[Federal Register Volume 74, Number 12 (Wednesday, January 21, 2009)]
[Notices]
[Pages 3570-3572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1153]


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COMMODITY FUTURES TRADING COMMISSION


Notice of Additional Conditions on the No-Action Relief When 
Foreign Boards of Trade That Have Received Staff No-Action Relief To 
Permit Direct Access to Their Automated Trading Systems From Locations 
in the United States List for Trading From the U.S. Linked Futures and 
Option Contracts and a Revision of Commission Policy Regarding the 
Listing of Certain New Option Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
providing notice requiring foreign boards of trade that may receive 
Commission staff no-action relief permitting them to make their 
automated trading systems directly available from the U.S. to comply 
with additional conditions for the no-action relief to remain effective 
if they list for trading from the U.S. contracts that are linked to 
contracts traded on certain U.S.-based entities. Separately, the 
Commission is providing notice that it is revising its policy regarding 
the notification procedures applicable to listing an option on a 
futures contract that already is (or can be) listed for trading from 
the U.S.

DATES: Effective Date: The conditions and notification procedures are 
effective immediately.

FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special 
Counsel, Division of Market Oversight, Commodity Futures Trading 
Commission, Three Lafayette Center, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: 202-418-5492. E-mail: <a href="/cdn-cgi/l/email-protection#fc989d92988e998f9992bc9f9a889fd29b938a"><span class="__cf_email__" data-cfemail="8befeae5eff9eef8eee5cbe8edffe8a5ece4fd">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

    Since 1996,\1\ Commission staff has issued no-action letters \2\ to 
foreign boards of trade (FBOT) stating that, subject to compliance with 
certain conditions, the staff will not recommend that the Commission 
take enforcement action against the FBOT or its members if the FBOT 
permits its members or participants in the United States to have direct 
access \3\ to its electronic trading system without seeking designation 
under the Commodity Exchange Act (CEA or Act) as a contract market 
(DCM) or registration as a derivatives transaction execution facility 
(DTEF).\4\ On June 2, 1999, the Commission issued an order which, among 
other things, withdrew proposed rules that would have governed 
automated access to FBOTs from the U.S. and instructed the Commission 
staff to begin immediately processing no-action requests from FBOTs 
seeking to place trading terminals in the U.S., and to issue responses 
where appropriate, pursuant to the general guidelines included in the 
Eurex (DTB) no-action process, or other guidelines established by the 
Commission.\5\ On October 22, 2006, the Commission issued a Statement 
of Policy that affirmed the use of the no-action process to permit 
FBOTs to provide direct access to their electronic trading systems to 
U.S. members or authorized participants.\6\
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    \1\ In February 1996, Commission staff issued no-action relief 
to Deutsche Terminborse (DTB), an automated international futures 
and options exchange headquartered in Frankfurt, Germany, that 
permitted DTB, subject to certain terms and conditions, to place 
computer terminals in the U.S. offices of its members for principal 
trading. See CFTC Interpretative Letter No. 96-28 (1996-1997 
Transfer Binder) Comm. Fut. L. Rep. (CCH) para. 26,669 (Feb. 29. 
1996). In June 1998, DTB merged with the Swiss Options and Financial 
Futures Exchange and DTB changed its name to Eurex Deutschland.
    \2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which 
defines the term ``no-action letter'' as a written statement issued 
by the staff of a Division of the Commission or of the Office of 
General Counsel that it will not recommend enforcement action to the 
Commission for failure to comply with a specific provision of the 
Act or of a Commission rule, regulation or order if a proposed 
transaction is completed or a proposed activity is conducted by the 
beneficiary.
    \3\ Direct access means that the member in the U.S. may enter an 
order directly into the trade matching engine to be matched 
according to the trade matching algorithm. Direct access is 
different from an automated order routing system (AORS) in that an 
order transmitted via AORS is intermediated in that it is entered 
into the trade matching engine by or through the intermediary, i.e., 
the intermediary, not the member in the U.S., has direct access.
    \4\ The no-action letters issued to FBOTs, formerly referred to 
as ``foreign terminal no-action letters,'' are currently referred to 
as ``direct access no-action letters'' and are published on the 
Commission's Web site at: http://www.cftc.gov/dea/deaforeignterminaltable.htm. Hereinafter the letters are simply 
referred to as ``no-action letters.'' Reference to DTEFs in the no-
action letters was added following the establishment of that 
registration category by the Commodity Futures Modernization Act of 
2000.
    \5\ Access to Automated Boards of Trade, 64 FR 32829 (June 18, 
1999).
    \6\ 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 FR 64443 
(November 2, 2006).
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    Commission staff has issued 21 no-action letters since the DTB 
letter, all of which grant the no-action relief requested subject to a 
series of terms and conditions. The terms and conditions, among other 
things, assure the Division (1) That the FBOT continues to be a bona 
fide FBOT subject to effective regulation in its home country; (2) that 
direct access is restricted to authorized entities; (3) that the 
Division receives notice of any material changes in the information 
provided to it in support of the no-action request including, without 
limitation, any modification of the FBOT's membership criteria, the 
location of its management, personnel or operations, the basic 
structure, nature, or operation of the trading system, or the 
regulatory or self-regulatory structure applicable to its members; and 
(4) that satisfactory information-sharing arrangements between the 
Commission, the FBOT, and the FBOT's relevant regulatory authorities 
will remain in effect.
    With respect to the listing of new contracts, initially FBOTs that 
received no-action relief that wished to list additional futures and 
option contracts for trading by direct access from the U.S. were 
required to request in writing and receive supplemental no-action 
relief from Commission staff prior to listing the new contracts. On 
June 30, 2000, the Commission issued a Statement of Policy that 
permitted FBOTs with no-action relief to list additional futures and 
option contracts for trading from the U.S. merely by filing with 
Commission staff no later

[[Page 3571]]

than the business day preceding the initial listing of the contracts: 
(1) A copy of the initial terms and conditions of the additional 
contracts and (2) a certification that it is in compliance with the 
terms and conditions of its no-action letter and that the additional 
futures and option contracts would be traded in accordance with such 
terms and conditions.\7\ On April 14, 2006, in light of its experience 
since the issuance of the Statement of Policy and in recognition of the 
fact that the listing of new products may raise previously unidentified 
regulatory issues, the Commission issued a revision to the new contract 
listing policy (Notice of Revision).\8\ The Commission determined to 
establish a ten business day advance notification requirement in order 
to give Commission staff the opportunity to review the terms and 
conditions of proposed additional contracts to address any regulatory 
issues raised prior to the contract being made available for trading by 
direct access from the U.S.
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    \7\ See Statement of Policy of the Commodity Futures Trading 
Commission Regarding the Listing of New Futures and Option Contracts 
by Foreign Boards of Trade That Have Received Staff No-Action Relief 
to Place Electronic Trading Devices in the U.S., 65 FR 41641 (July 
6, 2000). The Statement of Policy did not apply to broad-based stock 
index futures and option contracts that are now covered by Section 
2(a)(1)(C) of the Commodity Exchange Act. Foreign boards of trade 
were (and presently are) required to seek and receive written 
supplemental no-action relief from Commission staff prior to 
offering or selling such contracts.
    \8\ See 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, 71 FR 19877 (April 18, 2006). The notice of revision 
did not alter a FBOT's obligation to seek and receive written 
supplemental no-action relief from Commission staff prior to 
offering or selling broad-based stock index futures and option 
contracts. The FBOT is still required to file with Commission staff 
a copy of the initial terms and conditions of the additional 
contracts and a certification that it is in compliance with the 
terms and conditions of its no-action letter and that the additional 
futures and option contracts would be traded in accordance with such 
terms and conditions.
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II. Additional Conditions on the No-Action Relief

    On January 17, 2006, ICE Futures Europe \9\ notified the Division 
pursuant to the Statement of Policy of its intent to list for direct 
access from the U.S. a West Texas Intermediate (WTI) Light Sweet Crude 
Oil Futures Contract that cash-settled on the price of a physically-
settled Light Sweet Crude Oil Futures contract traded on the New York 
Mercantile Exchange (NYMEX), a U.S. DCM. On April 12, 2006, ICE Futures 
Europe notified the Division of its intent to list for direct access 
from the U.S. the ICE Futures New York Harbour Heating Oil Futures 
Contract and the ICE Futures New York Harbour Unleaded Gasoline 
Blendstock (RBOB) Futures Contract, each of which cash-settled on the 
price of physically-settled contracts traded on the NYMEX. On April 2, 
2007, ICE Futures Europe notified the Division of its intent to launch 
the ICE Futures WTI Light Sweet Crude Oil Options Contract. On December 
19, 2007 the Dubai Mercantile Exchange (DME) \10\ notified the Division 
pursuant to the Notice of Revision of its intent to list for trading 
for direct access from the U.S. on DME Direct the DME WTI Crude Oil 
Financial Futures Contract which cash-settled based on the NYMEX Light, 
Sweet Crude Oil futures settlement price on the penultimate trading 
day.
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    \9\ On November 12, 1999, the Division of Trading and Markets 
granted to the International Petroleum Exchange of London (IPE) (now 
ICE Futures Europe) no-action relief to make its electronic trading 
and order matching system, Energy Trading System II (ETS), available 
to IPE members in the United States. CFTC Staff Letter No. 99-69 
(November 12, 1999). The November 12, 1999 IPE no-action letter was 
amended by the Division of Market Oversight (Division) four times 
between July 26, 2002 and April 14, 2003 as trading of the contracts 
was transitioned from the ETS to the ICE Platform operated by 
IntercontinentalExchange, Inc., in Atlanta, Georgia and trading 
hours were extended.
    \10\ On May 24, 2007, the Division granted to the DME no-action 
relief to make its electronic trading and order matching system, 
known as DME Direct, available to DME members in the U.S. CFTC Staff 
Letter No. 07-06 (May 24, 2007).
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    The listing for trading by direct access from the U.S. by ICE 
Futures Europe and DME of contracts which settle on the price of 
contracts traded on a CFTC-regulated exchange raises very serious 
concerns for the Commission. Such linkages can create virtually a 
single market for the subject contracts consisting of both the 
underlying contract at the CFTC-regulated exchange and the cash-settled 
``look-alike'' contract traded on the FBOT. In the absence of certain 
preventive measures at the FBOT, this contract linkage could compromise 
the Commission's ability to carry out its market surveillance 
responsibilities, as well as the integrity of prices established on 
CFTC-regulated exchanges.
    In response to these concerns, the Division amended the no-action 
relief granted to ICE Futures Europe and DME, in letters dated June 17, 
2008 and July 3, 2008 respectively,\11\ by adding certain conditions 
\12\ with respect to any ICE Futures Europe or DME contract which 
settles against any price, including the daily or final settlement 
price, of (1) a contract listed for trading on a DCM or DTEF, or (2) a 
contract listed for trading on an exempt commercial market (ECM) that 
has been determined to be a significant price discovery contract \13\ 
(collectively, linked contracts).\14\ The purpose of the conditions is 
to ensure that ICE Futures Europe and DME apply to any linked contract 
comparable principles or requirements regarding the daily publication 
of trading information and the imposition of position limits or 
accountability levels for speculators as apply to the DCM, DTEF or ECM 
contract against which the linked contract settles. The conditions 
would also ensure that ICE Futures Europe and DME provide the 
Commission with information regarding the extent of speculative and 
nonspeculative trading in linked contracts that is comparable to the 
information provided to the Commission by DCMs, DTEFs or ECMs for 
publication of the Commitments of Traders Reports.
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    \11\ CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff 
Letter No. 08-10 (July 3, 2008).
    \12\ The no-action letters include a provision pursuant to which 
the Division may further condition the relief granted therein. See, 
e.g., CFTC Staff Letter No. 99-69 (November 12, 1999), issued to the 
International Petroleum Exchange, Inc., which states as follows: 
``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.''
    \13\ In 2008 Congress authorized the Commission to determine, in 
its discretion, that a contract performs a significant price 
discovery function under criteria established in Section 2(h)(7) of 
the CEA, including price linkage, arbitrage, material price 
reference, and material liquidity. When the Commission by order 
makes such a determination, the ECM on which the significant price 
discovery contract is traded must assume, with respect to that 
contract, all the responsibilities and obligations of a registered 
entity under the CEA and Commission regulations, and must comply 
with nine core principles established by Section 2(h)(7)(C). See 
CFTC Reauthorization Act of 2008, Pub. L. 110-246 at sec. 12304. See 
also Notice of Proposed Rulemaking: ``Significant Price Discovery 
Contracts on Exempt Commercial Markets,'' 73 FR 75888 (December 12, 
2008).
    \14\ ICE Futures Europe has listed for trading by direct access 
from the U.S. the four linked contracts previously identified. DME 
has not listed the one linked contract notified to the Division.
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    Accordingly, the ICE Futures Europe and DME no-action letters were 
amended with respect to the linked contracts to include the following 
conditions, to be satisfied within 120 days of the date of the amended 
no-action letter:
    (1) ICE Futures Europe (DME) will impose on linked contracts, by 
rule or otherwise, position limits or position accountability levels 
(including related hedge exemption provisions) that are comparable to 
the existing position limits or position accountability levels 
(including related hedge exemption provisions) as adopted by: (i) The 
DCM, DTEF or ECM for the contract against which the linked contract 
settles or (ii) the DCM, DTEF or ECM for a

[[Page 3572]]

financially-settled equivalent of such contract;
    (2) ICE Futures Europe (DME) will inform the Commission in a 
quarterly report of any trader that had positions in a linked contract 
above the applicable ICE Futures Europe (DME) position limit, whether a 
hedge exemption was granted, and if not, whether a disciplinary action 
was taken;
    (3) ICE Futures Europe (DME) will publish daily trading information 
(e.g., settlement prices, volume, open interest, and opening and 
closing ranges) that is comparable to the daily trading information 
published by the DCM, DTEF or ECM for the contract against which the 
ICE Futures Europe (DME) contract settles; and
    (4) ICE Futures Europe (DME) will provide to the CFTC (through the 
Financial Services Authority (FSA) in the case of ICE Futures Europe), 
a daily report of large trader positions in each linked contract for 
all contract months in a form and manner that (a) can be fully 
integrated into the CFTC's market surveillance systems, including full 
identification of each position's beneficial owner comparable to the 
reporting that is provided by the DCM, DTEF, or ECM; and (b) can, 
(subject to any Memorandum of Understanding between the CFTC and FSA in 
the case of ICE Futures Europe), be fully integrated into the CFTC's 
Commitments of Traders Report, including appropriate categorization of 
traders and their positions.
    The Commission is hereby providing notice that these conditions 
henceforth will be imposed on the no-action relief of any FBOT that 
lists for trading by direct access from the U.S. any futures or option 
contract which settles against any price, including the daily or final 
settlement price, of (1) a contract listed for trading on a DCM or 
DTEF, or (2) a contract listed for trading on an ECM that has been 
determined to be a significant price discovery contract.

III. Listing Option Contracts

    Both the Statement of Policy and the Notice of Revision required 
separate notification for futures and option contracts in order to 
permit the contracts to be listed for direct access from the U.S. Thus, 
even if the futures contract is currently listed, the FBOT must 
separately notify the Division, pursuant to the ten business day 
advance notification requirement of the Notice of Revision, of its 
desire to list the option on that futures contract. In contrast, when 
the Commission's Office of General Counsel (OGC) issues a no-action 
letter to allow the offer or sale of a FBOT-traded broad-based security 
index futures contract to persons located in the U.S., the option on 
that particular futures contract may also be offered or sold in the 
U.S. without any further regulatory action from OGC. This leads to an 
unusual situation when the FBOT, pursuant to Appendix D of Part 30,\15\ 
requests permission to list a futures contract for trading by direct 
access from the U.S. in the same no-action request letter in which the 
FBOT requests the OGC no-action position. When OGC issues the no-action 
letter, both the futures contract and the option on that contract may 
be offered or sold in the U.S. and, with the concurrence of the 
Division, the futures contract (but not the option on that futures 
contract) may be listed for direct access from the U.S. pursuant to the 
terms and conditions of the direct access no-action relief. The FBOT 
must then separately request permission from the Division to make the 
option contract available by direct access.
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    \15\ 17 CFR 30, App. D. (2003), 68 FR 33623.
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    In order to eliminate this inconsistency and to streamline the 
procedures for listing option contracts for direct access from the 
U.S., the Commission is hereby providing notice that the provisions in 
the Notice of Revision, insofar as they apply to options on futures 
contracts that are, or could be,\16\ listed for trading by direct 
access from the U.S. pursuant to the conditions of the FBOT's no-action 
relief, are revised as follows:
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    \16\ This procedure also applies where the FBOT has permission 
to list the futures contract for trading by direct access but has 
not yet done so at the time it also decides to list the option 
contract.
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    (1) If the option is on a broad-based security index futures 
contract which may be offered or sold in the U.S. and listed for direct 
access from the U.S. pursuant to a no-action letter issued by OGC, the 
option contract may be listed for direct access without further action 
by either the requesting FBOT or the Division.
    (2) If the option is on a futures contract that is neither a linked 
contract nor a broad-based security index futures contract which may be 
offered or sold in the U.S., the option contract may be listed for 
direct access merely by filing with Commission staff no later than the 
business day preceding the initial listing of the contract: (i) a copy 
of the initial terms and conditions of the additional contract and (ii) 
a certification that the FBOT is in compliance with the terms and 
conditions of its no-action letter and that the additional option 
contract would be traded in accordance with such terms and conditions.
    (3) If the option is on a futures contract that is a linked 
contract, the option contract may be listed for direct access merely by 
filing with Commission staff no later than the business day preceding 
the initial listing of the contract: (i) a copy of the initial terms 
and conditions of the additional contract and (ii) a certification that 
the FBOT is in compliance with the terms and conditions of its no-
action letter, including the conditions specifically applicable to 
linked contracts, and that the additional option contract would be 
traded in accordance with such terms and conditions.

    Issued in Washington, DC on January 14, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
 [FR Doc. E9-1153 Filed 1-16-09; 8:45 am]
BILLING CODE 6351-01-P


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