that a trading member receiving Exchange margin from a 

customer shall deposit the margin with the Exchange as agent for its customer. Thus, customer 

margins are not held by a member, but rather are held by TFX directly in what is known as 

“direct deposit” of customer margin. An intermediate broker may deposit its own property with 

the Exchange as agent for its customer, known as “replacement deposit,” if the customer has so 

agreed. Such separate deposits are maintained by TFX as funds arising from separate origins. 

Funds on deposit covering positions in one category may not be used by the Exchange to cover 

shortfalls in another deposit category.37

 

36 TFX accepts give-up agreements entered into for trading on another exchange as valid with respect to positions 

on TFX. TFX also accepts as valid the International Uniform Brokerage Execution Service (Give-up) Agreement 

prepared by the Futures Industry Association. 

37 As a means to meet its self-regulatory obligations, TFX requires that members file reports with the Exchange, 

including statements relating to the amount of outstanding margins supporting customers' accounts. TFX’s Member 

Firm Inspection Office conducts inspections of members’ account books to verify the status of deposited margins, 
Paul M. Architzel, Esq. 

Page 17 

 Segregation of customer funds is required to be provided by all Japanese brokers to their 

customers. Accordingly, any customer placing orders directly with a financial futures broker 

located in Japan will be covered by the segregation requirements. Non-Japanese customers 

carrying their positions through non-Japanese brokers are accorded the protections provided 

under the laws of their home country which govern the customer/broker relationship.38

F. Default remedies and procedures 

 In order to cover losses in the unlikely event of a clearing member default, TFX 

maintains a default compensation reserve financed from Exchange profits as well as a guaranty 

fund financed through deposits made by clearing members.39 All members are required to make 

a market entry deposit upon becoming a TFX member. Clearing members are further required to 

contribute to the guaranty fund (clearing deposit) by an amount that varies according to the 

clearing member’s aggregate traded volume during the previous six-month period. 

TFX has the following lines of defense to address the unlikely event of a clearing 

member default. First, TFX would have recourse to any amounts on deposit by the defaulting 

clearing member. Pursuant to the TFX Clearing Regulations, TFX would cover the 

uncompensated portion of such losses that remained in the following order: (i) TFX default 

compensation reserve; (ii) the guaranty fund; and (iii) extraordinary clearing deposits called from 

clearing members. A call for additional clearing deposits would require that clearing members 

contribute the additional amounts in proportion to their then current contribution.

V. OVERVIEW OF THE REGULATORY STRUCTURE IN JAPAN

A. Introduction 

 TFX and its members are subject to a comprehensive regulatory regime. This regime 

provides for financial, fitness and competency requirements for Exchange members and other 

industry participants; reporting and recordkeeping requirements; procedures governing the 

treatment of customer funds and property; sales practice and other conduct of business standards; 

measures designed to protect the integrity of the markets; and statutory prohibitions on fraud, 

customer abuse and market manipulation. 

The regulatory framework is established by the Financial Futures Trading Law, is based 

upon the concept of exchange self-regulation,40 and is supplemented by the Financial Futures 

 whether customer margins are properly segregated, and to confirm that all margins are properly accounted for, 

managed and preserved. 

38 U.S. customers trading through a U.S. FCM would therefore be recognized as being covered under the CFTC’s 

secured amount requirements. 

39 As of the end of 2006, the default compensation reserve stood at ¥164million ($1,350,225). As previously 

noted, the guaranty fund, as of March 31, 2006, contained ¥9.9 billion ($81,507,470). 

40 As discussed below, Japan has adopted a new statute governing financial instruments. This will become 

effective with respect to the trading of financial futures contracts in the summer of 2007. You represent that the new 

law, The Financial Instruments and Exchange Law, generally unifies regulation of financial instruments and 
Paul M. Architzel, Esq. 

Page 18 

Trading Law Enforcement Regulations and by Orders of the Office of the Prime Minister. In 

broadest terms, the regulatory framework requires that financial futures exchanges, such as TFX, 

be authorized to engage in business subject to initial and continuing compliance with regulatory 

requirements. Trading of financial futures other than on an exchange that has applied for and 

been so approved by the Prime Minister is prohibited. The conditions for approval as a financial 

futures exchange include requirements relating to governance of the exchange, criteria for 

admission of members, financial soundness of members, prudential financial requirements for 

members and market participants, sales practice and conduct of business standards, and practices 

and measures to protect market integrity. 

In order to be approved, the exchange’s trading rules and the customer service contracts 

(or Financial Futures Brokerage Terms) that it requires of its members must conform with the 

law and the enforcement regulations and Cabinet Orders thereunder, and must be sufficient for 

achieving the fair and smooth operation of the exchange and for the protection of customers. In 

addition, the exchange must demonstrate that it has sufficient resources to manage properly its 

operations as an exchange; that it has a sufficient number of members so that it is anticipated that 

its operations will be fair and smooth; and that its operation is necessary and appropriate to the 

public interest and to the protection of customers. Moreover, the officers of the exchange must 

demonstrate that they are fit for the position. Finally, approval of a financial futures exchange to 

operate requires that the exchange may not have a prior approval cancelled or be subject to 

cancellation due to a violation of any other provision.41

B. Exchange supervision 

 Under the Financial Futures Trading Law, the Prime Minister is responsible for 

exercising supervisory authority over TFX. Among other things, the Prime Minister is 

authorized to grant licenses to financial futures exchanges and to approve these exchanges’ 

Articles of Incorporation, Trading Regulations (Business Regulations), and Brokerage 

Agreement Standards (or Financial Futures Brokerage Terms), and their financial futures 

contracts. The Prime Minister has delegated these powers, other than the authority to grant 

licenses to financial futures exchanges, to the Commissioner of the FSA under the Financial 

Futures Trading Law. The FSA, established in July 2000 as a result of the merger of the 

Financial Supervisory Agency42 and the Financial System Planning Bureau of the Ministry of 

Finance, has a staff of 1340 and is largely organized into five major components: the Planning 

 strengthens certain aspects of the current law but that the over-all regulatory structure with respect to regulation of 

TFX will remain the same as it is currently. 

41 The Financial Futures Trading Law further sets forth requirements with respect to governance and the 

organization of a demutualized exchange, such as TFX, providing that shareholders with greater than a 20% interest 

in the exchange must obtain the approval of the Prime Minister. Such “major shareholders” are subject to on-site 

inspections, to inspections of their books and records, and are required to provide reports and information regarding 

their business and operations. No TFX shareholders currently exceed a ten per cent ownership interest in the 

Exchange. 

42 The Financial Supervisory Agency was established in 1998 as an administrative and external organ of the Prime 

Minister's Office and was responsible for the inspection and supervision of private-sector financial institutions and 

surveillance of securities transactions. 
Paul M. Architzel, Esq. 

Page 19 

and Coordination Bureau, the Inspection Bureau, the Supervisory Bureau, the Securities and 

Exchange Surveillance Commission (SESC) and the Certified Public Accountants and Auditing 

Oversight Board. The FSA is led by a Commissioner and has broad supervisory responsibility 

for all aspects of financial services, including inspection, supervision and surveillance of 

financial activities, and for planning with respect to the financial system. 

 Specifically, the FSA is responsible for ensuring the stability of the financial system in 

Japan; protection of depositors, insurance policyholders and securities investors; planning and 

policymaking concerning the financial system; inspection and supervision of private-sector 

financial institutions; and inspection, supervision and surveillance of securities and financial 

futures exchanges. In addition, the FSA has responsibility with respect to the establishment of 

rules for trading in securities and financial futures markets; the establishment of business 

accounting standards; supervision of certified public accountants and audit firms; and 

participation in the activities of international organizations and international regulatory 

cooperation. As noted above, the FSA operates through a structure of industry self-regulation 

and a framework of transparent and clear rules. 

Within the FSA, the SESC is responsible for oversight of the securities and financial 

futures markets and for overseeing those markets’ compliance with statutory mandates. The 

SESC has a staff of 564 and is directed by a Chairman and two Commissioners appointed by the 

Prime Minister. It conducts daily market surveillance of trading on the exchanges, compliance 

inspections of market intermediaries, examinations of disclosure documents, and investigations 

of acts suspected to have compromised the fairness of securities and financial futures trading and 

of other types of violations. Where an investigation warrants, the SESC may recommend that 

the Commissioner of the FSA take administrative action to impose a civil money penalty. In 

cases where an investigation uncovers a possible criminal offense, the FSA may file a formal 

complaint with the public prosecutors. The SESC also makes policy proposals to the 

Commissioner of the FSA. 

C. Requirements applicable to exchange operations 

 Exchanges are required by statute to include certain provisions within their rules. These 

relate to qualifications of members; the safekeeping and handling of trust money; the 

requirement, collection and safekeeping of margin funds; the terms and conditions for financial 

futures transactions and options contracts; listing and de-listing of contracts; suspension of 

trading; matters relating to settlement and delivery, matters relating to trading restrictions, and 

any other provisions that may apply to trading in such contracts on the exchange.43

 The Financial Futures Trading Law prohibits abusive trading activities. These include 

the prohibition against engaging in fictitious transactions, pre-arrangement of trades, acting 

 

43 The Prime Minister has statutory authority to restrict the trading of, or the acceptance of, orders by members for 

trading on the exchange if an excessive number of transactions are conducted or are likely to be conducted, or an 

unreasonable market price is formed or is likely to be formed on the exchange and such restriction is necessary to 

maintain order on such financial futures market and in the public interest or to protect customers. 
Paul M. Architzel, Esq. 

Page 20 

individually or in concert to give a false impression of market activity or price fluctuations 

(manipulation of prices), false dissemination of information relating to market activity or prices, 

and bucketing customer orders. As discussed above, customer margin funds must be held in 

segregation, thus establishing statutory protection of customer funds. Member conduct with 

respect to customers is also addressed under the Financial Futures Trading Law. Specifically, 

the exchange must promulgate rules detailing various items of the customer service agreement, 

i.e., customer service contracts (or Financial Futures Brokerage Terms) must include conditions 

for acceptance of orders, methods of settlement, provide rates and deposit methods for 

customer’s margin and other matters required for the acceptance of orders. 

 Exchanges must file periodic reports listing contract volume, reports on governing 

functions, major activities, activities as a self-regulatory organization, changes in exchange 

participants, adoption of and change in exchange rules, finances, profit and loss, financial 

statements and information relating to affiliates. In addition, the exchange is required to report 

to the Prime Minister regarding non-routine events, such as if the exchange temporarily closes, 

suspends, or cancels trading in whole or in part and when trading re-commences after a 

suspension. Moreover, the exchange must report to the Prime Minister without delay if the 

number of open transactions for the house account of a member exceeds levels specified by the 

Financial Futures Trading Law. The exchange is also required to publish information relating to 

total trading volume, daily high, low and last prices and trade value separately for each contract 

on a daily basis and in the manner provided by the Financial Futures Trading Law. 

 These regulatory requirements apply to the exchange on a continuing basis. Accordingly, 

pursuant to the Prime Minister’s supervisory authority, the Prime Minister may, upon finding 

violations by the exchange, cancel its approval to operate. The Prime Minister also may suspend 

the exchange’s operation and business upon a finding that the exchange harms the public interest 

or fails to protect customers. The Prime Minister may also order the exchange to remove 

officers found to have violated the law or to have become officers through fraudulent means and 

order the exchange to expel a member that has violated the law. The Prime Minister, as an 

exercise of supervisory authority, may as deemed necessary and appropriate, in the public 

interest, and to protect customers, order the exchange to amend its Articles of Incorporation, 

trading rules, customer service contract rules (or Financial Futures Brokerage Terms), other 

rules, trading practices, change management or to take such other measures as the Prime Minister 

determines are necessary. Finally, the Prime Minister may order the exchange to make reports or 

provide information regarding its business, operation or property, regarding the business 

operation or property of its members, or authorize government officials to enter the premises and 

conduct searches on site. These searches include searches of the exchange facilities and those of 

its members, as well as the subsidiaries of the exchange or its members.44

 

44 The Financial Futures Trading Law also includes within its framework regulation of market intermediaries. The 

regulatory regime requires that persons conducting a financial futures business register with the Prime Minister, and 

includes requirements with respect to advertisement, prohibitions on false or misleading advertisements, the 

requirement that a Customer Agreement be provided, required delivery to customers of various reports or 

statements, prohibitions on self-dealing, prohibitions on various abusive sales and trading practices, and the 

requirement that financial futures businesses act in a “faithful and fair” manner with customers. In addition, 

financial futures businesses are required to ascertain that trading in financial futures is appropriate for the customer 
Paul M. Architzel, Esq. 

Page 21 

D. Recent Amendments to regulatory statutes 

 You represent that Japan is currently amending many of the laws governing its financial 

services sector, including the laws which apply to financial futures trading. In particular, the 

Financial Futures Trading Law is to be superseded by the Financial Instruments and Exchange 

Law, a new statute which applies more broadly to a number of different types of securities, 

futures and deriviatives instruments. The new statute will go into effect during the summer of 

2007. 

 You represent that the overall intent of the new legislation is to strengthen and enhance 

financial service regulation, to bring greater uniformity to the regulations that apply to various 

financial instruments, to enhance the independence of self-regulatory functions of exchanges and 

to close loopholes which may exist among regulatory frameworks that apply to each separate 

type of financial instrument. This will help ensure that the rules are the same for various 

financial instruments having the same or similar economic functions and permit a greater degree 

of financial innovation and the development of new financial instruments that go beyond existing 

business lines. The legislation accomplishes this goal by applying a uniform set of rules to a 

variety of instruments that are currently regarded under the law as “securities.” Generally, as 

summarized by FSA, the goals of the legislation are to enhance user protections, enhance users’ 

convenience and to ensure development of an industry infrastructure that compares favorably to 

those of other major industrialized nations. The new structure introduces to Japanese financial 

regulation different rules depending upon the characteristics of the financial instruments and the 

knowledge and experience of the investor.45

 To the extent that the new law will affect the regulation of exchanges, you represent that 

its effect will be to strengthen and enhance the existing regulatory framework. For example, 

when implemented, the Financial Instruments and Exchange Law will permit all financial 

instruments exchanges to establish an independent self-regulatory committee within the 

organization. The new law will also increase penalties for violations and expand the scope of 

penalties for entering orders with the intention of canceling them for the purpose of market 

manipulation. Under the enhanced penalties, customers will be subject to both civil monetary 

and criminal penalties for such behavior and financial instruments firms will be subject to 

increased civil and criminal penalties. For example, violations such as unfair trading, spreading 

of rumors, resorting to deceptive devices, or market manipulation are currently subject to 

penalties of five years imprisonment or fines for an individual of ¥5 million46 or for a corporation 

 in light of the customer’s knowledge, experience and financial condition. Financial futures businesses are also 

required to keep books and records regarding their businesses, to keep a reserve against liabilities, and to maintain a 

required level of capital. 

45 Following implementation of the new Financial Instruments and Exchange Law, the same rules of conduct will 

apply to the intermediation of financial futures and derivatives. Under the new law, the regulation of the solicitation 

and sale of financial futures will move from its own discrete set of regulations to a broader rule book which applies 

generally to all financial instrument firms. Accordingly, many of the law’s revisions are targeted chiefly to 

disclosure requirements and to requirements relating to the offer and solicitation of financial instruments to 

investors. 

46 As of February 14, 2007, ¥5million=$41,165. 
Paul M. Architzel, Esq. 

Page 22 

of ¥500 million.47 These fines will be increased under the new law to 10 years imprisonment or 

¥10 million48 civil money penalties for individuals and ¥700 million49 for corporations. 

VI. TFX STATUS AS AN SRO

 The Financial Futures Trading Law provides that a financial futures exchange must 

require under its Articles of Incorporation that members comply with the Law, Orders and 

administrative rules issued thereunder, with the rules of the exchange, and with just and equitable 

principles of trade. Thus TFX, as a condition of continued approval to operate as a financial 

futures exchange, operates self-regulatory supervisory programs designed to ensure that its 

members comply. The Prime Minister may cancel such approval to operate upon a finding that 

TFX fails to enforce these obligations. The Prime Minister’s supervisory authority is carried out 

by the FSA, which conducts oversight supervision of TFX to ensure that it meets its selfregulatory obligations. You represent that TFX maintains records of its self-regulatory activities 

and FSA reviews the operation of TFX’s self-regulatory programs to ensure that TFX fulfills its 

statutory responsibilities. 

 You represent that TFX fulfills its self-regulatory responsibilities in a manner comparable 

to the operations of a U.S. DCM. As a general requirement, TFX is required to operate in a “fair 

and smooth” manner and to contribute to the protection of customers. It has a comprehensive 

rule book, which governs members’ conduct with respect to both trading on the Exchange and to 

sales and financial conduct in relation to their customers. These rules include, among other 

requirements, that members: be fit, not have any statutory disqualifications, provide customers 

with disclosure information, maintain customer funds in segregation, have adequate capital, 

provide customers with confirmations, not abuse customer orders or manipulate the market, and 

provide the Exchange with requested information. In addition to the specific requirements 

contained in Exchange rules, TFX also has a general requirement that its members follow just 

and equitable principles of trade. 

 TFX staff monitors to ensure that members comply with these rules and requirements and 

is empowered to bring remedial actions to address any breach of these requirements by members. 

Pursuant to the Financial Futures Trading Law, the Exchange is authorized to levy fines, to 

suspend or to restrict members or to expel members for violation of any of the conditions of 

membership, including the condition that members comply with the TFX rules and applicable 

law. The Inspection Office is responsible generally for conducting inspections of members to 

ensure compliance with Exchange rules and other requirements, and is also responsible for 

operating the Disciplinary Committee system that addresses violations by members of Exchange 

rules or other requirements. The Administration Office also has a role in rule enforcement in 

that it deals with membership applications and the entry and withdrawal of members. 

 

47 As of February 14, 2007, ¥500million=$4,116,539. 

48 As of February 14, 2007, ¥10million=$82,331. 

49 As of February 14, 2007, ¥700illion=$5,763,154. 
Paul M. Architzel, Esq. 

Page 23 

 In addition, as briefly noted above, component parts of the Business Operation 

Department, the Administration Office and the Operation Office are engaged in oversight of 

market and member activities. The Business Department includes the Market Surveillance 

Group and the Clearing and Settlement Group. The Market Surveillance Group, as its name 

denotes, conducts oversight and surveillance of trading on TFX. The Market Surveillance Group 

conducts surveillance of the market by analyzing various futures and cash market data, including 

price data, and by comparing current futures market data to the price levels across commodities, 

across time and across geographic markets. The Exchange has the authority to impose 

prophylactic limits on the size of member positions if it deems such limits to be necessary. 50

 The Market Surveillance Group also conducts surveillance to detect possible abusive 

trading by members, such as engaging in fictitious transactions, prearranging trades, acting 

individually or in concert to give a false impression of market activity and false dissemination of 

information by analyzing various futures market data, including in particular unusual trading 

patterns or other indicators of suspicious activity. In this regard, surveillance staff will open an 

inquiry when suspicious trades or trading patterns have been identified through various 

electronically generated exception reports. The staff has authority to make such inquiries of 

members regarding any suspicious activities and may make such further investigation as is 

warranted.51 The Clearing and Settlement Group is responsible for clearing operations and for 

monitoring risk, conducting risk assessment, and other related clearing functions. In the event 

that a member’s position is deemed to pose an unacceptable risk to the clearinghouse, TFX has 

the authority to take any necessary measures including, among other things, suspending the 

member’s trading, closing the member’s open position and requiring the posting of additional 

margin. 

VII. INFORMATION-SHARING

As described more fully below, the Commission and its staff will be entitled to receive 

sufficient information regarding TFX, the trading system and TFX’s market participants directly 

from TFX pursuant to the terms and conditions of the no-action relief granted herein and existing 

information-sharing agreements. TFX is a signatory to the companion memorandum to the 

Declaration on Cooperation and Supervision of International Futures Markets and Clearing 

Organizations, as amended March 1998 (commonly referred to as the Boca Declaration). As 

such, TFX supports the sharing of relevant information between certain derivatives exchanges 

and clearing organizations in order to combat potential hazards to the stability, safety and 

soundness of the international financial markets. Moreover, TFX in its No-action request, 

undertakes to provide the Commission, upon request, sufficient information regarding the 

Exchange and its members operating pursuant to the requested no-action relief to: (i) evaluate 

 

50 You represent that to date, TFX has not found it necessary to impose such limits with respect to trading in these 

cash-settled, financial futures contracts and that the Euroyen contracts are based upon very liquid and deep cash 

markets. 

51 As noted above, the trading system captures a comprehensive audit trail of order information and executed 

trades. This provides the foundation, along with other documentary evidence, for conducting initial inquiries and 

inspections. TFX keeps such audit trail information archived permanently. 
Paul M. Architzel, Esq. 

Page 24 

the continued eligibility of TFX or its members for the relief; (ii) enforce compliance with the 

terms and conditions of the relief; and (iii) enable the Commission to carry out its duties under 

the Act and Commission regulations. 

 With respect to government to government information sharing, you represent that the 

Japanese regulatory authorities have been leaders in efforts at international cooperation and 

information sharing with respect to the regulation of futures markets. Specifically, the Securities 

Bureau of the Ministry of Finance was one of the original signatories to the Windsor Declaration 

of 1995 and the Ministry of International Trade and Industries and the Ministry of Agriculture, 

Forestry and Fisheries were sponsors and signatories of the Tokyo Communiqué of 1997. 

Further, the FSA adheres to the IOSCO Objectives and Principles of Securities Regulation of 

1998.52

 In addition, the FSA is a joint signatory with the Commission and the U.S. Securities and 

Exchange Commission (SEC) of a Statement of Intent (SOI) Concerning Cooperation, 

Consultation and the Exchange of Information dated May 17, 2002 and amended January 16, 

2006. The SOI establishes a framework for information sharing and facilitates cooperation in 

cross-border investigations of potential violations of securities and futures laws. The SOI is 

supported by diplomatic Notes Verbale (Notes), exchanged by the governments of the U.S. and 

Japan. The Notes state the views shared by the two governments concerning the cooperation that 

the SEC, the CFTC and the FSA intend to provide under the SOI with respect to the way that 

information obtained under the SOI can be used by each country’s criminal authorities. By letter 

dated February 15, 2007, the FSA confirmed that the SOI, as amended, would extend to 

information requested by the Commission in connection with trades and activities by members of 

TFX under any no-action relief granted by the CFTC, or any division thereof, with regard to the 

placement in the U.S. of electronic facilities providing access to TFX.53

VIII. CONCLUSION

 Consistent with the Commission's Policy Statement and the June 2 Order, the Division 

has reviewed and considered TFX's No-action request and the information and documentation 

forwarded to the Division in support thereof. Among other things, the materials furnished by 

TFX indicate that TFX and its members are subject to oversight in Japan by a regulatory regime 

that is based upon regulatory objectives that generally are equivalent to those in the U.S.; that the 

regulatory regime provides basic protections for customers trading on TFX’s market and for the 

integrity of the market itself; that TFX and its regulatory authority employ surveillance, 

compliance and enforcement mechanisms designed to ensure compliance with statutes and 

TFX’s and the regulatory authority’s rules and regulations; that TFX adheres to the IOSCO 

Principles; and that adequate information-sharing arrangements applicable to the activities of 

 

52 In May 2006, Japan submitted an application to sign the IOSCO Multilateral Memorandum of Understanding 

Concerning Consultation and Cooperation and the Exchange of Information (MMOU) adopted at the IOSCO 

Annual Conference in May 2002. 

53 Letter from Toshitake Kurosawa, Director for International Financial Markets, FSA, to Richard Shilts, Director, 

Division of Market Oversight, Commodity Futures Trading Commission (February 15, 2007). 
Paul M. Architzel, Esq. 

Page 25 

TFX are in place.54

 Based specifically upon these and other representations made by TFX in support of its 

No-action request, the Division has determined that granting no-action relief to TFX and its 

members would not be contrary to the public interest. Accordingly, subject to compliance with 

the terms and conditions stated herein, the Division will not recommend that the Commission 

institute enforcement action against TFX or its members solely based upon TFX’s failure to 

obtain contract market designation or DTEF registration pursuant to Sections 5 or 5a, 

respectively, of the CEA if: (1) TFX members trade for their own accounts through the trading 

system in the U.S.; (2) TFX members who are registered with the CFTC as FCMs or who are 

Rule 30.10 Firms submit orders for U.S. customers to the trading system for execution; (3) TFX 

members who are registered with the CFTC as CPOs or CTAs, or who are exempt from such 

CPO or CTA registration pursuant to Commission Regulation 4.13 or 4.14, submit orders on 

behalf of U.S. pools they operate or U.S. customer accounts for which they have discretionary 

authority, respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm and 

guarantees without limitation all such trades of the CPO or CTA effected through submission of 

orders on the trading system; and (4) TFX members who are registered with the CFTC as FCMs 

or who are Rule 30.10 Firms accept orders for U.S. customers transmitted via AORS for 

submission to the trading system. 

 The Division's no-action position shall become effective immediately with respect to the 

following TFX contracts: 

• Three-month Euroyen Futures, and 

• Three-month Euroyen Options 

 If additional futures and option contracts become available for trading through the trading 

system, TFX may make such futures and option contracts available for trading on LIFFE 

CONNECTTM 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 No-Action Relief to Provide Direct Access to 

their Automated Trading Systems from Locations in the United States.55

 The scope of the Division's no-action position is restricted to providing relief from the 

requirement that TFX obtain DCM designation or DTEF registration pursuant to Sections 5 and 

5a, respectively, of the CEA and regulatory requirements that flow specifically from the DCM 

 

54 The Division notes that the foregoing is not intended to be an exhaustive list of the factors relevant to its 

decision to grant the no-action relief requested by TFX nor of the factors that the Division might consider when 

analyzing no-action requests from other exchanges. No-action requests, by their nature, require case-by-case 

evaluation and the Division's conclusion regarding any particular no-action request will be based upon the facts and 

circumstances presented at the time of its review of that request. 

55 71 Fed. Reg. 19877 (April 18, 2006); corrected at 71 Fed. Reg. 21003 (April 24, 2006). Furthermore, TFX has 

represented that it will not permit trades to be made in unapproved products for the account of any TFX member that 

is located in the U.S. 
Paul M. Architzel, Esq. 

Page 26 

designation and DTEF registration requirements if the above-referenced contracts are made 

available in the U.S. for trading through LIFFE CONNECTTM in the manner set forth herein. 

The Division's no-action position does not extend to any other provision of the CEA, any other 

Commission regulations, or to any registered futures association rules and does not excuse TFX 

or its members from compliance with any applicable requirements thereunder. Nor does the noaction position alter, restrict, or expand the coverage of existing Commission exemptions for 

particular products. 

 The Division specifically notes that its no-action position does not alter the general 

requirement that a firm operating pursuant to the no-action relief provided herein must be 

appropriately registered or exempt from such registration to engage in the offer or sale of a 

foreign futures contract or a foreign option transaction for or on behalf of a U.S. customer. For 

example, nothing in this letter is intended to alter current Commission rules that require that any 

foreign firm that clears trades on a fully-disclosed basis on behalf of U.S. persons (including 

where the U.S. person is a non-clearing member of a foreign board of trade trading solely for its 

own account) be a registered FCM or a Rule 30.10 Firm.56 However, if a foreign firm solely 

carries accounts on behalf of U.S. customers that are the foreign firm’s or any registered FCM’s 

proprietary accounts (as defined in Rule 1.3(y)) or the foreign firm is either a member of the 

relevant foreign board of trade or is a foreign affiliate of a registered FCM and its sole contact 

with a U.S. customer is that it carries the FCM's omnibus account, then the firm need not register 

under Rule 30.4 nor confirm relief under Rule 30.10. 

 Moreover, the Division's no-action position does not amend, revise, or negate the 

obligations of CPOs, CTAs, FCMs and Rule 30.10 Firms under the CEA, Commission 

regulations, or Rule 30.10 orders. For example, Rule 30.10 Firms continue to be prohibited from 

maintaining a presence in the U.S. Thus, Rule 30.10 Firms cannot provide direct access to the 

trading system in the U.S. (although they would be permitted to accept orders overseas from 

customers located in the U.S. that submit such orders by telephone or through an AORS located 

in the U.S.). FCMs or Rule 30.10 Firms who solicit or accept orders from U.S. customers for 

trading on the trading system remain responsible for, among other things, complying with risk 

disclosure, the handling and allocating of customer orders, and the segregation of customer 

funds. 

 The Division's no-action position does not affect the Commission's ability to bring 

appropriate action for fraud or manipulation. The Division specifically notes that the use of 

AORSs to transmit orders to LIFFE CONNECTTM shall be subject to all existing Commission 

rules and regulations and to any future rules or guidance issued by the Commission or the 

Division. Finally, this letter does not address issues that might arise under the Securities Act of 

1933, the Securities Exchange Act of 1934, or any other applicable federal securities law or rule 

 

56 At this time, the Commission has not issued a Rule 30.10 order to TFX permitting its members to conduct 

brokerage activities on behalf of U.S. persons without having to register as an FCM. However, TFX members 

otherwise may qualify as a Rule 30.10 firm pursuant to other orders issued by the Commission pursuant to Rule 

30.10. See, e.g., 67 FR 30785 (May 8, 2002) (permitting firms authorized by Eurex Deutschland to solicit and 

accept orders from U.S. persons for otherwise permitted transactions on all non-U.S. exchanges where such 

members are authorized to conduct business on behalf of customers pursuant to German law). 
Paul M. Architzel, Esq. 

Page 27 

promulgated thereunder. 

 The Division's no-action position is subject to compliance with the following conditions: 

1. TFX will continue to satisfy the criteria for approval by the Prime Minister as a financial 

futures exchange under the laws of Japan with respect to transactions effected through the 

trading system. 

2. The laws, systems, rules, and compliance mechanisms of Japan applicable to TFX will 

continue to require TFX to maintain fair and orderly markets; prohibit fraud, abuse, and market 

manipulation; and provide that such requirements are subject to the oversight of appropriate 

regulatory authorities. 

3. TFX will continue to adhere to the IOSCO Principles, as updated, revised, or otherwise 

amended to the extent consistent with United States and Japanese law. 

4. Only members of TFX will have direct access (i.e., not through an AORS) to the trading 

system from the United States and TFX will not provide, and will take reasonable steps to 

prevent third parties from providing, such access to TFX to persons other than TFX members.57

5. All orders that are transmitted to the trading system by a member of TFX that is operating 

pursuant to the no-action relief provided herein will be solely for the member’s own account 

unless (i) such member is registered with the CFTC as an FCM or is a Rule 30.10 Firm, or (ii) 

such member is registered with the CFTC as a CPO or CTA, or is exempt from such registration 

pursuant to Commission Regulation 4.13 or 4.14, provided that an FCM or Rule 30.10 Firm acts 

as clearing firm and guarantees without limitation all positions of such CPO or CTA effected 

through submission of orders on the trading system. 

6. All orders for U.S. customers accepted through an AORS and transmitted by TFX 

members through LIFFE CONNECTTM pursuant to the relief granted herein will be 

intermediated by a TFX member that is either registered with the CFTC as an FCM or is a Rule 

30.10 Firm. 

7. Prior to operating pursuant to the no-action relief requested herein, TFX will require each 

current and prospective member that is not registered with the Commission as an FCM, a CTA 

or a CPO to execute and file with TFX a written representation, executed by a person with the 

authority to bind the member, stating that as long as the TFX member operates pursuant to the 

no-action relief provided herein, the member agrees to and submits to the jurisdiction of the 

CFTC with respect to activities conducted pursuant to the no-action relief. TFX will maintain 

the foregoing representations as long as the relevant member is operating pursuant to the noaction relief and shall make such representation available to the Commission upon the request of 

a CFTC representative. 

 

57 For purposes of these conditions, “member” includes those affiliates identified in footnote 2. 
Paul M. Architzel, Esq. 

Page 28 

8. Prior to their operating pursuant to the no-action relief provided herein, TFX will require 

each current and prospective member that is not registered with the CFTC as an FCM, a CTA or 

a CPO to execute and file with TFX a valid and binding appointment of a U.S. agent for service 

of process in the U.S. pursuant to which the agent is authorized to accept delivery and service of 

“communications” issued by or on behalf of the CFTC.58 TFX will maintain the foregoing 

appointments as long as the relevant member is operating pursuant to the no-action relief and 

shall make such appointments available to the CFTC upon the request of a Commission 

representative. 

9. Prior to their operating pursuant to the no-action relief provided herein, TFX will require 

each current and prospective member of the Exchange that is not registered with the CFTC as an 

FCM, a CTA or a CPO to file with TFX a written representation, executed by a person with the 

authority to bind the member, stating that as long as the member operates pursuant to the noaction relief provided herein, the member will provide, upon the request of the Commission, the 

U.S. Department of Justice and, if appropriate, the National Futures Association (NFA), prompt 

access to original books and records maintained at their U.S. offices as well as to the premises 

where LIFFE CONNECTTM is installed or used in the U.S. TFX will maintain the foregoing 

representations as long as the relevant member is operating pursuant to the no-action relief. TFX 

will make such representations available to the CFTC upon the request of a Commission 

representative. 

10. Prior to operating pursuant to the no-action relief provided herein, TFX will file with the 

Division, and maintain thereafter as long as TFX operates pursuant to the no-action relief, a valid 

and binding appointment of a U.S. agent for service of process in the U.S., pursuant to which the 

agent is authorized to accept delivery or service of “communications”, as defined above, that are 

issued by or on behalf of the CFTC. 

11. TFX will maintain the following updated information and submit such information to the 

Division on at least a quarterly basis, and at any time promptly upon the request of a 

Commission representative, in the format reflected in the attachment to this letter: 

 a. For each contract available to be traded on the trading system, (1) the total trade 

volume originating from electronic trading devices providing direct access to LIFFE 

CONNECTTM in the U.S., (2) the total trade volume for such products traded through the 

trading system worldwide, and (3) the total trade volume for such products traded on 

TFX generally; and 

 b. A listing of the names, NFA ID numbers (if applicable), and main business 

addresses in the U.S. of all TFX members that have access to the trading system in the 

U.S. 

 

58 For purposes of these conditions, “communications” is defined to include any summons, complaint, order, 

subpoena, request for information, or notice or any other written or electronic documentation or correspondence 

issued by or on behalf of the Commission. 
Paul M. Architzel, Esq. 

Page 29 

12. TFX will request that the FSA provide to the Division not later than July 1st of each year 

a letter or email confirming that TFX retains its authorization in good standing as a 

financial futures exchange under the Financial Instruments and Exchange Law or other 

exchange licensing methodology used in Japan. 

13. TFX will promptly provide the Division with written notice of the following: 

 a.. Any material change in the information provided in its No-action request, 

including any information contained in the documents submitted in support thereof;59

 b. Any material change in TFX’s Rules or the laws, rules, and regulations in Japan 

relevant to futures and options; 

 c. Any matter known to TFX or its representatives that, in TFX's judgment, may 

affect the financial or operational viability of TFX, including, but not limited to, any 

significant system failure or interruption; 

 d. Any default, insolvency, or bankruptcy of any TFX member known to TFX or its 

representatives that may have a material, adverse impact upon the condition of TFX, TFX 

Clearing, or upon any United States customer or firm; 

 e. Any known violation by TFX or any TFX member of the terms or conditions of 

the no-action relief provided herein; and 

 f. Any disciplinary action taken by TFX against any TFX member operating 

pursuant to the no-action relief provided herein that involves any market manipulation, 

fraud, deceit, conversion or that results in suspension or expulsion and that involves the 

use of LIFFE CONNECTTM or an AORS to submit orders to TFX and either (1) the TFX 

member against whom the disciplinary action is taken is located or based in the U.S. or 

(2) the disciplinary action results, in whole or in part, from conduct that: (i) involves the 

use of a terminal or an AORS that is located in the U.S. to accept or submit an order for 

trading through LIFFE CONNECTTM; (ii) involves a U.S. customer or firm or registered 

FCM; or (iii) might have a material, adverse impact upon any U.S. customer or firm. 

14. Satisfactory information-sharing arrangements between the Commission and the relevant 

Japanese regulatory authorities will remain in effect. 

15. The Commission will be able to obtain sufficient information regarding TFX and its 

members operating pursuant to the no-action relief provided herein, and TFX will provide 

 

59 The Division notes that “material” changes in the information provided to it in support of this No-action request 

would include, without limitation, a modification of: TFX's membership criteria; the location of TFX's 

management, personnel or operations (particularly changes that may suggest an increased nexus between TFX's 

activities and the U.S.); the basic structure, nature, or operation of the trading system; or the regulatory or selfregulatory structure applicable to TFX members. 
Paul M. Architzel, Esq. 

Page 30 

directly to the Commission information necessary to evaluate the continued eligibility of TFX or 

its members for the relief, to enforce compliance with the terms and conditions of the relief, or to 

enable the Commission to carry out its duties under the CEA and Commission regulations and to 

provide adequate protection to the public or U.S. contract markets and DTEFs. 

16. TFX will employ reasonable procedures, to be determined by TFX, for monitoring and 

enforcing compliance with the terms and conditions of the no-action relief provided herein. 

 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 TFX's No-action request and the 

materials submitted in support thereof. Any materially different, changed, or omitted facts or 

circumstances may render this letter void. The Division specifically notes that it will examine 

the volume information submitted as a condition to the no-action relief provided herein as well 

as any changes in the nature or extent of TFX's activities in the U.S. to ascertain whether TFX's 

presence in the U.S. has increased to a level that might warrant reconsideration of the no-action 

relief. Finally, as with all no-action letters, the Division retains the authority to condition further, 

modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided 

herein, in its discretion. 

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

Andresen, Special Counsel, at dandresen@cftc.gov or by phone at (202) 418-5492. 

 Very truly yours, 

 Richard A. Shilts 

 Director 

cc: 

 Gregory C. Prusik, Vice-President Compliance and Registration, NFA 

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

Oversight, Chicago Regional Office 

Attachment