# Registration of Foreign Boards of Trade > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2011-31637 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** December 23, 2011 - **Citation:** 76 FR 80674 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 48 RIN 3038-AD19 Registration of Foreign Boards of Trade AGENCY: Commodity Futures Trading Commission. ACTION: Final rule. SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is issuing final rules to implement new statutory provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). On November 19, 2010, the Commission requested comment on proposed rules that would establish a registration requirement that applies to foreign boards of trade (FBOT) that wish to provide their identified members or other participants located in the United States with direct access to their electronic trading and order matching systems. After reviewing the comments submitted in response to the proposed rules, the Commission has determined to issue these final FBOT registration rules substantially as originally proposed, with certain modifications. DATES: Effective Date —February 21, 2012. FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special Counsel, (202) 418-5492, dandresen@cftc.gov , or David Steinberg, Special Counsel, (202) 418-5102, dsteinberg@cftc.gov , Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Introduction B. Foreign Boards of Trade and Direct Access 1. History of the No-action Process 2. Commission Determination To Adopt Formal Registration Rules 3. Overview of NPRM II. Summary of Comments A. General Comments B. Specific Comments 1. Application for Registration a. Treatment of FBOTs With Existing No-action Relief (i). Grandfathering and the Scope of the Limited Application (ii). 120 Days To File Limited Application (iii). Treatment of FBOTs That Have Not Obtained No-action Relief b. Timeliness of Commission Review of an Application 2. Standard of Review a. Need for Registration b. Foreign Supervision and the Comparable, Comprehensive Determination (i). Consideration of the Totality of Regulation (ii). Comparability Reviews (iii). Limitations of Comparability Reviews (iv). Reconfirmation and Withdrawal of Registration c. International Standards d. Clearing Standards (i). DCOs (ii). RCCPs Standards for Non-DCOs e. Foreign Regulation of FBOT Participants 3. Contracts a. Linked Contracts (i) Definition (ii). Conditions b. Swaps and Other Contracts (i). Swaps (ii). Clearing of Swaps (iii). Swaps Data Reporting (iv). Contracts Other Than Futures, Options and Swaps (v). Review of Contracts 4. Direct Access Definition 5. Scope of Registration ( i.e. , CEA Sections 5 and 5a) 6. Registration Requirements and Conditions a. Trading Rules b. Information Sharing c. Submission of U.S.-Domiciled Entities to Service of Process 7. Modification of Registration Requirements 8. Other Concerns a. Prescriptive Nature of the Regulations b. Alternative Trading Platforms c. Impact of FBOT Registration Rules 9. On-going Review of Registered FBOTs 10. The Appendix III. Conclusion and Effective Date A. Conclusion B. Effective Date IV. Related Matters A. Paperwork Reduction Act B. Cost Benefit Considerations C. Regulatory Flexibility Act I. Background A. Introduction On July 21, 2010, President Obama signed the Dodd-Frank Act. 1 Title VII of the Dodd-Frank Act 2 amended the Commodity Exchange Act (CEA or the Act) 3 to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers and major swap participants; (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight. 1 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm. 2 Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.” 3 7 U.S.C. 1 et seq. Section 738 of the Dodd-Frank Act amended CEA section 4(b) to provide that the Commission may adopt rules and regulations requiring FBOTs that wish to provide their members or other participants located in the United States with direct access to the FBOT's electronic trading and order matching system to register with the Commission. Direct access is defined in the statute as an explicit grant of authority by an FBOT to an identified member or other participant located in the U.S. to enter trades directly into the FBOT's trade matching system. 4 CEA section 4(b) also authorizes the Commission to promulgate rules and regulations prescribing procedures and requirements applicable to the registration of such FBOTs. 4 Direct access is defined in CEA section 4(b)(1)(A). Accordingly, on November 19, 2010, the Commission published a notice of proposed rulemaking that set forth proposed regulations that would establish a registration requirement and related registration procedures and conditions applicable to FBOTs that wish to provide their members or other participants located in the United States with direct access to their electronic trading and order matching system (NPRM). 5 The Commission requested comment on all aspects of the proposed regulations. After thoroughly reviewing the comments submitted in response to the NPRM, the Commission has determined to issue these final rules which are substantially the same as those proposed, with some modifications made in response to certain of the comments received and with a partially revised format, as discussed below. 5 See Registration of Foreign Boards of Trade , 75 FR 70974 (November 19, 2010). B. Foreign Boards of Trade and Direct Access 1. History of the No-action Process Since 1996, FBOT requests to provide members and other participants that are located in the U.S. with direct access to their electronic trading and order matching systems have been addressed by Commission staff in accordance with the no-action process set forth in Commission regulation 140.99. 6 Specifically, such FBOTs seeking to provide direct access to members and participants located in the U.S. have requested, and, where appropriate, received from the relevant division of the Commission, a no-action letter in which division staff represents that, provided the FBOT satisfies the conditions set forth therein, the division will not recommend that the Commission institute enforcement action against the FBOT for failure to register as a designated contract market (DCM) or derivatives transaction facility (DTEF). Since 1996, Commission staff has issued 24 direct access no-action relief letters (formerly referred to as foreign terminal no-action relief letters) to FBOTs, 20 of which remain active. 7 A detailed discussion of the history and evolution of the FBOT no-action process and the scope of the relief provided can be found in the NPRM. 8 6 See, e.g. , CFTC Letter No. 96-28 (February 29, 1996). Commission regulation 140.99 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 the 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. 7 One no-action relief letter was superseded and three were revoked when the FBOTs ceased operations as regulated or recognized markets. Currently, 14 of the FBOTs with active no-action relief report volume originating from the U.S. via direct access. 8 75 FR 70974-76. While the no-action process has served a useful purpose, the Commission, given the new authority provided by Congress in the Dodd-Frank Act to promulgate registration requirements applicable to FBOTs that provide direct access, has determined to replace the staff no-action process with generally applicable Commission regulations. 2. Commission Determination To Adopt Formal Registration Rules In determining to adopt formal registration rules for FBOTs, the Commission has also considered that the no-action process is generally better suited for discrete, unique factual circumstances and for situations where neither the CEA nor the Commission's regulations address the issue presented. The Commission has determined that, where the same type of relief is being granted on a regular and recurring basis, as it has been with respect to permitting FBOTs to provide direct access to their trading systems to specified members and other participants that are located in the U.S., it is no longer appropriate to handle requests for the relief through the no-action process. Rather, such matters should be addressed in generally applicable registration regulations. By implementing uniform application procedures and registration requirements and conditions, the process by which FBOTs are permitted to provide members and other participants located in the United States with direct access to their trading systems will become more standardized and more transparent to both registration applicants and the general public and will promote fair and consistent treatment of all applicants. Further, generally applicable regulations will provide greater legal certainty for FBOTs providing direct access than the no-action relief process because no-action letters are issued by the staff and are not binding on the Commission. The Commission also notes that an FBOT registration regime will be more consistent with the statutory authority pursuant to which other countries, including the United Kingdom, Australia, Singapore, Japan and Germany, among others, permit U.S.-based DCMs to provide direct access internationally. Accordingly, for the reasons noted above and pursuant to the new authority provided by amended CEA section 4(b), the Commission has determined to adopt FBOT registration regulations. The final rules will replace the existing policy of accepting and reviewing requests for no-action relief to permit an FBOT to provide for direct access to its trading system with a requirement that an FBOT seeking to provide such access must apply for and be granted registration with the Commission. 9 9 In 2006, the Commission issued a Policy Statement in which it endorsed the no-action process for FBOTs that want to provide direct access to their trading systems to U.S.-based participants. 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 64843 (Nov. 2, 2006) (Policy Statement). With the exception of the Commission's endorsement of the use of no-action relief to permit direct access, which is superseded by this final rule, the Policy Statement remains effective. 3. Overview of NPRM As noted above, on November 19, 2010, the Commission published a NPRM in which it proposed regulations that would require FBOTs that wish to provide their members or other participants located in the U.S. with direct access to the FBOT's electronic trading and order matching system to become registered with the Commission. The proposed rules described the types of FBOTs that would be eligible for registration under the proposed regulations and prescribed the application procedures, requirements, and conditions that would be applicable to such registration. The rules were proposed to be codified in new Part 48 of the Commission's regulations. The proposed regulations provided that it would be unlawful for an FBOT to permit direct access to members and other participants in the U.S. unless the FBOT was registered with the Commission. The proposed requirements for registration were divided into the same seven general categories evaluated during the course of a review of a request for FBOT no-action relief: membership criteria, trading system, contracts, settlement and clearing, regulatory authorities, rules and rule enforcement, and information sharing. Pursuant to the proposed regulations, whether the registration requirements are successfully met would be determined by review of the information and documentation submitted by the applicant and, if appropriate, a staff on-site visit to the FBOT and clearing organization and their regulatory authorities to observe and discuss procedures and policies described in the information submitted by the applicant. The proposal also contained the conditions that a registered FBOT would be required to meet to retain its registration, including continued satisfaction of the registration requirements; conditions related to the FBOT's regulation in its home country; satisfaction of comparable international standards; restrictions upon the FBOT's provision of direct access; acknowledgement and agreement to Commission jurisdiction; information-sharing requirements; monitoring for and enforcing compliance with the conditions of registration; conditions specifically applicable to swap trading; reporting obligations; and special conditions that would apply to linked contracts. 10 As proposed, the rules provided for a “limited” application process for FBOTs currently operating pursuant to existing no-action relief. 11 The proposal also set forth the procedures to be followed should an FBOT wish to list additional contracts for trading by direct access after being registered. Finally, the proposal identified certain events that may trigger the revocation of an FBOT's registration. 10 CEA section 4(b)(1)(B) defines a linked contract as an agreement, contract, or transaction that settles against any price (including the daily or final settlement price) of one or more contracts listed for trading on a registered entity. 11 The proposed rules would have required that FBOTs operating under existing no-action relief submit a limited application for registration within 120 days of the effective date of the registration rules. An FBOT would be permitted to continue to operate pursuant to the no-action relief during the 120-day period and until the Commission notified the FBOT that the application was approved or denied. II. Summary of Comments A. General Comments The Commission received 147 comments in response to the NPRM. 12 The comments included 24 comment letters that addressed a variety of substantive issues raised by the proposal. Those 24 comment letters came from entities representing a broad range of interests, including eleven letters representing fourteen FBOTs currently providing direct access to members or other participants in the U.S. pursuant to staff direct access no-action relief letters 13 and three letters from FBOTs that were not currently providing direct access to U.S. participants. 14 The Commission also received comments from a U.S. derivatives marketplace, 15 three industry or trade associations, 16 a non-profit organization, 17 a natural gas company, 18 a foreign regulator, 19 a United States Senator, 20 and the Commodity Market Oversight Coalition. 21 12 The comment file is available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=902. 13 Dubai Mercantile Exchange (DME), London Metal Exchange (LME), Australian Securities Exchange (ASX), Montreal Exchange Inc. (MX), Intercontinental Exchange (ICE) (owner of ICE Futures Europe and ICE Futures Canada), European Energy Exchange AG (EEX), Hong Kong Futures Exchange Limited (HKFE), BM&F Bovespa (BM&F), Nasdaq OMX Oslo ASA (OMX), NYSE Euronext (NYX) (operator of three FBOTs, Liffe Administration and Management, Euronext Paris SA, and Euronext Amsterdam N.V.), and Eurex Deutschland (Eurex). 14 Osaka Securities Exchange (OSE), Natural Gas Exchange, Inc. (NGX), and Bursa Malaysia Derivatives Exchange (Bursa Derivatives). A direct access no-action letter was issued to OSE on June 1, 2011. NGX is currently operating as an exempt commercial market (ECM), and will continue to do so under the ECM grandfather relief provided for in the Dodd-Frank Act. 15 CME Group, which includes four CFTC-registered DCMs: The Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the City of Chicago, Inc. (CBOT), the New York Mercantile Exchange, Inc. (NYMEX), and the Commodity Exchange, Inc. (COMEX). 16 Futures and Options Association (FOA), Air Transport Association of America (ATA) (two comment letters), and Petroleum Marketers Association of America and the New England Fuel Institute (Petroleum Marketers). 17 Better Markets, Inc. (Better Markets). Better Markets describes themselves as a non-profit organization that promotes the public interest in capital and commodity markets. 18 BG Americas & Global LNG (BG Americas). 19 European Securities and Markets Authority (ESMA). 20 Senator Carl Levin, Chairman of the United States Senate Permanent Subcommittee on Investigations. 21 The Commodity Market Oversight Coalition (CMOC) states that it represents an array of interests, including the interests of commodity producers, processors, distributors, retailers, commercial and industrial end-users, and average American consumers and that it was established to promote government policy and regulation in the commodity trading markets that preserve the interests of bona fide hedgers and consumers and the health of the broader economy. The Commission also received 94 virtually identical comment letters from self-identified small business owners in the oil and gas industry and/or grocery industry. Each of these letters presented a range of comments spanning several provisions of the Dodd-Frank Act and, with respect to the proposed FBOT regulations, included nearly identical text in which the commenters generally expressed support for the requirement that FBOTs register with the Commission and for the requirements that FBOTs adopt position limits, implement prohibitions on manipulation and excessive speculation, and be subject to ownership caps. 22 22 Each of these letters contained a similar short paragraph specifically addressing the proposed FBOT rules. A representative letter stated: “I support the requirement that FBOTs register with the CFTC and make their trading data available as well as requiring that they adopt position limits and implement prohibitions on manipulation and excessive speculation. They should also be subject to ownership caps.” The Commission also received a brief comment from a private citizen. In addition, the comment file includes 26 comments submitted in response to the Commission's reopening of the comment period for several Dodd-Frank related rulemakings. See Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act , 76 FR 25274 (May 4, 2011) (extending the comment deadline for multiple Dodd-Frank Act rulemakings to June 3, 2011). None of the comments submitted in response to the reopening of the comment period specifically addressed the proposed FBOT registration regulations and, therefore, they are not addressed in this document. Of the 24 comment letters addressing various substantive FBOT registration issues in the proposed regulations, 17 letters voiced general support for the proposed rules and for the adoption of an FBOT registration process. 23 For example, OMX stated: 23 See letters from ASX, BM&F, Bursa Derivatives, Eurex, EEX, LME, MX, OMX, NGX, OSE, FOA, ATA, BG Americas, Petroleum Marketers, CMOC and Senator Levin. ICE commented that the CFTC “generally strikes the right balance with the proposed rulemaking.” Our overall impression of the proposed rules is that they will create a more transparent and standardized process that will provide a greater legal certainty for FBOTs. We are thus under the impression that the new rules will represent an improvement of the legal process related to FBOTs. Similarly, Eurex commented: Eurex supports the proposed regulations as set forth in the [NPRM] and it values the legal certainty that registration by the Commission will provide. Eurex looks forward to being registered by the Commission as an FBOT and to the fuller participation in the development of the U.S. derivatives industry that it expects will accompany registration. Each of the generally supportive comments, however, also offered varying critiques that focused on specific issues. These are discussed in greater detail below. Four of these comment letters generally did not support the proposed rules 24 and one comment letter raised concerns with respect to the impact of FBOT registration on the effectiveness of the Dodd-Frank Act. 25 For example, NYX and ESMA questioned whether a registration regime was superior to the existing no-action process. Specifically, NYX noted, “[W]e are not convinced that a move from the existing regime to a more formal, rules-based solution is either necessary or desirable.” ESMA noted that, “It seems to us that there is no legal provision that would require the CFTC to depart from the present practice of issuing no-action relief letters. [* * *] [T]he new registration procedure and the mandatory application of very comprehensive, ongoing requirements to all FBOTs would be burdensome and costly without any apparent improvements for the safeguard of public interests such as the maintenance of fair and orderly markets, investor protection and the resilience of the market.” Similarly, LME, while supporting the Commission's desire to establish a standardized regulatory framework for FBOTs that wish to provide direct access to U.S.-domiciled market participants, commented that the approach of requiring FBOTs to register with the Commission would constitute an unnecessary burden on the CFTC and FBOT applicant resources and stated its preference for a comparability-based exemptive approach, which would accomplish the same objectives, rather than a registration regime. HKFE commented that creating unnecessary obstacles to cross-border trading will affect all markets and market participants and limit the use of risk mitigating instruments traded in global markets. 24 NYX, HKFE, ESMA, and CME Group. 25 Better Markets. The CME Group expressed concern that the prescriptive nature of the rules may result in retaliatory, anti-competitive action by foreign regulators. CME Group commented that: [W]e have significant concern that the proposed rules are overly prescriptive and will have the effect of engendering retaliatory action by foreign regulators that will inhibit our ability to continue to grow our business and compete effectively in the current global environment. CME Group also argued that since the Dodd-Frank Act did not intend to grant the Commission general regulatory authority over FBOTs, the imposition of an information gathering process with limited utility would do little more than stretch already limited Commission resources. Better Markets argued that enabling FBOTs to provide direct access to members and other participants in the U.S. would “undercut[] the effectiveness of the Dodd-Frank Act” unless FBOTs were subject to regulatory requirements that are “the same as or equivalent to the Dodd-Frank Act structure.” Better Markets expressed concern that, even if there are parallel systems that are adequately structured in foreign jurisdictions, there is a risk that the regulatory regime will not be administered similarly to the markets subject to Commission oversight. B. Specific Comments The specific issues raised by commenters can be grouped generally into nine categories and include the following: Application for registration; standard of review; contracts; direct access definition; scope of registration; registration requirements and conditions; modification of registration requirements; other concerns; and ongoing review of registered FBOTs. These concerns and the Commission's conclusions with respect to them are discussed below. 1. Application for Registration a. Treatment of FBOTs With Existing No-Action Relief Proposed regulation 48.6 provides that FBOTs currently providing direct access pursuant to a Commission staff no-action letter would be required to apply for registration within 120 days of the effective date of the FBOT registration regulations, but would permit them to file a limited application, as described in the proposed regulation. Eurex expressly supported the proposed limited application process; ASX welcomed the formalization of the registration requirements. Twelve of the comment letters, however, were in favor of either further narrowing the scope of the limited application process or completely grandfathering FBOTs currently operating pursuant to no-action relief. Several commenters also requested that the time period for submitting a limited application be expanded. (i) Grandfathering and the Scope of the Limited Application Eight of the twelve commenters, including commenters representing 11 FBOTs providing direct access to their trading systems pursuant to existing no-action relief 26 and the CME Group and FOA, specifically requested that the CFTC significantly narrow proposed § 48.6 to either provide grandfathered registration to FBOTs operating under existing no-action relief or to require FBOTs applying for registration to supply only that information which (1) has materially changed since the time the FBOT's no-action relief was granted, (2) was not previously filed with the Commission or (3) relates to newly imposed registration requirements. The commenters generally argued that the limited application process set forth in proposed § 48.6 is too burdensome and is unnecessary given that FBOTs and their regulatory regimes were reviewed by Commission staff during the process of issuing a no-action letter. 26 BM&F, DME, EEX, HKFE, ICE, MX, OMX, and NYX. FOA commented that FBOTs currently operating under no-action relief should not have to reapply for approval to allow direct access to their markets and recommended that the CFTC should principally rely on information previously provided by the FBOT and its regulator to satisfy the proposed registration requirements and should identify for each FBOT operating under a no-action letter what specific additional information is required. NYX generally agreed with this recommendation and further suggested that, if a limited application for registration is necessary, the FBOTs should be required to consult with the Commission in order to identify which specific information not previously submitted would be necessary to demonstrate compliance with the registration requirements. BM&F commented that where an FBOT had been granted no-action relief following adoption by the Commission of the 2006 Policy Statement, that FBOT should only be required to certify that there have been no material changes to the information or representations in its request for no-action relief or, if there have been changes, to identify those changes and demonstrate how they would be in compliance with the registration rule. ICE commented that the FBOT should only be required to submit additional relevant information necessary to update the Commission's understanding of the foreign regulatory regime. The Commission does not believe that it would be prudent to grandfather FBOTs that are operating under existing no-action relief without any further review to determine that the registration requirements set forth in § 48.7 are being met. FBOT requests for no-action relief were assessed based upon the information and documentation presented at the particular time of the request (some as early as 1999), were based upon a comparison of the regulatory regimes in the U.S. and the applicable foreign jurisdiction that existed at the time, were subject to varying standards of review that applied at the time (which have changed as statutes and policies have evolved), and were reviewed on a case-by-case basis. Just as the Dodd-Frank Act represents a significant change in the regulatory approach in the U.S., many foreign jurisdictions have changed their approaches since the time the existing no-action letters were granted as well. The Commission also does not believe that it would be either feasible or appropriate for the Commission staff to ascertain for each FBOT operating under existing no-action relief the precise information or documentation in its individual no-action request submission that would need to be updated or revised in order to satisfy registration requirements. The FBOTs are in a better position to recognize their own particular circumstances and to identify any information and documentation that may require updating in light of those changes. This is especially true of information regarding the relevant foreign regulations to which the FBOT is presently subject, as these may have differing applicability depending upon the FBOT's particular business model. The FBOT should be afforded the opportunity to provide materials demonstrating that the foreign regime currently is comparable and comprehensive to the regulatory regime in the United States. In response to the comments received, the Commission has determined to modify the limited application documentation requirements in one aspect. The proposed limited application process required that, to the extent an FBOT operating under existing no-action relief intends to rely upon previously submitted information or documentation to demonstrate that it satisfies the registration requirements, the FBOT must resubmit the information or documentation, identify the specific requirements for registration set forth in proposed § 48.7 that are satisfied by the resubmitted information, and certify that the information remains current and true. The Commission has determined to streamline the § 48.6 application requirements for any FBOT whose original no-action relief request was submitted electronically and remains on file with the Commission staff. 27 In lieu of re-transmitting to the Commission previously submitted information and documentation, such FBOTs would be permitted to simply refer to each portion of their original submission that satisfies a particular registration requirement, identify the specific registration requirement that is fulfilled by that section, and certify that the information or documentation originally provided remains current and true. The FBOT would continue to be required to submit new information or documentation, to the extent that its original application would not adequately demonstrate that the FBOT would be in compliance with one or more of the registration requirements. This typically would be necessary where one of the registration requirements, such as a requirement applicable to clearing and settlement, imposes a standard that was not applied at the time of the original application for no-action relief. 27 Documents submitted electronically can be more easily identified and located and can be retransmitted quickly and at less cost than documents in hard copy. It is also easier to identify and highlight those segments of an electronically submitted document that would satisfy a current requirement of registration. (ii) 120 Days To File Limited Application Seven commenters, including six FBOTs and one industry association, requested that the proposed 120-day time period within which an FBOT operating under existing no-action relief would be required to file a limited application be extended. Four specifically asked that the period be lengthened to 180 days, 28 while another asked for a year. 29 Two entities commented that the registration rules should provide that FBOTs with existing no-action relief may continue to operate as such as long as they submit an application within the 120-day period, which is determined in good faith by the applicant to be complete. 30 Such commenters expressed concern that there may be an extended period of legal uncertainty after the 120-day period, but before the Commission acted upon the application. 28 BM&F, EEX, LME, and MX. 29 ICE. 30 NYX and FOA. In response to these comments the Commission has determined to adopt the proposal with certain modifications. The final regulations provide that the required timeframe within which an FBOT operating pursuant to existing no-action relief is required to submit a limited application for registration, determined in good faith by the applicant to be complete, is 180 days from the effective date of the FBOT registration rules. 31 The final rule also provides legal certainty in that § 48.6 provides that an FBOT “may continue to operate pursuant to the existing no-action relief, subject to the terms and conditions contained therein, during the 180-day period, while the Commission is reviewing its application, and until the Commission approves or disapproves the application or otherwise withdraws the existing no-action relief.” Thus, FBOTs could continue to provide for direct access pursuant to the no-action relief during the 180-day period and, if they submitted timely and complete applications for registration, until such time as the Commission acts upon the registration applications. 31 If, at any time after the 180-day deadline but before a limited application is approved or disapproved, the Commission determines that the application is materially incomplete, the Commission may, after providing the FBOT with notice and an opportunity to respond to the determination of incompleteness, withdraw the existing no-action relief if the Commission determines that the application cannot be made complete in a timely manner. (iii) Treatment of FBOTs That Have Not Obtained No-action Relief NGX asked whether FBOTs with pending applications could file a limited application and stated that, if so, the review of such applications should take precedence over the review of applications of FBOTs currently operating under existing no-action relief. Bursa Derivatives asked if the Commission would take into consideration any Regulation 30.10 relief granted by the Commission to an FBOT or any visit made to an FBOT in the Regulation 30.10 review when evaluating such FBOT's application under the proposed registration process. 32 32 A Rule 30.10 order permits firms that are members of a self-regulatory organization and subject to regulation by a foreign regulator to conduct business from locations outside of the U.S. for U.S. persons on non-U.S. boards of trade without registering under the CEA, based upon the firm's substituted compliance with a foreign regulatory structure found comparable to that administered by the Commission under the CEA. Among the issues considered by the Commission in determining whether to grant Rule 30.10 relief based on 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. In consideration of the comments concerning limited applications for registration, the Commission has determined that an FBOT with a pending request for direct access no-action relief should be permitted to file a limited application for registration, recognizing that some of the required information and documentation is likely to have been recently submitted and, therefore, up-to-date. Thus, § 48.6 has been modified to provide that an FBOT that has submitted a complete application for no-action relief that is pending as of the effective date of the final rule could, as part of its application for registration, identify information or documents provided in its request for no-action relief that would satisfy particular registration requirements. Those aspects of the registration requirements that were not addressed in the materials submitted in connection with the no-action request would have to be addressed directly in the FBOT's registration application. With respect to the question of precedence of review, the Commission is not assigning precedence to any group of applicants. The Commission does, however, anticipate that the applications of FBOTs with pending relief requests generally will be submitted, and acted upon, before those of FBOTs which have no-action relief, largely because the latter FBOTs can continue to operate pursuant to the existing no-action relief during the 180-day timeframe for submission of an application and so long as a complete and timely application is submitted. In contrast, those FBOTs with pending relief requests cannot provide for direct access until they submit an application and receive an Order of Registration. With respect to consideration of any regulation 30.10 relief granted by the Commission to an FBOT or related visits in evaluating the FBOT's application for registration, the Commission believes it would be appropriate to consider such information only to the extent that it is relevant to particular registration requirements ( e.g., requirements that members be fit and proper and other foreign regulatory regime standards applicable to market participants) and is identified as such by the FBOT. The Commission notes that there is limited overlap between the factors considered when granting regulation 30.10 relief and those that will be examined in connection with FBOT registration. Regulation 30.10 review primarily is focused on the foreign regulatory standards applicable to market participants. While regulation 30.10 relief could inform the Commission's decision to register an FBOT, it would not be an appropriate substitute for the comparability and comprehensiveness analysis required under the FBOT registration regulations. b. Timeliness of Commission Review of an Application The proposed regulations did not include a proposed timeline for completion of Commission staff review of an application. Bursa Derivatives suggested that the Commission adopt a timeline of 180 days for the Commission to notify FBOTs whether an application has been approved or denied. The commenter noted that this would be consistent with the 180 days allotted for reviewing a designated contract market application. The Commission has determined not to adopt a firm timeline for completion of Commission staff review of an application. The Commission is committed to completing its review of applications for FBOT registration within a year or in as timely a manner as circumstances and resources will allow. However, the Commission can neither predict the total number of applications for registration that will be submitted nor whether such applications will be received simultaneously or over a period of time and, thus, cannot be assured that it would have sufficient resources at all times to meet such a self-imposed deadline. The Commission is likely to receive applications from most of the 20 FBOTs currently operating under existing no-action relief in addition to applications from other FBOTs that wish to register. The Commission notes that the lack of a specific deadline for the review of FBOT registration applications will not have a significant impact on those FBOTs currently able to provide direct access pursuant to a staff no-action letter that submit timely applications for registration. As previously noted, the final regulations permit such FBOTs to continue to provide direct access to FBOT members and other participants located in the U.S. during the review period, subject to compliance with the terms and conditions of their no-action relief letters. 2. Standard of Review a. Need for Registration One foreign regulator, ESMA, questioned whether replacing the practice of issuing no-action letters with a process whereby FBOTs would register with, and become subject to, the jurisdiction of the Commission would provide sufficiently enhanced public safeguards to outweigh the burdens imposed. Noting that section 738 of the Dodd-Frank Act seems to provide the Commission full flexibility on whether and how to implement the rules on registration, ESMA stated that: “Since the CFTC has also verified in the past that a FBOT and its clearing organisation are subject to comprehensive regulation and comparable oversight by the home regulatory authority, * * * the creation of new US regulatory measures with extra-territorial application should be avoided as far as possible and replaced by effective co-operation between the home and host regulatory authorities. Jurisdiction should indeed generally be exercised by the home country alone. The necessary cooperation could be ensured by an MoU determining how the home and the host authority should collaborate, exchange information and conduct common reviews and inspections.” 33 33 ESMA. HKFE and MX commented that the CFTC has already determined that FBOTs currently allowed to operate in the U.S. are subject to comprehensive and comparable regulation in their home jurisdictions under the no-action relief regime. HKFE further stated that, therefore, a substantive or a rule-by-rule review by the CFTC for the purposes of FBOT registration may not be necessary or appropriate except where the CFTC has fundamental concerns about a jurisdiction's regulations, regulatory objectives or practices. As previously noted, requests for no-action relief were submitted to and reviewed by Commission staff and not by the Commission itself and the letters granting no-action relief are not binding upon the Commission. Moreover, in analyzing requests for no-action relief, staff did not review the requests under the same standards that will be universally applied under the final regulations. For example, staff did not specifically consider whether an FBOT or its clearing organization was subject to “comprehensive regulation and comparable oversight by the home regulatory authority.” Rather, staff's standard of review has ranged from determining that the FBOT is regulated by a legitimate regulatory authority to determining that the FBOT and its regulatory authority support and enforce standards for trading and customer and market protection that are equivalent to those supported by the CFTC and its regulated DCMs. The Commission believes that the application procedures contained in the final registration regulation would provide for appropriate review. While the rule would create a new registration category, that category would operate pursuant to open and transparent standards and procedures that may not have been uniformly applied with respect to FBOT no-action letters. The proposed regulatory measures are applicable only to FBOTs that choose to provide for direct access to their trading systems to persons located in the U.S. In addition, the Commission believes that the rule, as proposed, would encourage effective co-operation between the home and host regulatory authorities in that it, among other things, provides for expanded information sharing between the regulatory authorities. Finally, with respect to the comment that the proposal is creating new U.S. regulatory measures with extra-territorial application, the Commission notes that Congress has authorized the registration of FBOTs in the Dodd-Frank Act. Moreover, the FBOT registration process relies significantly upon the Commission's determination that the FBOT's home country regulatory authority provides for comparable, comprehensive supervision and regulation. The Commission finds it particularly noteworthy that other countries that permit direct access, including the UK, Japan, Singapore, Hong Kong, Germany and Australia, among others, do so under a registration or licensing scheme. Accordingly, the Commission believes that the establishment of the FBOT registration regime in the final rule is generally consistent with international practices. b. Foreign Supervision and the Comparable, Comprehensive Determination As required by CEA section 4(b)(1)(A)(i), proposed § 48.5(d)(2) provided that the Commission, when reviewing an application for FBOT registration, will consider whether the FBOT and its clearing organization are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country that is comparable to the comprehensive supervision and regulation to which DCMs and derivatives clearing organizations (DCO), respectively, are subject in the United States. Seven commenters specifically addressed this provision, offering critiques of the Commission's approach to evaluating an FBOT's home regulatory regime. 34 34 Eurex, FOA, LME, EEX, OMX, Better Markets, and CME Group. Two commenters recommended that the Commission make a determination as to whether an FBOT is subject to a comparable comprehensive regulatory regime on a jurisdiction-by-jurisdiction basis where appropriate. 35 For example, if more than one FBOT is subject to the regulatory regime in the United Kingdom, the Commission could make a single determination as to the comparability and comprehensiveness of the regulatory regime in the United Kingdom. 35 LME and EEX. EEX commented that all trading venues recognized as a “Regulated Market” under the European Union's (EU) Markets in Financial Instruments Directive (MiFID) should be deemed fit to meet the regulatory standards of a registered FBOT. LME commented that the Commission should take the same jurisdictional approach with respect to the review of clearing organizations. In consideration of these comments, the final regulation, in the application form for registration, Form FBOT, 36 provides for a jurisdiction-based review of the comparability of the foreign regulatory regime when multiple FBOTs that are subject to the same regulatory regime are applying for registration. Specifically, the regulation, through the Form FBOT, provides that multiple FBOTs that are subject to the same regulatory regime and that are applying for registration at the same time may collectively provide information regarding the regulatory regime under which they operate. The information may be provided by the FBOTs themselves, or by the applicable foreign regulatory authority. 36 The proposed rules included an appendix that identified the information required in, and provided guidelines for submitting, an application for registration as an FBOT. That appendix included detailed descriptions of the minimum required documentation and information that should be included in an application. In these final rules, the Commission has revised the proposed appendix to include the submission requirements identified therein in standardized application forms, Form FBOT and Supplement S-1 to Form FBOT. Form FBOT is to be completed by an FBOT applying for registration and Supplement S-1 is to be completed by the clearing organization affiliated with the FBOT. The substance and content of Form FBOT and Supplement S-1 are parallel to those requirements and guidelines that were originally included in the appendix to the proposed rules. The Commission does not agree, however, that a determination that an FBOT operating in one jurisdiction should be registered eliminates the need to conduct a subsequent inquiry into the laws and regulations applicable to a different FBOT in the same jurisdiction that applies for registration at a different time. Additionally, a single jurisdictional analysis of comprehensiveness and comparability may not be able to take into account the fact that different FBOTs operating in the same jurisdiction may be subject to different regulations, depending upon a host of factors including, among other things, their business structure, the participants they accept, the products they trade and the exceptions and exemptions provided in the relevant regulatory regime. Accordingly, two FBOTs operating in the same country may be subject to regulation that differs in substantive ways. Moreover, financial markets worldwide are currently in an enhanced state of regulatory flux, making it a particularly inopportune time to state that once a jurisdiction is deemed comparable, it will be deemed comparable for the purpose of all future applications. 37 37 Notwithstanding the above, in a situation where an FBOT applying for registration is located in the same jurisdiction and subject to the same regulatory regime as a registered FBOT, the Commission believes that it would be acceptable for the FBOT applying for registration to include by reference, as part of its application, information about the regulatory regime that is posted on the Commission's Web site. The FBOT applying for registration must specifically identify the applicable information and certify that the information thus included in the application is directly applicable to it and remains current and valid. (i) Consideration of the Totality of Regulation Eurex, noting that in many jurisdictions the concept of self-regulation is not as established as in the U.S. and that foreign exchanges are not empowered in the same way as DCMs, recommended that, in considering the comparability of regulation, the CFTC explicitly incorporate that it may rely on the totality of the regulation—self and governmental—of the FBOT in evaluating the FBOT for comparable comprehensive supervision and regulation. The Commission has determined to adopt the rule as proposed, but notes that consistent with this Eurex comment, the Commission will rely on the totality of the regulation of the FBOT and its clearing organization in evaluating whether they are subject to comparable comprehensive supervision and regulation. (ii) Comparability Reviews FOA expressed concern that the proposed registration regulations would change the approach to comparability used under the existing no-action review process into what is effectively a rules-equivalence approach and that this could lead to a “line by line” examination of the European Union's approach to the regulation of derivatives transactions, central counterparties and trade repositories. FOA commented that a “line by line” examination of the foreign regulator's approach would complicate cross-border business and increase the risk of inadvertent breaches. The Commission has determined to adopt the rule as proposed. As in the case of the review performed under the no-action review process, the Commission's determination of the comparability of the foreign regulatory regime to which the FBOT applying for registration is subject will not be a “line by line” examination of the foreign regulator's approach to supervision of the FBOTs it regulates. Rather, it will be a principles-based review conducted in a manner consistent with the part 48 regulations pursuant to which the Commission will look to determine if that regime supports and enforces regulatory objectives in the oversight of the FBOT and the clearing organization that are substantially equivalent to the regulatory objectives supported and enforced by the Commission in its oversight of DCMs and DCOs. (iii) Limitations of Comparability Reviews CME Group suggested that the Commission's analysis should be more narrowly tailored and that the Commission should limit its inquiry to questions regarding the comparability of the regulatory regime in the FBOT's home jurisdiction, focusing on (1) the regulatory regime in the FBOT's home jurisdiction, (2) the FBOT's status in its home jurisdiction and its rules and enforcement thereof, and (3) any existing information-sharing agreements between the FBOT, the Commission, and the home jurisdiction regulator. CME Group argued that such an approach would focus the Commission's attention on the legitimacy of the home regulator rather than on the broader inquiries that have informed the no-action process. The Commission has determined to adopt the rule as proposed. The Commission does not believe that its review of an FBOT seeking to provide direct access to its trading system to persons located in the U.S. should be restricted to the three areas suggested by the commenter. The Commission believes that the broader review contemplated by the proposed regulations, which is an outgrowth of the review conducted during the no-action process, is necessary to ensure the protection of persons located in the U.S. that will be trading by direct access on the FBOT. Accordingly, the final regulations continue to require the FBOT to provide sufficient information and to demonstrate that the registration requirements set forth in § 48.7 are satisfied ( e.g., information and documentation on the relevant membership standards, the contracts to be made available in the U.S. and the automated trading and clearing and settlement systems). The Commission believes that its review of the information and documentation provided in these areas is necessary to provide greater assurance that, among other things, the members of the FBOT and its clearing organization members are subject to appropriate standards, the contracts to be made available are not readily susceptible to manipulation, all linked contracts are identified, the trading system complies with the Principles for Screen-Based Trading developed by the Technical Committee of the International Organization of Securities Commissions (IOSCO Principles) 38 and produces an adequate audit trail, and the clearing and settlement systems satisfy appropriate standards. 38 The IOSCO Principles were formulated by eight jurisdictions which comprised Working Party 7 (Working Party) of the Technical Committee of IOSCO under the chairmanship of the Commission. The Working Party's 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, and articulated for each issue 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. The Commission adopted the IOSCO Principles as a statement of regulatory policy for the oversight of screen-based trading systems for derivative products. Policy Statement Concerning the Oversight of Screen-Based Trading Systems. 55 FR 48670 (Nov. 21, 1990). (iv) Reconfirmation and Withdrawal of Registration Better Markets commented that proposed § 48.8(a)(2)(iii), which would impose continuing requirements on the foreign regulatory structure to maintain its laws governing the FBOT, was too narrow and too focused on the letter of the law, rather than the realities of the marketplace. Better Markets proposed an annual reconfirmation and demonstration of the appropriateness of the FBOT's regulatory regime and, further, that an FBOT's registration should be discontinued if the foreign regulatory regime changes in ways such that the FBOT would not be able to qualify for initial registration. The Commission has determined to adopt the rule as proposed, with slight modifications. The Commission notes that the regulations contain multiple provisions designed to demonstrate that the FBOT continues to be subject to an appropriate regulatory regime. For example, § 48.8(a)(1) conditions continued FBOT registration upon the FBOT's and its clearing organization's satisfaction of all of the registration requirements set forth in § 48.7; § 48.8(a)(2)(i) conditions registration upon the FBOT continuing to satisfy the criteria for a regulated market or licensed exchange pursuant to the regulatory regime described in its application and continuing to be subject to oversight by the regulatory authorities described in the registration application; § 48.8(a)(2)(ii) imposes a similar condition with respect to the FBOT's clearing organization; § 48.8(a)(2)(iii) conditions registration upon the laws, systems, rules, and compliance mechanisms of the regulatory regime applicable to the FBOT continuing to require the FBOT 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; and § 48.8(a)(3) conditions continued registration upon the FBOT's and, if the FBOT's clearing organization is not a DCO, the clearing organization's satisfaction of certain internationally recognized standards. In addition, § 48.8(b)(1)(iii)(G) requires that the FBOT and its clearing organization, or their respective regulatory authorities, as applicable, provide to the Commission annually a written description of any material changes to the regulatory regime to which the foreign board of trade or the clearing organization is subject that have not been previously disclosed or a certification that no material changes have occurred. Further, proposed § 48.9(b)(2) provides that the Commission may revoke an FBOT's registration, after appropriate notice and an opportunity for a hearing, if there is a material change in the regulatory regime applicable to the FBOT or its clearing organization. The Commission has modified § 48.9(b)(2) to provide that the Commission may revoke an FBOT's registration, after appropriate notice and an opportunity to respond, if there is a material change in the regulatory regime applicable to the FBOT or its clearing organization such that the regulatory regime no longer satisfies any registration requirement or condition for registration applicable to the regulatory regime. The Commission believes that in this instance, as in other instances in the final rule where the FBOT is provided appropriate notice by the Commission of an issue about which it is expected to communicate with the Commission, an opportunity to respond is adequate for the purpose of addressing the issue. c. International Standards The requirements for and conditions of registration set forth in proposed § 48.7 and § 48.8, respectively, would require an FBOT and its clearing organization to observe specified international standards. In order to become registered, an FBOT would be required to successfully demonstrate that its trading system complied with the current IOSCO Principles. 39 Unless the FBOT's clearing organization is registered with the Commission as a DCO, the FBOT also would be required to demonstrate that the clearing organization observed: (1) The current Recommendations for Central Counterparties jointly issued by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of IOSCO, as updated, revised or otherwise amended, or (2) successor standards, principles and guidance for central counterparties or financial market infrastructures adopted jointly by CPSS and IOSCO's Technical Committee (RCCPs). OMX commented that, in order to provide more flexibility, the registration requirements should refer to “recognized international standards,” rather than specific international regulations. 39 A review of the FBOT requests for no-action relief to permit direct access reveals that most of the applicants stated that their regulatory authority has endorsed the IOSCO Principles. Several of the FBOTs indicated that that their regulatory authority, in its review of the FBOT's trading system during development and/or on an ongoing basis, specifically took into account the IOSCO Principles. The Commission has determined to adopt §§ 48.7(b)(1) and (d)(1) and § 48.8(a)(3) substantially as proposed. The use of a singular set of internationally recognized standards provides clarity, consistency and certainty to the application requirements and the standards identified in the proposal are directly relevant to the review to be afforded FBOTs and their clearing organizations. In addition, due to the breadth of participation by sponsoring organizations 40 and the approval of the standards by IOSCO and CPSS, these principles are considered the premier standards in the industry and are likely to have greater global recognition than similar regional standards. 40 The current RCCPs were finalized in 2004 by a CPSS-IOSCO Task Force that included representatives from the following entities: National Bank of Belgium; Comissão de Valores Mobiliários, Brazil; People's Bank of China; Czech National Bank; European Central Bank; Autorité des Marchés Financiers, France; Bank of France; Deutsche Bundesbank; BaFin (German Financial Services Authority); Securities and Futures Commission, Hong Kong; Reserve Bank of India; Securities and Exchange Board of India; Commissione Nazionale per le Società e la Borsa, Italy; Bank of Japan, Financial Services Authority, Japan; Malaysian Securities Commission; Bank of Mexico; Netherlands Authority for Financial Markets; Saudi Arabian Monetary Agency; Comisión Nacional del Mercado de Valores, Spain; Monetary Authority of Singapore; Bank of England; Financial Services Authority, United Kingdom; Securities and Exchange Commission; CFTC; Board of Governors of the Federal Reserve System; Federal Reserve Bank of New York; International Monetary Fund; and the World Bank. The recommendations were initially released in a consultative document that requested public comment. The final version incorporates consideration of the comments received from central banks, regulators and the operators of and participants in central counterparties. The Commission did not receive comments specifically related to the requirement that an FBOT's clearing organization observe any “successor standards, principles and guidance” to the current RCCPs that may be jointly issued by CPSS and IOSCO in the future. The Commission wishes to clarify, however, that such standards would include, to the extent applicable, the “Principles for Financial Market Infrastructures” (FMI Principles) 41 that CPSS and the IOSCO Technical Committee intend to finalize in early 2012 and that, when effective, would replace the current RCCPs as the CPSS/IOSCO standards applicable to central counterparties. In March 2011, CPSS and the IOSCO Technical Committee publicly issued a “Consultative Report” that included the then-current draft of the FMI Principles and that requested comment upon the draft by July 29, 2011. CPSS and the IOSCO Technical Committee are in the process of reviewing the comments received and finalizing the FMI Principles. The Commission would not expect an FBOT's clearing organization to observe the FMI Principles until the effective date thereof established by CPSS and IOSCO. However, because it is anticipated that several FBOTs may wish to apply for registration between the time that the final FMI Principles are published and the time that the FMI Principles become effective and that clearing organizations for FBOTs may find that they already observe the FMI Principles, an FBOT that applies for registration after the FMI Principles are published in final form may demonstrate that its clearing organization observes those principles in lieu of demonstrating observance of the RCCPs. 41 Not all of the FMI Principles are applicable to central counterparties. d. Clearing Standards The FBOT registration requirements set forth in proposed § 48.7 include certain substantive standards that would have to be satisfied by an FBOT's clearing organization or the FBOT itself, if it is performing its own clearing functions. Among other things, an FBOT would be required to demonstrate that the members of its clearing organization are fit and proper and meet appropriate financial and professional standards; that the clearing organization is registered with the Commission as a DCO or observes the RCCPs or successor standards; that the clearing organization is in good regulatory standing in its home country jurisdiction; that the regulatory authorities governing the activities of the clearing organization provide comprehensive supervision and regulation comparable to that provided by the Commission to DCOs and engage in ongoing supervision and oversight of the clearing organization; that the clearing organization has the capacity to detect, investigate and sanction persons who violate its rules; and that the clearing organization has sufficient compliance staff and resources. (i) DCOs LME and CME Group commented that if an FBOT's clearing organization is registered with the Commission as a DCO, the FBOT should not be required to establish that the clearing organization satisfies the remaining criteria set forth in the proposed regulation. The Commission has determined to adopt the approach suggested by the commenters. Much of the criteria set forth in § 48.7 are likely to have been reviewed in connection with the clearing organization's application for a registration as a DCO and any additional review would be redundant. Accordingly, proposed § 48.7 has been modified to reflect that the registration requirements applicable to an FBOT's clearing organizations may alternatively be demonstrated by a statement from the clearing organization that it is registered and in good standing with the Commission as a DCO. (ii) RCCPs Standards for Non-DCOs Certain commenters questioned the appropriateness of the proposal's requirement that clearing organizations that are not CFTC-registered DCOs would have to demonstrate compliance with the RCCPs. MX suggested that the Commission should instead require the clearing organization to demonstrate that the regulations, standards, and policies of the applicable foreign regulator are comparable to those of the Commission; ICE suggested that the CFTC should rely on the expertise of the foreign regulator to regulate its own clearing organizations. As noted above, OMX recommended that the registration requirements permit clearing firms to demonstrate that they satisfy certain recognized international standards for central counterparties, rather than referring specifically to the RCCPs. By contrast, Eurex suggested that the inquiry into a firm's clearing organization should be restricted to a demonstration that the RCCPs are satisfied. NYX suggested that if the proposed RCCP standard is adopted, the CFTC should obtain confirmation of that fact from the firm's home country regulator, in lieu of requiring the information from the clearing organization itself. Bursa Derivatives suggested that the Commission should clarify that a clearing organization's reasons for non-compliance with certain RCCPs would be considered by the Commission and asked whether a time period would be specified for the clearing organization to comply with all of the RCCPs in such instance. The Commission has determined to adopt §§ 48.7(d)(1) and 48.8(a)(3)(ii) substantially as proposed. As noted above, the Commission believes that requiring an FBOT's clearing organization to demonstrate that it observes a singular set of internationally recognized standards provides clarity, consistency and certainty to the application requirements. Such representations also enable the Commission to obtain assurance that the clearing organizations used by the FBOTs observe, among other things, appropriate criteria for participation; measurement and management of credit exposures; management of custody, investment and operational risk; margin; financial resources; default procedures; governance; and transparency without specifically requiring the clearing organizations to demonstrate compliance with requirements that are identical to those that would be imposed upon a DCO. The use of an international standard that is substantially similar, though not identical, to the requirements imposed upon U.S. registrants is consistent with the directive in CEA section 4(b)(1)(A)(i) that the Commission consider whether the relevant regulatory regime is “comparable” and “comprehensive.” It is also consistent with section 752 of the Dodd-Frank Act, which seeks to promote consistency in global regulation of swaps and futures contracts and the requirement set forth in §§ 48.7(b)(1) and 48.8(a)(3)(i) that the FBOT itself comply with the IOSCO Principles. The RCCPs were developed with broad participation and comment from entities from multiple nations and have been approved by both IOSCO's Technical Committee and the CPSS. The same will be true of the FMI Principles, when finalized. Accordingly, the Commission believes that the RCCPs and their successor standards are the appropriate criteria to use when reviewing an FBOT's clearing organization that is not registered as a DCO. The Commission notes that the RCCPs consist of recommendations that are expressed as general principles, explanations thereof, and key issues and questions to be considered when assessing observance of the recommendations, rather than a checklist of obligations to be reviewed. The Commission recognizes that the generality of the recommendations and the explanations thereof afford some flexibility in assessing a clearing organization's observance thereto. The Commission anticipates that, for purposes of an FBOT registration application, clearing organizations may demonstrate observance of individual RCCPs, as well as observance of the RCCPs as a whole, in a variety of ways. 42 42 The Commission expects to take a similar approach with respect to the FMI Principles, when finalized. As currently drafted, the FMI Principles will include general principles, key considerations that explain the general principle, and explanatory notes that discuss the objective and rationale behind the principle and that provide guidance on how the standards expressed therein can be implemented. In some cases, annexes will provide additional information and guidance. When published, the document also will be accompanied by an assessment methodology. CPSS and IOSCO encourage relevant national authorities to assess observance of the RCCPs by the central counterparties in their jurisdictions as well as RCCP assessments by international financial institutions ( i.e., the International Monetary Fund and the World Bank) as part of their Financial Sector Assessment Programs. The Commission anticipates that a similar approach will be taken with regard to the FMI Principles. The Commission encourages FBOT registration applicants to submit with their registration applications any such assessments that have been made of their clearing organizations and any other information from their home country regulator(s) (provided that submitting such assessments to the Commission is not inconsistent with any applicable laws of the home country) that would be relevant to a determination that the clearing organization observes the RCCPs. Such assessments will inform the Commission's review of the clearing portion of the application. Due to the generality of the RCCPs, however, the Commission believes that a certification from a regulatory authority that the clearing organization observes the RCCPs, without more, would not provide it with sufficient information as to the relevant clearing operations to adequately assess the FBOT application and, thus, would not be sufficient to demonstrate that the RCCP requirement is met. With respect to Bursa Derivatives' request that the Commission consider a clearing organization's reasons for non-compliance with certain RCCPs, the Commission generally believes that a registered FBOT's clearing organization should be able to represent that it observes the RCCPs or successor standards. However, the Commission recognizes that a clearing organization may have very unique factual circumstances that may warrant an exception to the requirement with respect to a limited scope of RCCPs. Accordingly, the Commission would, where circumstances warrant, entertain applications from FBOT's whose clearing organizations do not observe all of the RCCPs. e. Foreign Regulation of FBOT Participants In the proposed rules, the Commission specifically asked for comment as to whether, to the extent an FBOT is permitted to list swaps, the Commission should examine the regulatory oversight of relevant market participants ( e.g., the functional equivalents of swap dealers (SD) and major swap participants (MSP)) in the applicable foreign jurisdictions when making a determination as to the comparability and comprehensiveness of the supervision and regulation of the relevant regulatory regime. Three commenters addressed the issues related to market participants. Better Markets commented that “[s]uch examination is critical * * * [and must include an assessment of] rules relating to collateral, business conduct and trading behavior.” It noted that “SDs and MSPs are subject to rigorous standards because safeguards for these important market participants enhance the continued financial integrity of the marketplace.” Better Markets further argued that the requirements for the foreign equivalents of SDs and MSPs should be the same as or equivalent to those imposed by the Dodd-Frank Act. In contrast, ICE commented that requiring equivalent or comparable regulation of foreign swap dealers or major swap participants is premature, positing that the proper course is for the CFTC to “work with foreign regulators to ensure high-level comparable regulation of market participants.” As previously noted, FOA expressed concern that this type of analysis could easily lead to a “line by line” examination of the EU's approach to the regulation of derivatives transactions, central counterparties and trade repositories, which would complicate cross-border business and increase the risk of inadvertent breaches of rules. The Commission has determined that it would not be appropriate, in the context of this rulemaking, when making a determination as to the comparability and comprehensiveness of the supervision and regulation of the relevant regulatory regime with respect to the registration of an FBOT, to require examination of the regulatory oversight of SDs and MSPs in the applicable home country jurisdictions. CEA section 4(b) applies with respect to FBOTs that wish to provide for direct access and the CEA section 4(b)(1)(A)(i) standard of review to be applied is “whether any such foreign board of trade is subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the foreign board of trade's home country.” The Commission believes that the review standard is thereby appropriately focused on an FBOT's operations, including its clearing organization, and its regulatory authority. Thus, the appropriate review here is to examine the FBOT's membership and trading participant standards as they relate to trading on the FBOT. If such membership and/or trading participant standards have been determined to be adequate by the FBOT's regulatory authority, which has been determined to provide comparable, comprehensive supervision and regulation of the FBOT, any further participant review would be beyond the scope of CEA section 4(b). 3. Contracts a. Linked Contracts (i) Definition Proposed § 48.2(d) defined a linked contract as “a futures or option or swap contract made available for direct access from the United States by a registered foreign board of trade that settles against any price (including the daily or final settlement price) of one or more contracts listed for trading on a registered entity as defined in section 1a(40) of the Act.” 43 Three commenters requested clarification with respect to this definition. 44 NGX requested that the Commission clarify the definition of linked contract to take into account the nuanced distinction between (1) contracts which are settled against the settlement price of a contract listed for trading on a U.S. contract market and (2) basis contracts, the prices of which are merely quoted with reference to another market. Better Markets commented that the definition of linked contract is far too narrow, and argued that it should include contracts that are reasonably likely to influence prices of the DCM/SEF-traded contracts as well as contracts that directly reference the prices of DCM/SEF-traded contracts. LME requested clarification on the scope of the definition of linked contract, commenting that LME did not believe the definition captured any contract of the type traded on LME. 43 Registered entity is defined in CEA section 1a(40) to mean: (A) A board of trade designated as a contract market under section 5 of the Act; (B) a derivatives clearing organization registered under section 5b of the Act; (C) a board of trade designated as a contract market under section 5f of the Act; (D) a swap execution facility registered under section 5h of the Act; (E) a swap data repository registered under section 21 of the Act; and (F) with respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded. 44 NGX, Better Markets, and LME. The Commission has determined to adopt the definition in § 48.2(d) substantially as proposed. The definition of linked contract leading to the requirement to impose additional conditions on such contracts is based upon the statutory description of linked contracts found in CEA section 4(b)(1)(B). 45 With respect to contracts that do not meet the definition of linked contracts, the proposal provided that applicants must identify contracts that share any other commonality (changed to relationship in the final rule) with a contract listed for trading on a registered entity— for example, if both the FBOT's and the registered entity's contracts settle to the price of the same third party-constructed index. With respect to these types of contracts, as with all conditions of registration, the final rule provides that the Commission, in its discretion and after appropriate notice and opportunity to respond, may impose additional conditions on the registered FBOT. Such additional conditions would be imposed if deemed necessary by the Commission to maintain its ability to carry out its market surveillance responsibilities when faced with contract relationships that essentially create a single market for the contracts listed by the FBOT and the registered entity and could include, among others, the conditions applicable to the listing of a linked contract. 45 The Commission does not believe that any LME contract currently made available for direct access under LME's no-action relief, all of which settle against prices generated by the LME, would fall into that definition. (ii) Conditions Proposed § 48.8(c) applied certain additional specified conditions for FBOTs that make linked contracts available by direct access. 46 The conditions included in § 48.8(c)(1), as set forth in CEA section 4(b)(1)(B), included: (1) Making public daily trading information regarding the linked contract that is comparable to the daily trading information published for the contract to which it is linked; (2) adopting position limits for the linked contract that are comparable to the position limits adopted by the registered entity for the contract to which it is linked; (3) having the authority to require or direct any market participant to limit, reduce, or liquidate any position; (4) agreeing to promptly notify the Commission of certain changes with respect to the linked contract; (5) providing information to the Commission regarding large trader positions in the linked contract that is comparable to the large trader position information collected by the Commission for the contract to which it is linked; and (6) providing the Commission such information as is necessary to publish reports on aggregate trader positions for the linked contract that are comparable to such reports on aggregate trader positions for the contract to which it is linked. 46 Under the proposed regulations, the requirements to register and to comply with the conditions for making available linked contracts are applicable only to those FBOTs which make such contracts available through direct access. The registration and linked contract provisions of the final rule do not extend to FBOTs that do not provide direct access to the FBOT's trade matching system from the U.S. The other conditions on linked contracts, set forth in § 48.8(c)(2), are based on the second set of additional conditions the Commission imposed on the no-action relief issued to ICE Futures Europe when that exchange made available for trading by direct access certain contracts in energy commodities linked to the prices of contracts traded on NYMEX. 47 The conditions would require that the FBOT, among other things, (1) inform the Commission in a quarterly report of any member that had positions in a linked contract above the applicable FBOT position limit, (2) provide trade execution and audit trail data for input to the CFTC's Trade Surveillance System (TSS), (3) provide for CFTC on-site visits for the purpose of overseeing the FBOT's and the clearing organization's ongoing compliance with registration requirements and conditions, (4) provide, at least one day prior to the effective date, copies of, or hyperlinks to, all rules, rule amendments, circulars and other notices published by the FBOT with respect to all linked contracts, (5) provide copies of all disciplinary notices involving the FBOT's linked contracts, and (6) promptly take similar action with respect to its linked contract in the event that the CFTC, pursuant to its emergency powers authority, directs that the U.S. registered entity which lists the contract to which the FBOT's contract is linked to take emergency action with respect to a linked contract ( e.g., to reduce positions in or cease trading in the contract). 47 See CFTC Letter No. 09-37 (August 20, 2009). Five commenters addressed these additional conditions. 48 With respect to linked contracts and position limits, LME, noting that foreign markets may well implement restrictions that could be more effective than position limits in addressing the regulatory objectives to be addressed by position limits, suggested that FBOTs should be permitted to adopt the position limits of a linked market as a safe harbor, but that the CFTC should also permit applicants to submit for approval any alternative approach that the Commission determines to be comparable in result. OSE argued that the proposed additional conditions for linked contracts are only necessary when an FBOT has more than a de minimis amount of trading in a linked contract. 48 LME, OSE, Senator Carl Levin, CMOC and ATA. OSE also noted that the burdens associated with proposed § 48.8(c)(2) may be overly costly and could be narrowed. Specifically, OSE commented on proposed § 48.8(c)(2)(ii), which would require that the FBOT provide trade execution and audit trail data on a linked contract for input into the TSS on a routine basis by the day following the trade date. OSE suggested that the Commission assess the relative burdens of the requirement and whether it could achieve the regulatory purpose through a more targeted requirement, such as requiring the data on an “as necessary” rather than on a daily basis. OSE also expressed concern about proposed § 48.8(c)(2)(vi), which would require the FBOT, in the event that the Commission directs that the registered entity that lists the contract to which the FBOT's contract is linked take emergency action with respect to a linked contract, subject to information-sharing arrangements between the Commission and its regulatory authority, to promptly take similar action with respect to the its linked contract. OSE suggested that it is preferable for the Commission to coordinate the actions that the FBOT should take in response to a market disruption or event through the FBOT's regulator, in recognition of international comity. Two commenters, Senator Carl Levin and ATA, strongly supported the proposed linked contract conditions, both specifically identifying the requirement that the FBOT share its trade execution and audit trail data, as well as the position limit provisions. Senator Levin commented that sharing trading data is vital for the Commission to detect price manipulation and excessive speculation involving U.S. futures traded on foreign exchanges. Further, Senator Levin noted that he believed the linked contract provisions would help to close the “London loophole” (a scheme, whereby, according to Senator Levin, traders move their trading activity to foreign markets to avoid position limits set by U.S. exchanges) by ensuring that the Commission is able to police FBOT trading in U.S. commodities to stop excessive speculation, price manipulation, and market disruptions. CMOC encouraged the CFTC to require that the FBOT impose position limits that are at least equal to or lower than the limits to be imposed in the U.S. on registered entities under the Dodd-Frank Act. The Commission has determined to adopt § 48.8(c) substantially as proposed. The first set of conditions for linked contracts, found in § 48.8(c)(1) are statutory-based conditions which are specifically required by the CEA section 4(b)(1)(B). The second set of conditions for linked contracts, found in § 48.8(c)(2), as previously noted, represent the second group of additional conditions the Commission imposed on the no-action relief issued to ICE Futures Europe when that exchange made available for trading by direct access contracts linked to the prices of contracts traded on NYMEX. These conditions remain necessary because such linkages create a single market for the subject contracts and, in the absence of certain preventive measures at the FBOT, could compromise the Commission's ability to carry out its market surveillance responsibilities. Because of the linkage, the trading of the linked contracts on an FBOT potentially affects the pricing of contracts traded on registered entities. With respect to the proposed § 48.8(c)(2)(ii) trade execution and audit trail data on a linked contract reporting requirement, the Commission has considered comments urging the Commission to require the data on an “as necessary” rather than on a daily basis and has determined that the timely provision of such information is essential if the Commission is to adequately carry out its trade practice and market surveillance responsibilities with respect to the linked contract listed on the registered entity. Commission staff conducts surveillance and reviews the trading data on a daily basis, and the trade data from the FBOT's linked contract are a critical component of this surveillance. With respect to the proposed § 48.8(c)(2)(vi) coordinated emergency action requirement, the Commission believes that the timeliness of any required emergency action, which would be taken only if necessary to protect the market and the public, is critical and outweighs the benefit that would be derived from coordinating actions through the FBOT's regulator. The Commission notes that the requirement to take emergency action is an extremely rare event and, in the normal course of business, the Commission would, time permitting, coordinate with the FBOT's regulator regarding critical actions to be taken concerning a linked contract. The Commission has determined to modify the second set of conditions on linked contracts by moving the requirement in proposed § 48.8(c)(2)(iii), which provided for CFTC on-site visits for the purpose of overseeing the FBOT's and the clearing organization's ongoing compliance with registration requirements and conditions, to § 48.8(a)(8), thus making it a general condition for maintaining registration. b. Swaps and Other Contracts (i) Swaps Under proposed § 48.7(c)(1)(i), a registered FBOT would be permitted to provide direct access to futures, options, and swap contracts that would be eligible to be listed for trading on a DCM. Five commenters supported permitting the execution of swaps on an FBOT by persons located in the U.S. by direct access. 49 Eurex, for instance, commented that the Commission should permit FBOTs to provide trading access to qualified U.S. persons for trading swaps that are listed on the FBOT, noting that the currently proposed conditions on FBOTs would be sufficient for them to comply with the purposes of the Dodd-Frank Act regarding swap trading. 49 Eurex, ICE, NGX, MX, and BG. The Commission has determined to adopt the rule as proposed. The Commission notes, however, that the regulations would only permit an FBOT to make swaps available to persons located in the U.S. for trading by direct access after the FBOT, its clearing organization, and the swaps to be made available by direct access have been determined by the Commission to be subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the FBOT's home country. Moreover, only swaps that would be permitted to be traded on a DCM could be made available, all such traded swaps would be required to be cleared, and the parties trading such swaps would be required to satisfy FBOT membership/trading participant standards that would have been reviewed and approved by the FBOT's regulatory authority. 50 50 The Commission notes that its decision to permit registered FBOTs to make swaps available via direct access to persons located in the U.S. is guided in part by the fact that the Dodd-Frank Act permits swaps to be listed for trading on a DCM and the FBOTs that are eligible to be registered are defined by § 48.2(b) as FBOTs that possess the attributes of an established, organized exchange. This definition was intended to restrict FBOT registration eligibility to entities similar in nature to those that received direct access no-action relief in the past ( e.g., entities that are comparable in operation and regulation to registered DCMs). Moreover, there is nothing in the Dodd-Frank Act, including section 738 of the Dodd-Frank Act amending section 4(b) of the Act, which expressly precludes a registered FBOT from offering swaps through direct access. However, the Commission also believes that the terms and conditions of any swap contract to be made available to persons located in the United States through direct access must demonstrate that such contract would meet review standards similar to those of a swap to be listed on a DCM and must demonstrate that the contract is not one that a U.S. person would be prohibited from trading. Registered FBOTs that permit swaps to be traded by direct access would also be subject to additional conditions, including the requirement to ensure that all swap transaction data, including price and volume, are timely reported as soon as technologically practicable after execution of the swap transaction to a swap data repository (SDR) that is either registered with the Commission or has an information-sharing arrangement with the Commission. Additionally, the FBOT must agree to coordinate with the Commission with respect to arrangements established to address cross market oversight issues involving swaps trading, including surveillance, emergency actions, and the monitoring of trading. Finally, based on its experience in administering these FBOT registration provisions and other rules related to swaps trading, the Commission may, in its discretion and after notice and an opportunity to respond, impose additional conditions upon the FBOT's registration with respect to the listing of swaps contracts. (ii) Clearing of Swaps Under proposed § 48.7(c)(1)(ii), all contracts that could be made available to be traded by direct access, including swaps, would be required to be cleared. ICE, BG Americas, and NGX opposed the mandatory clearing requirement for swaps. ICE commented that the clearing mandate contained in the proposed regulations differed from the clearing requirements applicable to swaps transactions on U.S. markets. Specifically, transactions executed on a swap execution facility (SEF) would not be required to be cleared if such transactions were not subject to the mandatory clearing requirements set forth in the Act. NGX noted that end users executing swaps on SEFs would be exempt from the mandatory clearing requirements pursuant to section 2(h)(7) of the Act. Similarly, BG Americas commented that the mandatory clearing standard applicable to transactions executed on an FBOT would be higher than that applicable to U.S. exchanges, in light of the available exemptions from the clearing requirement in the CEA, and recommended that the Commission clarify in the final rule that the mandatory clearing requirements on FBOTs will be no different from the clearing requirements on U.S. exchanges. The Commission has determined to adopt § 48.7(c)(1)(ii) as proposed. All three commenters supported their view by referencing the clearing standards applicable to transactions executed on SEFs, not on DCMs. As stated above, both the proposed and final § 48.2(b) restrict the universe of FBOTs that are eligible to be registered under part 48 to those that possess “the attributes of an established, organized exchange or other trading facility.” This provision is intended to limit FBOT registration eligibility to the types of entities to which direct access no-action relief has been granted in the past ( e.g., entities that are comparable in operation and regulation to registered DCMs). Accordingly, the Commission believes that the treatment of swaps that registered FBOTs will make available for trading to members and other participants located in the U.S. through direct access should parallel the treatment afforded to swaps transactions that may be traded on DCMs. The CEA requires swaps transactions that are traded on a DCM to be cleared. Specifically, CEA section 5(d)(11) includes DCM Core Principle 11, “Financial Integrity of Transactions,” which requires a board of trade to establish and enforce rules and procedures for ensuring the financial integrity of transactions entered into on or through the facilities of the contract market (including the clearing and settlement of transactions with a DCO). Accordingly, the Commission believes that it is appropriate to require that all transactions (including swaps) that are eligible to be traded by direct access pursuant to an FBOT registration be cleared. (iii) Swaps Data Reporting Under proposed § 48.8(a)(9)(i), a registered FBOT permitting swaps to be traded by direct access would be required to report to the public, on a real-time basis, data relating to each swap transaction, including price and volume, as soon as technologically practicable after execution of the swap transaction. Under proposed § 48.8(a)(9)(ii), a registered FBOT permitting swaps to be traded by direct access would be required to ensure that all swap transaction data is timely reported to an SDR that is either registered with the Commission or has an information-sharing arrangement with the Commission. Two commenters addressed these reporting requirements. ATA expressed concern about the effect of real-time reporting on their members' ability to hedge and recommended that this requirement be revised to allow delayed reporting to permit counterparties to close their related transactions. ICE expressed the view that the CFTC should not require all FBOTs to report swaps transactions to an SDR. 51 51 ICE noted that the SDR rules for domestic markets have not been finalized and SDRs are not yet operational and that, accordingly, the CFTC should delay implementation of this requirement until SDR rules are finalized and SDRs are operational. Further, the CFTC could rely on reporting to the CFTC from the FBOT, its clearing organization, or the foreign regulatory authority under an information-sharing arrangement. The Commission has determined to retain both reporting requirements, but to modify the proposed rule with respect to the responsibility for real-time reporting of swaps transaction information to the public. The Commission recognizes that the real-time reporting of swaps information to the public and the reporting of swaps transactions to an SDR are key objectives of the Dodd-Frank Act. Real-time reporting enhances price discovery. Reporting swaps transactions is necessary to permit the Commission and other regulatory authorities to view the market as a whole. As previously stated, § 48.2 is intended to restrict the universe of FBOTs that are eligible to be registered under part 48 to those entities that are comparable in operation and regulation to registered DCMs. The Commission anticipates that DCMs will be required to ensure that all swap transaction data, including price and volume, are timely reported to an SDR after execution of the swap transaction. Real-time swap transaction and pricing data will then, in turn, be publicly disseminated by the SDR. Accordingly, the Commission has determined to limit the registered FBOT reporting requirements contained in § 48.8(a)(9)(i) to an obligation to ensure that all transaction data relating to each swap transaction, including price and volume, be reported to an SDR that is registered with the Commission or has an information sharing arrangement with the Commission. The Commission is aware that no SDRs are either registered or operational at this time. Accordingly, until such time as appropriate SDR operations are in place, the conditions contained in Orders of Registration issued to FBOTs that wish to permit members and other participants to trade swaps via direct access will indicate that the FBOT may list such swaps for direct access but will be required to comply with § 48.8(a)(9)(i) as soon as practicable following the licensing or registration of a SDR that meets applicable requirements. (iv) Contracts Other Than Futures, Options, and Swaps Proposed § 48.7(c)(1)(i) provided that contracts that may be made available by direct access by a registered FBOT must be futures, option, or swaps contracts. LME and NGX requested clarification with respect to whether the proposed rules would permit an FBOT to offer spot and forward contracts and other similar physically-settled transactions. NGX also asked the Commission to clarify that, although the proposed regulations would permit a registered FBOT to list for trading through direct access any contract that is legally offered in the U.S., only those contracts that are regulated under the Act would be within the scope of the FBOT registration provision. The Commission has determined to adopt the rule as proposed. As stated in the proposal, those types of contracts subject to the CFTC's jurisdiction are within the ambit of the FBOT registration rules. The registration provisions do not preclude an FBOT from making available to participants located in the U.S. other products ( e.g., spot contracts and forward contracts) to the extent applicable law otherwise allows. The Commission also has determined to remove any reference to products from the FBOT definition set forth in § 48.2(a). (v) Review of Contracts Proposed § 48.7(c) would require that an FBOT, as part of its application for registration, provide, among other things, the terms and conditions of the futures, option and swaps contracts intended to be made available for direct access. Additionally, proposed § 48.10 would require a registered FBOT that wishes to offer new contracts subsequent to registration to submit such contracts to the CFTC for review prior to making the additional contracts available for trading by direct access. LME commented that the Commission should adopt an exemptive, rather than a registration, regime and require contract designation, similar to that applied by the Commission when a DCM submits a new contract for listing, only with respect to linked contracts. The Commission has determined to adopt §§ 48.7(c) and 48.10 as proposed, modified to reflect newly adopted procedures, discussed below, applicable to the offer or sale, to persons in the U.S., of non-narrow-based security index futures and option contracts. The Commission believes that it is necessary to review the terms and specifications of all contracts before they are made available for trading by direct access to ensure that the contracts would be legally permitted to be traded on a DCM and otherwise conform to the requirements and conditions applicable to contracts listed on the FBOT for trading by direct access by persons located in the U.S. The Commission also believes that it is necessary and appropriate to review new contracts in order to, among other things, determine that the contracts are actually futures, option, or swap contracts; ensure that they are not contracts determined by the Commission pursuant to CEA section 5c(c)(5)(C)(i) to be contrary to the public interest; ensure that they are not contracts on such products as security futures or narrow-based stock indexes or other securities regulated by the U.S. Securities and Exchange Commission; and determine whether the contract is linked to or may otherwise have some impact on a contract traded on a CFTC-regulated entity. The Commission notes that the treatment of new products set forth in the proposed and final rules is consistent with the existing practice under the no-action regime. The Commission further notes that, in the past, Commission staff has attempted to complete its review of additional contracts proposed to be made available for direct access promptly. Thus, an FBOT's ability to bring such contracts to market quickly generally has not been impaired. With respect to the listing of additional non-narrow-based security index futures and option contracts to be made available by direct access, proposed § 48.10 provided that a registered FBOT could list for trading such an additional futures contract pursuant to the procedures set forth in Appendix D to Part 30. Proposed § 48.10 also provided that a registered FBOT could, without further action by either the FBOT or the Commission, list for trading an additional option contract on a non-narrow-based security index futures contract which could be offered or sold in the United States pursuant to a no-action letter issued by the Commission's Office of the General Counsel. HKFE requested clarification with respect to any interrelationship between the proposed rules and the approval process for the offer and sale of index products to persons in the U.S. The Commission has revised its procedures applicable to the offer or sale, to persons in the U.S., of a non-narrow-based security index futures contract traded on an FBOT to conform to recent amendments to its regulations. 52 Generally, the new procedures involve the issuance of a Commission certification rather than a no-action letter. Accordingly, § 48.7(c)(2) has been added and provides that foreign futures (and option contracts) on non-narrow-based security indexes must have been certified by the Commission pursuant to the procedures set forth in § 30.13, and § 48.10 has been updated and now provides that a registered FBOT may list for trading by direct access an additional futures (or option contract) on a non-narrow-based security index pursuant to the Commission certification procedures set forth in § 30.13(d) and Appendix D to Part 30. Further, with respect to option contracts, if the option is on a non-narrow-based security index futures contract which may be offered or sold in the United States pursuant to a Commission certification issued pursuant to § 30.13, the option contract may be listed for trading by direct access without further action by either the registered FBOT or the Commission. 53 In response to HKFE's query, the Commission notes that the Commission certification procedures for non-narrow-based security indexes and the FBOT registration procedures are independent of each other, with the exception that a registered FBOT applying for Commission certification to offer or sell to persons located within the U.S. a non-narrow-based security index contract may, in that same request, pursuant to § 30.13(k), request that such contract be made available for trading by direct access. 52 See Foreign Futures and Options Contracts on a Non-Narrow-Based Security Index; Commission Certification Procedures, 76 FR 59241 (September 26, 2011). 53 Upon the implementation date, regulations 48.7(c) and 48.10 supersede and replace the provisions included in the “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; corrected at 71 FR 21003, April 24, 2006) and the “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,” 74 FR 3570 (January 21, 2009). 4. Direct Access Definition Proposed § 48.2(c) defines direct access to mean “an explicit grant of authority by a foreign board of trade to an identified member or other participant located in the United States to enter trades directly into the trade matching system of the foreign board of trade,” which is identical to the definition provided in CEA section 4(b)(1)(A). LME and HKFE requested clarification of the definition. LME requested clarification of the degree to which the definition covers access to application programming interfaces (API) developed by members to interface with exchange systems. LME indicated that it understood the direct access definition to include access to the graphical user interface of an FBOT, and not indirect access via an API. HKFE asked the Commission to clarify the meaning of “explicit grant of authority” and to provide examples of the kind of conduct or actions on the part of an FBOT that would be regarded as “an explicit grant of authority.” HKFE also requested that the CFTC clarify the position taken previously in connection with the granting of a direct access no-action letter that an automatic order routing connection from the U.S. to an FBOT would not be considered as “direct access.” Similarly, in relation to proposed § 48.8(a)(4), which addresses restrictions on direct access, ASX requested that the placement of terminals in non-exchange participant offices, and the conditions thereof, be specified in the new rules. The Commission has determined to adopt the rule as proposed. Direct access is defined in the CEA and in the proposed and final regulations to mean an explicit grant of authority by an FBOT to an identified member or other participant located in the U.S. to enter trades directly into the trade matching system of the foreign board of trade. This means that the FBOT itself, and not its members or participants, has identified and permitted a member or participant to enter trades directly into the FBOT's order matching and trade entry system from the U.S. The electronic means of entry to the trading system may be through the internet, a dedicated closed electronic system, an API, or other type of electronic interface—the dispositive factor is that the order is transmitted by an identified member or other participant located in the U.S. and the order is entered directly into the trade matching system. Thus, it does not constitute direct access if the order is sent by a person in the U.S. by means of an automated order routing system (AORS) to an intermediary located outside of the U.S. for further action or to pass through an order entry or risk management filter at the intermediary prior to reaching the trade matching engine. Proposed § 48.8(a)(4), which addresses restrictions on direct access, requires that the FBOT not provide, and take reasonable steps to prevent, third parties from providing direct access to the FBOT. This provision is intended to restrict direct access to FBOT-authorized persons by such methods as restricted access to hardware, password control, and other similar physical or electronic security measures. It is not intended to prohibit a registered FBOT from authorizing its member firms or other participants eligible to handle U.S. customer orders to permit their customers in the U.S. to access the trading system using the member firm's or participant's member ID (mnemonic) or password. In other words, a registered FBOT's member or participant located outside of the U.S. may, if so authorized by the FBOT, permit customers in the U.S. to transmit orders directly to the trade matching engine. The Commission is aware that two FBOTs currently operating with direct access no-action relief—ASX 54 and HKFE 55 —permit their exchange participants to allow non-exchange participants in the U.S. to have access to the exchanges' trading systems, subject to a guarantee from an exchange participant firm. 54 CFTC Letters No. 01-75 (July 30, 2001) and No. 04-32 (October 25, 2004). 55 CFTC Letter No. 01-74 (July 30, 2001). 5. Scope of Registration ( i.e., CEA Sections 5 and 5a) HKFE commented that there is no express provision in the proposed rules stating that registration under Part 48 would relieve an FBOT from compliance with CEA section 5 or 5a (that is, registering as either a DCM or DTEF). HKFE asked for clarification as to whether registration would relieve an FBOT from compliance with CEA section 5 or 5a. The Commission has determined to adopt the rule as proposed. Registration with the Commission under the Part 48 regulations would relieve an FBOT from compliance with CEA section 5 and its requirement to register with the Commission as a DCM and comply with the core principles and regulations associated with DCMs to the extent that its activity within the U.S. is limited to permitting members and other participants located in the U.S. to have direct access to its trade matching system, subject to the terms and conditions of registration, and so long as it remains an FBOT. Of course, the registered FBOT could, alternatively, choose to comply with CEA section 5 and become a registered DCM, subject to the regulatory requirements applicable thereto. The Commission notes that CEA section 5a was repealed by the Dodd-Frank Act. 6. Registration Requirements and Conditions Proposed § 48.7 identified certain requirements that must be satisfied by an FBOT seeking to register with the Commission. Proposed § 48.8 imposed various continuing conditions on registered FBOTs. Several commenters raised issues related to the proposed requirements and conditions. a. Trading Rules Proposed § 48.7(b) identified the attributes of the automated trading system that would be required to be met by any FBOT seeking to register with the Commission. In response to the proposal's request for comment with respect to whether the Commission should require FBOTs to adopt additional conditions to promote orderly markets and customer protection, such as automated safety features to protect against errors in the entry of orders, price-banding mechanisms, maximum order size limitations, or trading pauses to prevent cascading stop-loss orders, ICE commented that the Commission should not issue prescriptive trading rules for FBOTs and that the foreign regulator, not the CFTC, has the primary interest in adopting rules in this area. Further, ICE noted that the CFTC should work through international regulatory groups like IOSCO to implement consistent controls, instead of prescriptive rules. The Commission has determined not to require, as a requirement for, or a condition of, registration, that FBOTs adopt such automated safety features. The Commission believes that the primary interest in adopting rules in this area remains with the foreign regulatory authority. The Commission believes that the trading system attributes described in and required by § 48.7(b), which include compliance with the IOSCO Principles for Screen-Based Trading, are adequate to ensure the FBOT's trading system, among other things, is fair, reliable, capable of responding to emergencies, provides an adequate audit trail, and provides for reporting of trade data. They are features common to all automated trading systems that staff has reviewed in the context of the no-action process. b. Information Sharing Proposed § 48.8(a)(6) imposed certain information sharing obligations on a registered FBOT and its clearing organization. NYX asserted that the CFTC should not seek to obtain information directly from a clearing organization. Rather, the CFTC should look to the exchange—which should always be able to provide all the information held by the clearing organization in relation to business conducted on that exchange. NYX also commented that some European clearing organizations have the status of banks ( e.g., LCH Clearnet SA), and so may find it difficult to share information directly with the Commission rather than through their regulators. The Commission continues to believe that it would be appropriate and expedient to obtain information regarding the clearing function directly from the clearing organization, in lieu of relying upon intermediation by another entity. Nonetheless, with respect to the FBOT being better able to provide information requested of the clearing organization, the Commission notes that § 48.8(a)(6)(iii) provides that the FBOT and its clearing organization, as applicable, will provide information for certain purposes directly to the Commission. Accordingly, an FBOT could provide the information directly to the Commission, if it were better able to do so. Such information also could be provided by the applicable regulatory authority, although the FBOT and its clearing organization remain ultimately responsible to provide the information directly to the Commission under the final rule. c. Submission of U.S.-Domiciled Entities to Service of Process As a condition of registration, proposed § 48.8(a)(5) would require that certain members or other participants granted direct access by a registered FBOT (1) file a written representation with the Commission submitting to the CFTC's jurisdiction, (2) file a valid and binding appointment with the FBOT of an agent for service of process in the U.S., and (3) maintain a written representation with the FBOT that it will provide the Commission and other U.S. authorities with access to books and records and to the premises where the FBOT's trading system is made available in the U.S. LME questioned the need to require U.S.-based persons with direct access to foreign markets (FBOTs) that trade from the U.S. to comply with these three conditions. LME argued that in terms of personal jurisdiction, a U.S.-based person with direct access to an FBOT raises no more jurisdictional issues than a U.S.-based person trading on a U.S. market, as long as both traders are conducting their trading from the U.S. Upon further review and consideration of the comments received, the Commission has determined that § 48.8(a)(5)(iii), which obligated a registered FBOT to require that each current and prospective member or other participant that is granted direct access pursuant to the FBOT's registration and that is not registered with the Commission as a FCM, a CTA or a CPO file with the FBOT a valid and binding appointment of a U.S. agent for service of process in the U.S., is not necessary. Accordingly, that section has been deleted from the final rule. However, the Commission has determined that the remaining two conditions applicable to members and participants should be adopted as proposed. The Commission believes these conditions remain necessary to ensure that the FBOT members and other participants that have been granted direct access to an FBOT's trading system knowingly consent to submit to the CFTC's jurisdiction and to provide the Commission and other appropriate U.S. authorities with access to relevant books, records and trading premises in the U.S. 7. Modification of Registration Requirements Proposed § 48.5(e) provided that the Commission may, after appropriate notice and an opportunity for hearing, amend, suspend, terminate or otherwise restrict the terms of an Order of Registration. ASX noted that the proposed rules refer to the ability to modify relief, and asked whether the Commission would provide any clarity with respect to applying for modification and the criteria for modification. The Commission believes it is not necessary to promulgate a specific procedure for applying for modification of FBOT registration requirements or to delineate the circumstances under which modification might be granted. While the Commission would consider a request for modification of specified registration requirements or conditions if such request is supported by adequate justification and appropriate documentation, the Commission does not anticipate that modifications would be granted unless particularly unique factual circumstances are presented. Given that such requests would involve a unique set of facts and circumstances, the Commission believes that a case-by-case approach is appropriate and thus, is adopting § 48.5(e) substantially as proposed, except that the rule now provides for appropriate notice and an opportunity to respond. 8. Other Concerns a. Prescriptive Nature of the Regulations Three commenters voiced concern regarding the risk of protectionism by foreign regulators that might arise in the event that the Commission adopts overly prescriptive registration regulations for FBOTs. 56 FOA noted that the standards set in the U.S. for recognition of foreign regulators would impact, for example, the European approach to the recognition of U.S. market infrastructures. CME Group expressed concern that the proposed rules were overly prescriptive and noted that the Commission should be cognizant of the “realistic possibility” that enacting the proposed rules might encourage foreign regulators to adopt a reactive regulatory stance toward U.S.-based exchanges. HKFE asserted that the adoption of the proposed rules would be a departure from the CFTC's long-standing policy of mutual recognition and comity and that this could lead to the diminution rather than the expansion of global connectivity. 56 HKFE, FOA, and CME Group. The Commission has determined to adopt the rule as proposed. The Com [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2011-31637. Public record. Not legal advice.