# CFTC Letter No. 08-14: The Division of Market Oversight issued a letter granting no-action relief to permit Nord Pool ASA (Nord Pool or the Exchange) to make its electronic trading and order matching system (ETS), as well as its Application..

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/CFTC_L08_14

## Section

- **Citation:** CFTC Letter No. 08-14
- **Heading:** The Division of Market Oversight issued a letter granting no-action relief to permit Nord Pool ASA (Nord Pool or the Exchange) to make its electronic trading and order matching system (ETS), as well as its Application..
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** CFTC Staff Letters (2008-present) / The Division of Market Oversight issued a letter granting no-action relief to permit Nord Pool ASA (Nord Pool or the Exchange) to make its electronic trading and order matching system (ETS), as well as its Application...

## Text

Summary: The Division of Market Oversight issued a letter granting no-action relief to permit Nord Pool ASA (Nord Pool or the Exchange) to make its electronic trading and order matching system (ETS), as well as its Application Program Interface (API), available to Exchange members in the U.S. without obtaining contract market designation or registration as a derivatives transaction execution facility pursuant to Sections 5 and 5a of the CEAct. The relief applies to Nord Pool members in the U.S. that qualify as “Professional Clients” (as defined in the European Union Markets in Financial Derivatives Directive (MiFID)) or as “eligible contract participants” (ECP) (as defined in Section 1a(12) of the CEAct) trading for their proprietary accounts; Nord Pool members that are registered as futures commission merchants (FCM) that submit orders to ETS for execution from or on behalf of U.S. customers that qualify as Professional Clients or as ECPs; firms exempt from such registration pursuant to Commission Rule 30.10 (Rule 30.10 Firms) that accept orders through automated order routing systems for transmission to ETS from or on behalf of U.S. customers that qualify as Professional Clients or ECPs; and Nord Pool members that are registered as Commodity Pool Operators (CPO) or Commodity Trading Advisors (CTA), or exempt from such CPO or CTA registration pursuant to Commission Regulation 4.13 or 4.14, that submit orders for execution on behalf of U.S. pools they operate that qualify as Professional Clients or ECPs or accounts of U.S. customers that qualify as Professional Clients or ECPs, for which they have discretionary authority, respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm and guarantees without limitation all such trades of the CPO or CTA effected through submission of orders on ETS.
ecution on behalf of U.S. pools they operate that qualify as Professional Clients or ECPs or accounts of U.S. customers that qualify as Professional Clients or ECPs, for which they have discretionary authority, respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm and guarantees without limitation all such trades of the CPO or CTA effected through submission of orders on ETS.

U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5260
Facsimile: (202) 418-5527
www.cftc.gov
Division of
Market Oversight

CFTC Letter No. 08-14
August 20, 2008
No-Action
Division of Market Oversight

David Yeres, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019 6131

Re:
Nord Pool ASA, Request for No-Action Relief from Contract Market Designation
and Derivatives Transaction Execution Facility Registration Requirements

Dear Mr. Yeres:

This is in response to your letter dated May 21, 2008 to the Division of Market Oversight
(Division) of the Commodity Futures Trading Commission (CFTC or Commission).1 By this
correspondence, you request, on behalf of Nord Pool ASA, (NP or the Exchange) that the
Division confirm that it will not recommend that the Commission take enforcement action
against NP or its members2 if NP does not seek designation as a contract market (DCM) pursuant
to Section 5 of the Commodity Exchange Act (CEA or Act) or registration as a derivative
transaction execution facility (DTEF) pursuant to Section 5a of the Act, or Commission rules
thereunder, in connection with the installation and use by NP members in the United States3 of
the Exchange’s electronic trading and order matching system and application program interface
(API) (referred to hereafter as its trading system or ETS). (no-action request).

1
Letter from David Yeres, Esq., Clifford Chance US LLP, to Richard A
s
thereunder, in connection with the installation and use by NP members in the United States3 of
the Exchange’s electronic trading and order matching system and application program interface
(API) (referred to hereafter as its trading system or ETS). (no-action request).

1
Letter from David Yeres, Esq., Clifford Chance US LLP, to Richard A. Shilts, Director, Division of Market
Oversight, Commodity Futures Trading Commission (May 21, 2008).
2
For purposes of this letter and the relief provided herein, references to the members of NP shall include any
“affiliate” of any NP member that has been granted access by the NP member to the Exchange’s Trading System.
An “affiliate” of a NP member shall mean any person, as that term is defined in Section 1a(28) of the Act, that: (i)
owns 50% or more of the member; (ii) is owned 50% or more by the member; or (iii) is owned 50% or more by a
third person that also owns 50% or more of the member. An affiliate will be deemed a client of a NP member when
trading for the affiliate’s own account. NP represents that under its rules such affiliates would be required to comply
with NP’s Market Conduct Rules and that NP members remain responsible to NP for such compliance.
3
For purposes of this letter and the relief provided herein, the term “United States” shall include the United
States, its territories and possessions.

David Yeres, Esq.
Page 2

Specifically, NP wishes to make its trading system available through direct access4 to NP
members that:

(1) trade in the U.S. for their proprietary accounts, as defined in Commission Regulation
1.3(y), on ETS and MTS (described below) and that qualify as (i) “Professional Clients”
(as defined in the EU “Markets in Financial Instruments Directive” (MiFID))5 or as (ii)
“eligible contract participants” (ECP) (as defined in Section 1a(12) of the Act);
e through direct access4 to NP
members that:

(1) trade in the U.S. for their proprietary accounts, as defined in Commission Regulation
1.3(y), on ETS and MTS (described below) and that qualify as (i) “Professional Clients”
(as defined in the EU “Markets in Financial Instruments Directive” (MiFID))5 or as (ii)
“eligible contract participants” (ECP) (as defined in Section 1a(12) of the Act);

(2) are registered with the Commission as futures commission merchants (FCM) that
submit orders to the trading system for execution for U.S. customers6 that qualify as
Professional Clients or as ECPs;

(3) are registered with the Commission as commodity pool operators (CPO) or
commodity trading advisors (CTA), or are exempt from such registration pursuant to
Commission Rules 4.13 or 4.14, and that submit orders for execution on behalf of U.S.
pools they operate that qualify as Professional Clients or ECPs or accounts of U.S.
customers that qualify as Professional Clients or ECPs, for which they have discretionary
authority, respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm
and guarantees without limitation all such trades of the CPO or CTA effected through
submission of orders on the trading system; and

4
For purposes of this letter and the relief provided herein, the term “direct access” refers to the explicit grant of
authority by NP to a NP member to enter trades directly into the Exchange’s trading system.
5
Currently, in order to become an NP Member and engage in any trading activity, each entity must qualify as a
"professional client" as defined under Annex II of the MiFID, a European Union law which harmonizes the
regulatory regime for investment services across 30 member-states of the European Economic Area. As a result, the
relief requested and provided herein is applicable to members and U.S. customers who qualify as “professional
clients” or eligible contract participants
entity must qualify as a
"professional client" as defined under Annex II of the MiFID, a European Union law which harmonizes the
regulatory regime for investment services across 30 member-states of the European Economic Area. As a result, the
relief requested and provided herein is applicable to members and U.S. customers who qualify as “professional
clients” or eligible contract participants.
MiFID defines a "professional client" as "a client who possesses the experience, knowledge and expertise to make
its own investment decisions and properly assess the risks that it incurs" and, as a rule (subject to limited exceptions
set forth in Section II of Annex II of the MiFID), includes the following four categories of entities: (1) entities
which are required to be authorized or regulated to operate in financial markets, such as credit institutions,
investment firms, other authorized or regulated financial institutions, insurance companies, collective investment
schemes and management companies of such schemes, pension funds and management companies of such funds,
commodity and commodity derivatives dealers, locals, and other institutional investors; (2) large enterprises meeting
two of the following three size requirements on a company basis: (i) balance sheet total: EUR 20,000,000
($31,200,600), (ii) net turnover: EUR 40,000,000 ($62,401,200), and (iii) own funds: EUR 2,000,000 (3,120,060);
(3) governments, public bodies that manage public debt, Central Banks, international and supranational institutions
and other similar international organizations; and (4) other institutional investors whose main activity is to invest in
financial instruments. Further, Annex II of the MiFID also provides for client reclassification as a “professional
client” upon such client’s request, provided that such client meets the criteria specified with respect to experience,
expertise and size requirements
itutions
and other similar international organizations; and (4) other institutional investors whose main activity is to invest in
financial instruments. Further, Annex II of the MiFID also provides for client reclassification as a “professional
client” upon such client’s request, provided that such client meets the criteria specified with respect to experience,
expertise and size requirements. See MiFID Annex II as well as Sections 10-2 and 10-5 of the Norwegian Securities
Trading Regulations 2007, implementing the MiFID provisions, for the complete “professional client” definition.
6
For purposes of this letter and the relief provided herein, the term “United States customers” shall have the
same meaning as the term “foreign futures or foreign options customers” as it is defined in Rule 30.1(c).

David Yeres, Esq.
Page 3

(4) are registered with the Commission as FCMs, or are exempt from such registration
pursuant to Commission Rule 30.10 (Rule 30.10 Firms),7 that accept orders through
automated order routing systems (AORS)8 from U.S. customers that qualify as
Professional Clients or ECPs for transmission to the trading system.9

As you know, the Commission, on October 27, 2006, issued a policy statement that
affirmed the use of the no-action process to permit foreign boards of trade to provide direct
access to their electronic trading systems from the U.S
orders through
automated order routing systems (AORS)8 from U.S. customers that qualify as
Professional Clients or ECPs for transmission to the trading system.9

As you know, the Commission, on October 27, 2006, issued a policy statement that
affirmed the use of the no-action process to permit foreign boards of trade to provide direct
access to their electronic trading systems from the U.S. (Policy Statement).10 The Division has
reviewed NP’s no-action request and the materials submitted in support thereof in accordance
with the Policy Statement and the June 2, 1999, Commission Order (June 2 Order) which first
directed the Commission staff to consider requests from foreign exchanges for interim no-action
relief to allow them to provide direct access to their trading systems from the U.S.11

In connection with its no-action request, NP has forwarded the following information to
the Division:

7
Rule 30.10 permits a person affected by the requirements contained in Part 30 of the Commission's rules to
petition the Commission for an exemption from such requirements. Appendix A to the Part 30 rules provides an
interpretative statement that clarifies that a foreign regulator or self-regulatory organization (SRO) can petition the
Commission under Rule 30.10 for an order to permit firms that are members of the SRO and subject to regulation by
the foreign regulator to conduct business from locations outside of the United States for United States persons on
non-United States boards of trade without registering under the Act, based upon the person's substituted compliance
with a foreign regulatory structure found comparable to that administered by the Commission under the Act
rms that are members of the SRO and subject to regulation by
the foreign regulator to conduct business from locations outside of the United States for United States persons on
non-United States boards of trade without registering under the Act, based upon the person's substituted compliance
with a foreign regulatory structure found comparable to that administered by the Commission under the Act.
Among the issues considered by the Commission in determining whether to grant Rule 30.10 relief to a foreign
regulatory or self-regulatory authority are the authority's: (i) requirements relating to the registration, authorization,
or other form of licensing, fitness review, or qualification of persons through whom customer orders are solicited
and accepted; (ii) minimum financial requirements for those persons that accept customer funds; (iii) minimum sales
practice standards, including risk disclosures, and the risk of transactions undertaken outside of the United States;
(iv) procedures for auditing compliance with the requirements of the regulatory program, including recordkeeping
and reporting requirements; (v) standards for the protection of customer funds from misapplication; and (vi)
arrangements for the sharing of information with the United States. Interpretative Statement with Respect to the
Commission's Exemptive Authority Under § 30.10 of its Rules, 17 C.F.R. Part 30, Appendix A (2007).
8
For purposes of this letter, the term “AORS” shall mean any system of computers, software or other devices that
allows entry of orders through another party (an intermediary) that has been granted direct access to the trading
system where, without substantial human intervention, trade matching or execution takes place
uthority Under § 30.10 of its Rules, 17 C.F.R. Part 30, Appendix A (2007).
8
For purposes of this letter, the term “AORS” shall mean any system of computers, software or other devices that
allows entry of orders through another party (an intermediary) that has been granted direct access to the trading
system where, without substantial human intervention, trade matching or execution takes place.
9
NP is requesting a no-action position to provide immediate, interim relief for itself and its members pending any
adoption of rules or guidelines by the Commission regarding foreign boards of trade that wish to permit direct
access to their electronic trading systems from the United States. NP accordingly requests that this letter and the
relief provided herein be automatically modified in the event that the Commission or its staff adopts generally
applicable rules or guidelines regarding the issues addressed herein, and agrees that NP would be subject to those
rules or guidelines in such an event. NP additionally acknowledges that, as with all no-action letters, the Division
retains the authority to condition further, modify, suspend, terminate or otherwise restrict the terms of any no-action
relief.
10 Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement to Become a
Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. Reg. 64443 (November 2,
2006).
11 Order of the CFTC Withdrawing Proposed Rules Regarding Access to Automated Boards of Trade, 64 FR
32829, 32830 (June 18, 1999).
ct the terms of any no-action
relief.
10 Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement to Become a
Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. Reg. 64443 (November 2,
2006).
11 Order of the CFTC Withdrawing Proposed Rules Regarding Access to Automated Boards of Trade, 64 FR
32829, 32830 (June 18, 1999).

David Yeres, Esq.
Page 4

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

•
Information about membership criteria;

•
Information about various aspects of NP’s trading system (including the order-matching
system, the audit trail, response time, reliability, security, and adherence to the IOSCO
Principles) and information about settlement and clearing;

•
Information about NP’s home country regulatory regime and information regarding NP’s
status in its home jurisdiction and its rules and enforcement thereof (including market
surveillance and trade practice surveillance);

•
A description of current information–sharing agreements to which NP and its regulator
are parties;

•
The Norwegian Stock Exchange Act 2001 (the Exchange Act 2001);

•
The Regulated Markets Act 2007 ((the Exchange Act 2007) (excerpts);

•
The Norwegian Securities Trading Act (STA 2007);

•
Norwegian Securities Trading Regulations 2007 (STR 2007);

•
NP’s trading and clearing rules for all products, including Financial Electricity Contracts;

•
NP’s ethical guidelines and market conduct rules;

•
Certification of an authorized representative of NP as to the truth and completeness of the
material facts set forth in the no-action request and undertaking to notify the Commission staff if,
prior to the issuance of no-action relief requested in the no-action request, any material
representation made in such request ceases to be true and complete
cal guidelines and market conduct rules;

•
Certification of an authorized representative of NP as to the truth and completeness of the
material facts set forth in the no-action request and undertaking to notify the Commission staff if,
prior to the issuance of no-action relief requested in the no-action request, any material
representation made in such request ceases to be true and complete.

The Division also received separately from Kredittilsynet, the Financial Supervisory
Authority of Norway, NP’s regulatory authority, a representation regarding information-sharing
with the CFTC in connection with the granting of direct access to NP’s trading system from the
U.S. This representation is described below in section VII.

Representations made by NP regarding the structure of NP, NP's activities in the U.S.,
NP's membership criteria, NP’s electronic trading and order matching system, the regulatory
regime in Norway, and the information-sharing arrangements applicable to NP and its regulator
are summarized in Sections I - VII below. For purposes of this response to the no-action request,
the Division has relied upon NP's representations and information provided by NP and has not

David Yeres, Esq.
Page 5

conducted an independent review to confirm their accuracy.12 Commission staff, however, did
conduct an on-site visit at NP and Nord Pool Clearing to meet Exchange staff and discuss issues
relevant to the request for no-action relief with respect to NP’s activities. Separately,
Commission staff met with representatives of NP’s regulatory authority and discussed, among
other things, the Norwegian regulatory approach to exchange licensing and ongoing oversight.

I.
GENERAL INFORMATION REGARDING NP

A
it at NP and Nord Pool Clearing to meet Exchange staff and discuss issues
relevant to the request for no-action relief with respect to NP’s activities. Separately,
Commission staff met with representatives of NP’s regulatory authority and discussed, among
other things, the Norwegian regulatory approach to exchange licensing and ongoing oversight.

I.
GENERAL INFORMATION REGARDING NP

A.
The Nord Pool Group

NP is a Norwegian public limited company authorized by the Norwegian Ministry of
Finance as an exchange under the Norwegian Stock Exchange Act of 2001 (the Exchange Act
2001) and the Exchange Act 2007.13 NP is supervised by Kredittilsynet, the Norwegian
Financial Supervisory Authority (FSA of Norway or NFSA). NP lists cash settled Financial
Electricity Contracts, which comprise futures contracts, as well as forward contracts, option
contracts and contracts for differences, related to prices quoted for electric power and EU
Emission Allowances. NP acts as a central market for trading in the listed products.

Nord Pool is the world's first multinational exchange for trading electric power
derivatives. Established in 1993 following Norway’s deregulation of its power markets pursuant
to the Energy Act of 1990, NP is owned by the two national public electricity grid operators,
Statnett SF in Norway (50%) and Affärsverket Svenska Kraftnät in Sweden (50%). Statnet SF is
wholly owned by the Norwegian state. Svenska Kraftnät is an agency of the Swedish state. At
present NP has more than 70 employees with headquarters located near Oslo in Lysaker,
Norway, and branch offices in Stockholm, Sweden, Fredricia, Denmark and Helsinki, Finland.
In 2006 representative offices were opened in Amsterdam, the Netherlands, and Berlin,
Germany
Sweden (50%). Statnet SF is
wholly owned by the Norwegian state. Svenska Kraftnät is an agency of the Swedish state. At
present NP has more than 70 employees with headquarters located near Oslo in Lysaker,
Norway, and branch offices in Stockholm, Sweden, Fredricia, Denmark and Helsinki, Finland.
In 2006 representative offices were opened in Amsterdam, the Netherlands, and Berlin,
Germany.

The Nord Pool Group comprises NP, Nord Pool Spot AS, and NP’s wholly-owned
subsidiaries Nord Pool Clearing ASA (NP Clearing),14 which was established as a separate Nord

12 As stated below, the no-action relief provided herein is contingent upon the accuracy of the representations
made by NP in support of its No-action request. Any materially different, changed, or omitted facts or
circumstances may render the no-action relief void or cause the Division, in its discretion, to condition further,
modify, suspend, terminate, or otherwise restrict the relief.
13 NP, a public limited liability company, is regulated by the Act on Public Limited Liability Companies 1997 No
45 (the PLC Act), to the extent there are no special provisions in the Exchange Act 2001. A new Regulated Markets
Act was enacted in June 2007 (the Exchange Act 2007), generally superseding the Exchange Act 2001.
14 You represent that NP has contracted with OMX AB, a company organized under the laws of Sweden, to sell to
OMX AB, a subsidiary of The NASDAQ OMX Group, Inc., 100% of NP Clearing and NP Consulting (the OMX
Transaction). The OMX Transaction is expected to close in the summer/autumn of 2008. Upon closing of the OMX
Transaction, the Nord Pool markets that are the subject of this no-action letter, will continue to be operated by NP,
which will also continue to be responsible for all self-regulatory and market surveillance functions. All Nord Pool
market clearing shall be done exclusively by NP Clearing
action). The OMX Transaction is expected to close in the summer/autumn of 2008. Upon closing of the OMX
Transaction, the Nord Pool markets that are the subject of this no-action letter, will continue to be operated by NP,
which will also continue to be responsible for all self-regulatory and market surveillance functions. All Nord Pool
market clearing shall be done exclusively by NP Clearing. There will be no change in the ownership of NP upon
closing of the OMX Transaction. No material change is expected as result of the consummation of the OMX
Transaction with respect to any licensing standards, regulatory oversight, membership and capital requirements, as
described in the no-action request with respect to NP Clearing. However, it is understood that consideration is been

David Yeres, Esq.
Page 6

Pool business on January 1, 1999, and Nord Pool Consulting,15 of which NP acquired full
ownership as of January 1, 2004. Other companies which are owned in part by NP include Nord
Pool Spot AS and Nord Pool Finland Oy. Nord Pool Spot AS is owned 20% each by NP,
Statnett SF, Svenska Kraftnet, Fingrid and Energinet.dk. Nord Pool Spot AS owns 100 % of
Nord Pool Finland Oy.16 The Nord Pool Group has more than 420 members in total, including
members and representatives in 21 countries.

Pursuant to its Articles of Association, NP is led by a Board of Directors (Board)
comprising a maximum of six directors elected at the general meeting of the company
shareholders. The chair and deputy chair of the Board are also elected at the general meeting
from among the directors representing Statnett SF and Svenska Kraftnät. The president cannot
be a director
ives in 21 countries.

Pursuant to its Articles of Association, NP is led by a Board of Directors (Board)
comprising a maximum of six directors elected at the general meeting of the company
shareholders. The chair and deputy chair of the Board are also elected at the general meeting
from among the directors representing Statnett SF and Svenska Kraftnät. The president cannot
be a director. The Board is assisted in its operations by the Market Council, an advisory board
for all activities on the Nordic power exchange that is comprised of 10 power traders and
industry representatives and reports to the Board. The Board is also assisted in its operations by
a control committee, an in-house risk committee and internal audit function, and a disciplinary
committee.

The control committee monitors to assure compliance with requirements that follow from
legislation, regulations and license terms and that the management and Board comply with
company articles of association and decisions of NP’s governing bodies. The control committee
also assesses capitalization and security aspects of the business. The control committee is
elected at the general shareholder meeting of the company and submits annual reports on its
work at the general meeting and to the NFSA. The risk committee, which reports to the chief
executive officer, systematically and continuously analyzes the risks that might threaten the
companies’ strategic and operational goals. The disciplinary committee advises the Board with
respect to breaches of NP’s rules. Appointed by the Board, the committee, whose duties are
directly related to building a secure market, works on cases identified by the Exchange’s market
surveillance department.

NP is also advised by the product group, comprised of eight exchange members from the
financial group, on issues concerning the financial market and its members
s the Board with
respect to breaches of NP’s rules. Appointed by the Board, the committee, whose duties are
directly related to building a secure market, works on cases identified by the Exchange’s market
surveillance department.

NP is also advised by the product group, comprised of eight exchange members from the
financial group, on issues concerning the financial market and its members. The group's key
roles are to develop the financial market and promote the market as a whole through the right
products, exchange services and exchange rules and regulations so that the financial market is

given to future transference of the clearing function to an affiliate, OMX Technology AB, or another affiliated
clearing organization in Sweden, in which case, prior review and written approval by the Division will be required
to maintain the effectiveness of this relief.
15 Nord Pool Consulting AS assists governments to plan for changes in their electricity markets. Much of its
activity is carried out indirectly through the World Bank and the European Bank for Reconstruction and
Development.
16 Nord Pool Spot AS operates the spot exchange for the Nordic electricity market. In a daily auction, Nord Pool
Spot produces the next 24 hours’ electricity prices per hour for each price area. A total index called the “system
price” is also produced and is the basis for settlement of the forward and futures contracts traded at NP. Nord Pool
Spot ASA also operates the hourly balancing markets in certain price areas.
es the spot exchange for the Nordic electricity market. In a daily auction, Nord Pool
Spot produces the next 24 hours’ electricity prices per hour for each price area. A total index called the “system
price” is also produced and is the basis for settlement of the forward and futures contracts traded at NP. Nord Pool
Spot ASA also operates the hourly balancing markets in certain price areas.

David Yeres, Esq.
Page 7

an
need for

adapted to the markets' and the members' needs as well as ensuring its integrity, neutrality and
security.

B.
Products

NP proposes to make available for direct access its cash-settled Financial Electricity
Contracts and its physically-settled Financial European Union (EU) Allowances Contracts, all of
which you represent to be futures contracts. The Financial Electricity Contracts include futures
contracts,17 forward contracts,18 option contracts,19 and CFDs20 related to prices quoted for
electric power in the Nordic, German and Dutch regions.21 The Financial EU Allowances
Contracts include forward contracts and spot contracts22 for the sale and purchase of Europe
Union Allowance Certificates (EU Allowances).23 The terms of these contracts generally have
no nexus to the United States, nor do they raise any particular U.S. regulatory interest or
enhanced information-sharing or market surveillance.

C.
Presence in the United States

NP intends to permit entities located in the U.S. to become Exchange members and/or
clearing members/clearing clients with direct access to the trading system, either directly through
ETS or via telephone through NP’s telephone-based system for Exchange trading (MTS). NP
does not intend to permit any individuals located in the U.S. to become Exchange members. NP
does not have any offices in the U.S
nds to permit entities located in the U.S. to become Exchange members and/or
clearing members/clearing clients with direct access to the trading system, either directly through
ETS or via telephone through NP’s telephone-based system for Exchange trading (MTS). NP
does not intend to permit any individuals located in the U.S. to become Exchange members. NP
does not have any offices in the U.S. and represents that it does not intend to establish a physical

17 Futures contracts traded on NP are standardized contracts for future delivery subject to the daily cash settlement
based upon the net change in their value.
18 Forward contracts traded on NP are standardized contracts for future cash settlements subject to the daily
valuation process and settlement only at maturity. In the interim, exposures are addressed by additional collateral
deposits, letters of credit or financial guaranties of qualifying banking institutions.
19 Option contracts traded on NP are standardized European-style options on a cash-settled futures contract.
Option contracts are subject to daily valuation process and settlement only at maturity. In the interim, exposures are
addressed by additional collateral deposits, letters of credit or financial guaranties of qualifying banking institutions.
20 CFDs traded on NP are standardized contracts subject to the daily valuation process and settlement only at
maturity. In the interim, exposures are addressed by additional collateral deposits or financial guaranties of
qualifying banking institutions. CFDs are cash-settled contracts relating to differences between the Nordic, German
or Dutch (as applicable) area electricity prices and the Nordic electricity system price.
21 These contracts are settled based upon prices published by Nord Pool Spot AS, a licensed operator of the
Nordic market for physical electricity delivery, licensed and supervised by the Norwegian Department of Energy
ns. CFDs are cash-settled contracts relating to differences between the Nordic, German
or Dutch (as applicable) area electricity prices and the Nordic electricity system price.
21 These contracts are settled based upon prices published by Nord Pool Spot AS, a licensed operator of the
Nordic market for physical electricity delivery, licensed and supervised by the Norwegian Department of Energy.
22 Spot contracts are physically settled standardized contracts trading for one day and subject to next trading day
delivery and settlement.
23 The certificates entitle the holder to dispose of CO2 gas under the EU regime established to meet the
requirements under the Kyoto Protocol. The certificates may be purchased to allow certain regulated entities to
produce emissions of CO2 gas in excess of the emission quotas imposed by local environmental authorities.

David Yeres, Esq.
Page 8

presence in the U.S. in the future. NP’s employees periodically visit the U.S. on business-related
matters. NP’s English-language website is located at: http://www.nordpool.com/asa/.24

II.
MEMBERSHIP

A.
Introduction

Direct access to the NP markets is limited to Exchange members. Exchange members
may trade for their own accounts or for the accounts of clearing members or clearing clients of
NP Clearing or others (trading clients).

B.
Exchange and Clearing Members

Exchange members must be limited companies or other corporate entities incorporated
under the laws of their home states with regular business involving trading in listed products.
The members must have entered into an Exchange Membership Agreement with NP for principal
and/or client trading and must have satisfied NP’s requirements as specified in that agreement.25
No individuals are permitted to become members. In signing the Exchange Membership
Agreement, the member agrees to be bound by the relevant NP rules
h regular business involving trading in listed products.
The members must have entered into an Exchange Membership Agreement with NP for principal
and/or client trading and must have satisfied NP’s requirements as specified in that agreement.25
No individuals are permitted to become members. In signing the Exchange Membership
Agreement, the member agrees to be bound by the relevant NP rules.

Each Exchange member must meet the requirements set out in the NP Trading Rules
(trading rules) and NP Clearing Rules (clearing rules) for Financial Electricity Contracts and EU
Emission Allowances. In general, these rules require entities admitted to Exchange membership
to demonstrate to NP that they are fit and proper. Applicants must send NP a written application
and, by signing the Agreement, represent that the applicant: (a) is properly staffed and well
organized with personnel who have the necessary competence and knowledge for Exchange
trading in listed products and is aware of the characteristics of the listed products and the risks
involved in trading in such products; (b) has all requisite power and authority and legal right to
enter into the Exchange Membership Agreement and to effect Exchange trading in accordance
with the trading rules and to perform its obligations with respect to Exchange trading; (c) has
taken all necessary actions to authorize the execution, delivery and performance of the Exchange
Membership Agreement, implying that the trading rules and each contract entered into in
accordance with the trading rules constitutes a legal, valid and binding obligation enforceable
against the member; and (d) holds any public licenses needed to conduct its affairs under the
trading rules.

To become an Exchange member an entity must also submit the Clearing Membership
Agreement, meet the requirements for clearing with respect to the relevant contracts, and, as a
general rule, become a clearing member of NP Clearing
es a legal, valid and binding obligation enforceable
against the member; and (d) holds any public licenses needed to conduct its affairs under the
trading rules.

To become an Exchange member an entity must also submit the Clearing Membership
Agreement, meet the requirements for clearing with respect to the relevant contracts, and, as a
general rule, become a clearing member of NP Clearing. NP Clearing (on behalf of NP)
evaluates the applicant’s financial soundness based mainly on the applicant’s audited financial

24 NP’s website includes general information relating to the Exchange, its corporate organization, the contracts
traded thereon, and the operation of the trading system and of the market. In addition, NP’s website includes its
rulebooks and provides the public with access to various market data.
25 You represent that only a minority of Exchange members engages in client trading.

David Yeres, Esq.
Page 9

statements, in addition to any quarterly or semi-annual accounts or reports available. NP
Clearing performs a credit evaluation of the applicant based upon, among other things, its legal
status, financial soundness, expected trading behavior, and organization and level of competence.
NP Clearing’s stated objective is not to have any uncovered risk in relation to any members. The
financial evaluation is used to guide the size of the initial call for collateral, which must be
posted by the applicant before trading and clearing may commence (Initial Margin or base
collateral).26 The Initial Margin is a fixed amount that is designed to cover overnight risk for
new trades, i.e., risk in excess of daily variation margin and mark to market settlements
n to any members. The
financial evaluation is used to guide the size of the initial call for collateral, which must be
posted by the applicant before trading and clearing may commence (Initial Margin or base
collateral).26 The Initial Margin is a fixed amount that is designed to cover overnight risk for
new trades, i.e., risk in excess of daily variation margin and mark to market settlements.
Pursuant to NP Clearing rules, the Initial Margin for a clearing member for clearing Financial
Electricity Contracts is Norwegian Kroner (NOK) 1,000,000 or the Euro equivalent
(approximately $195,000), or a higher amount as determined by NP Clearing. If the applicant is
unable to post the required base collateral, NP Clearing will reject the application. NP Clearing
continuously monitors the member’s financial situation and, if a member’s equity ratio is low,
will increase the Initial Margin to a level which NP Clearing finds sufficient for the participant’s
level of trading activity.27

As discussed further below, NP and NP Clearing are presently amending their rulebooks
to implement an amended clearing model, which would include Exchange members who are not
clearing members. Exchange members who are not clearing members will be required to have a
contractual relationship with a clearing member in order to gain access to NP and NP Clearing.
All transactions entered into by a non-clearing member will be automatically booked on clearing
accounts established in the name of the respective general clearing member, which will assume
responsibility for any trades carried out by such non-clearing member.

As part of the approval procedure for Exchange/clearing membership, NP and/or NP
Clearing may require further information as well as a legal opinion with respect to the
applicant’s legal status, financial soundness, organization, technical systems, level of experience
and competence and other relevant matters for evaluating if the applicant is fit and proper for
Exchange membership
ember.

As part of the approval procedure for Exchange/clearing membership, NP and/or NP
Clearing may require further information as well as a legal opinion with respect to the
applicant’s legal status, financial soundness, organization, technical systems, level of experience
and competence and other relevant matters for evaluating if the applicant is fit and proper for
Exchange membership. Exchange trading may start only after NP Clearing has approved the
Exchange member and has opened a clearing account for registering the member’s trades.

An Exchange member that wishes to trade through ETS must also enter into an ETS
Agreement and be assigned one or more ETS Licenses or one or more identities providing ETS
internet access. Further, such member must appoint at least one Exchange trader responsible for
the member’s trading. Only Exchange traders, who are subject to approval by NP, may
communicate orders to ETS. NP may stipulate specific conditions for approval of Exchange

26 "Initial Margin" represents a good faith collateral deposit made by a clearing firm against possible future
obligations and required as a condition to clearing membership. Thus, Initial Margin is similar to a U.S. clearing
firm contributing to a guaranty fund of a clearing organization or purchasing shares of such organization as a
membership requirement. Initial Margin does not refer to a good faith deposit with respect to any specific trading
transaction, but rather is a required component of a prospective clearing member's relationship with NP Clearing.
The amount of the Initial Margin is fixed depending on the nature of the expected trading activity.
27 As used by NP, equity ratio refers to an indicator of the level of leverage used by the prospective clearing
member and is usually calculated by dividing the member's total liabilities by paid-in equity. As such, the equity
ratio would indicate what proportion of equity and debt the clearing member is using to finance its assets.
d depending on the nature of the expected trading activity.
27 As used by NP, equity ratio refers to an indicator of the level of leverage used by the prospective clearing
member and is usually calculated by dividing the member's total liabilities by paid-in equity. As such, the equity
ratio would indicate what proportion of equity and debt the clearing member is using to finance its assets.

David Yeres, Esq.
Page 10

traders, including requirements on qualifications and experience with respect to the relevant
contracts. The NP member is responsible without any limitations for all trading carried out by its
Exchange trader(s) and is held to have authorized the subsequent clearing of the Exchange trade
at NP Clearing.
C.
Client Representatives

An Exchange member may, with special approval from NP, act as a client representative
and trade for the accounts of clients.28 In order to trade on behalf of clients, the member must
submit a written application to NP and be specifically approved by the Exchange.29 NP may
require further information from the applicant Exchange member with respect to the applicant’s
future operations as a client representative and may impose specific conditions for approval.
Pursuant to NP Clearing rules, the Initial Margin for a client representative for clearing Financial
Electricity Contracts is NOK 1,500,000 or the Euro equivalent (approximately $292,000), or a
higher amount as determined by NP Clearing based, among other things, on the number of
clearing clients and separate clearing accounts.

Pursuant to the trading rules, client representatives bear full responsibility to NP in
connection with all client trading. In accordance with the clearing rules, client representatives
also have responsibility to NP Clearing for the clearing of client trades
gher amount as determined by NP Clearing based, among other things, on the number of
clearing clients and separate clearing accounts.

Pursuant to the trading rules, client representatives bear full responsibility to NP in
connection with all client trading. In accordance with the clearing rules, client representatives
also have responsibility to NP Clearing for the clearing of client trades. The clearing member
must, in order to represent a clearing client or another clearing member, enter into a Clearing
Client Agreement with NP Clearing and the clearing client, who will be allocated accounts with
NP Clearing for registering transactions in the clearing client’s name. Upon entering into the
Clearing Client Agreement, the clearing client appoints the Exchange member/clearing member
as its clearing representative, thereby obtaining the right to have its trades cleared with NP
Clearing through the client representative.30

An Exchange member may also trade on behalf of trading clients who are not clearing
clients or clearing members. Trades executed for the accounts of these clients are booked in the
clearing account of the relevant Exchange member. Client representatives trading on behalf of
such trading clients must further ensure that the trading clients sign the statement contained in
the Market Conduct Rules agreeing to submit to the Market Conduct Rules and must keep a
record of such statements. NP may at any time require access to the statements.31

28 Trading clients may be clearing members or clearing clients with NP Clearing or other entities or persons.
29 A Client Representative is subject to the insider trading rules, market abuse rules and the rules of good business
conduct including best execution principles, as well as general fraud rules under Norwegian criminal law
nts. NP may at any time require access to the statements.31

28 Trading clients may be clearing members or clearing clients with NP Clearing or other entities or persons.
29 A Client Representative is subject to the insider trading rules, market abuse rules and the rules of good business
conduct including best execution principles, as well as general fraud rules under Norwegian criminal law.
30 Each clearing client acknowledges that it is bound by the Market Conduct Rules, an appendix to the clearing
rules (and the trading rules), upon signing the Clearing Client Agreement to appoint the clearing representative.
31 NP also recognizes brokers, which are entities which have entered into a Broker Agreement with NP Clearing
giving the broker access to the clearing desk application for the purpose of registering clearing requests with NP
Clearing on behalf of clearing members and/or clearing clients for trades matched outside the Exchange by the
broker. A broker who has no other relationship to NP may be appointed by an Exchange member as an Exchange
trader responsible for the member’s trading and thereby have access to ETS. Brokers are subject to the same
regulations as other intermediaries, including the applicable Market Conduct Rules.

David Yeres, Esq.
Page 11

NP has adopted Ethical Guidelines which provide that an Exchange or clearing member
acting on behalf of clients as intermediary or agent shall endeavor to protect the interest of the
client in all cases where there are possible conflicts between the members’ own interests and
their client’s best interests, and shall ensure that clients are treated equally and in a fair and non-
discriminatory manner. Further, the Ethical Guidelines provide that members, when performing
investment services, must attend to clients in a “correct and loyal” manner, in accordance with
national legislation and international standards as to good business practice
embers’ own interests and
their client’s best interests, and shall ensure that clients are treated equally and in a fair and non-
discriminatory manner. Further, the Ethical Guidelines provide that members, when performing
investment services, must attend to clients in a “correct and loyal” manner, in accordance with
national legislation and international standards as to good business practice. In addition, the
Market Conduct Rules, which promulgate proper business practices in exchange trading, set
forth a general prohibition on any abusive market practices, including improper handling of
customer orders.32

III.
OVERVIEW OF THE NP TRADING SYSTEM

At the outset, the Division notes that the description of NP’s trading system, ETS, set
forth herein is based upon representations made by NP or its representatives. The Division has
not performed an independent assessment of the security or soundness of ETS in connection with
this request. Nonetheless, Commission staff did observe ETS operations during a demonstration
conducted during the staff’s onsite visit. ETS uses the OMX CLICK electronic trade matching
system, for which it has a perpetual license.33

A.
Introduction

Access to ETS, a fully automated electronic trading system, is granted to Exchange
members through fixed telecom lines or via internet connection.34 Alternatively, Exchange
members may also place orders to buy and sell listed products through NP’s telephone-based
system for Exchange trading, known as MTS.35 NP’s trading hours, published on NP’s website,

32 As discussed below, the supervision of the proper handling of customer orders by intermediaries is not
regulated by NP directly, but rather by the NFSA in instances involving intermediaries licensed as investment firms.
33 OMX provides technology to over 60 exchanges, clearing organizations and central securities depositories in
more than 50 countries
32 As discussed below, the supervision of the proper handling of customer orders by intermediaries is not
regulated by NP directly, but rather by the NFSA in instances involving intermediaries licensed as investment firms.
33 OMX provides technology to over 60 exchanges, clearing organizations and central securities depositories in
more than 50 countries. Commission staff has previously reviewed earlier versions of OMX trading systems. The
OM CLICK trading system, used by BrokerTec Futures Exchange, L.L.C. (BTEX), was thoroughly examined by the
Division and the Commission’s Office of Information Resources Management in connection with BTEX’s
application to become a DCM. The Commission approved BTEX as a DCM on June 18, 2001; it ceased operations
in November 2003. Commission staff also has previously described OM CLICK in connection with the granting of
direct access no-action relief to the OM London Exchange Limited (OM London). See CFTC Staff Letter 00-93
(September 21, 2000). OM London is no longer in operation.
34 Access to users in the U.S. will be by internet connection only. NP represents that a virtual private network
(VPN) PowerCLICK link-up via the internet is as fast and stable as the fixed-lines solution, even at high system
loads.
35 With MTS, discussed further below, Exchange members place orders by telephone to NP employees who
subsequently enter the orders in ETS.
onger in operation.
34 Access to users in the U.S. will be by internet connection only. NP represents that a virtual private network
(VPN) PowerCLICK link-up via the internet is as fast and stable as the fixed-lines solution, even at high system
loads.
35 With MTS, discussed further below, Exchange members place orders by telephone to NP employees who
subsequently enter the orders in ETS.

David Yeres, Esq.
Page 12

are 8.00 a.m. to 3.30 p.m. Oslo time each trading day, defined as each day that is neither a
Saturday nor Sunday nor a Norwegian national holiday.36

B.
ETS

Exchange members may place (register) electronic orders on ETS. An order is a binding
offer to buy or sell a certain number of contracts that is subject to registration, ranking and
automatic matching without any further approval from the member. To register an order in ETS,
the member must enter the following information: (a) the product series; (b) whether the order is
to buy or sell; (c) the size of the order (referred to as the order volume and described below); (d)
the futures price, forward price, CFD price, option premium or allowance spot price limit; (e)
whether the order is an order book order (a limit order) or a market order; and (f) possible
combination order terms.37 An order is deemed registered and becomes binding when the
member placing the order has received an electronic confirmation of the registration in ETS.
Orders can be registered either as order book orders or as market orders. An order book order
that is not immediately matched is automatically stored in ETS for the entire trading day, after
which it is cancelled. A market order is automatically cancelled if it cannot be matched
immediately.38

Order volume determines whether there are any restrictions on matching protocols or
how order size will be displayed. For order book orders, matching may take place for part of the
order volume
is not immediately matched is automatically stored in ETS for the entire trading day, after
which it is cancelled. A market order is automatically cancelled if it cannot be matched
immediately.38

Order volume determines whether there are any restrictions on matching protocols or
how order size will be displayed. For order book orders, matching may take place for part of the
order volume. A market order must be identified as either fill-or-kill, where the order is either
matched for the entire order volume or cancelled, or fill-and-kill, where the order is matched for
as much of the order volume as possible and then cancelled for the remaining order volume.
Orders may be registered with a hidden (non-disclosed) volume, where only part of the order is
displayed in ETS. When the displayed order volume is matched, ETS will automatically restate
the displayed order volume until the full hidden volume is matched. Members may also register
combination orders, defined as orders to simultaneously buy and/or sell contracts in two or more
different product series. Standardized combination orders, which concern two orders with the
same volume, may be registered as order book orders or market orders. Non-standardized
combination orders must be registered as market orders. For all combination orders, matching
only takes place for two or more orders at the same time.

Orders to buy or sell listed products received by ETS are ranked based upon price and
time, and trades are automatically entered into upon a match. To create a basis for matching,
orders are automatically ranked in ETS. The order with the best price, including the best net
price for combination orders, always has priority. Order book orders at the same price are

36 A financial help desk and a clearing desk to assist members are open during similar hours.
37 The same information must be registered when changing or cancelling an order in ETS
te a basis for matching,
orders are automatically ranked in ETS. The order with the best price, including the best net
price for combination orders, always has priority. Order book orders at the same price are

36 A financial help desk and a clearing desk to assist members are open during similar hours.
37 The same information must be registered when changing or cancelling an order in ETS.
38 Among the data to which the member has access through ETS are the following: (1) best buy and sell price, as
well as order depth; (2) last traded price, as well as highest and lowest price distributed during the day; (3) the total
volume behind the individual prices; (4) intraday graphs displaying price and volume movements throughout the
trading day; and (5) an overview of the orders posted to the market and the trades executed by the member during
the trading day.

David Yeres, Esq.
Page 13

ranked by time of registration (first registered, first matched); and combination orders are ranked
before other orders at the same price and volume. If the terms of a registered order are changed,
the order acquires a new registration time except where the change is a reduction in order
volume, in which case the order retains the original registration time.

An Exchange trade occurs, and a contract is automatically entered into for the account of
the member that entered the registered order, when a matching order is registered in ETS. A
matching order is an opposite order at the same price for the same product series, or with a lower
price limit when the first order is a buy order, or with a higher price limit if the first order is a
sell order. In the event that a newly-registered offer price is lower than the best bid price then
registered in ETS, the trade will be matched at the bid price. In the event that a newly-registered
bid price is higher than the best offer price then registered in ETS, the trade will be matched at
the offer price
first order is a buy order, or with a higher price limit if the first order is a
sell order. In the event that a newly-registered offer price is lower than the best bid price then
registered in ETS, the trade will be matched at the bid price. In the event that a newly-registered
bid price is higher than the best offer price then registered in ETS, the trade will be matched at
the offer price. As previously discussed, certain orders may be matched for less than the entire
order volume.

C.
MTS

Trading in MTS, NP’s telephone-based trading system, is affected by Exchange members
calling in registration orders or non-registration orders, described below, by telephone to NP
employees at MTS who subsequently enter the orders in ETS. MTS is available to any member,
irrespective of whether the member has an electronic link to ETS. When registering, changing or
canceling registration orders, members are required to provide the same information as when
registering an order in ETS. For example, when placing registration orders by phone, an
Exchange member must specify whether the order is an order book order or a fill-or-kill market
order or a fill-and-kill market order. A registration order is considered registered by NP when
MTS provides a telephonic confirmation of the entry of the order in ETS. A registered
registration order remains valid until changed or cancelled by the member and MTS has
confirmed this by telephone or until the end of the trading day the registration order was called
in. An Exchange trade occurs, and a contract is automatically entered into for the account of the
member that entered the registered order in MTS, when a matching order is registered in ETS.

Alternatively, an Exchange member may, subject to certain conditions, call in non-
registration orders to MTS. Non-registration orders are binding on the member only when the
member is in telephone contact with MTS or for a time period agreed upon between NP and the
member
o for the account of the
member that entered the registered order in MTS, when a matching order is registered in ETS.

Alternatively, an Exchange member may, subject to certain conditions, call in non-
registration orders to MTS. Non-registration orders are binding on the member only when the
member is in telephone contact with MTS or for a time period agreed upon between NP and the
member. A non-registration order must state a better price than the best bid price registered in
ETS (in respect of a bid) and a better price than the best offer price (in respect of an offer) for an
order volume that NP finds to be sufficient. NP may refuse to receive further non-registration
orders and, without notifying members with non-registration orders, stop handling some or any
such orders for a pre-defined or indefinite period of time, if considered necessary to assure MTS
continues to function the properly.

Upon receipt of a non-registration order, NP checks to determine whether an order in
ETS matches the non-registration order and, if so, registers an order in ETS on behalf of the
member in order to execute a trade. If no matching order is registered in ETS, NP contacts by
telephone the members with the best price in ETS in the relevant series following the price/time

David Yeres, Esq.
Page 14

priority ranking, including the best net price for combination orders, and invites the Exchange
members to match the price of the non-registration order. If a matching order is received, NP
immediately registers an Exchange trade in ETS.

If no matching order is received, NP may contact by telephone the market makers in the
relevant series, ranked internally by the price of their orders in ETS. If a matching order is
received from a market maker, NP immediately registers an Exchange trade in ETS
tch the price of the non-registration order. If a matching order is received, NP
immediately registers an Exchange trade in ETS.

If no matching order is received, NP may contact by telephone the market makers in the
relevant series, ranked internally by the price of their orders in ETS. If a matching order is
received from a market maker, NP immediately registers an Exchange trade in ETS. If no
matching order is received, NP may contact the Exchange member submitting the non-
registration order by phone and ask whether the member wants a quote request, which is an
electronic notice to all members linked to ETS inviting them to meet a non-registration order in a
specified series, without identifying any price limit. Exchange members responding to a quote
request are ranked according to the price and timing of their responses. If no members respond
to the quote request, NP may contact by telephone any Exchange member with registered orders
in the relevant series, as well as other members that staff believes may be willing to meet the
non-registration order. Any matching orders subsequently submitted are ranked according to the
price and time of response.

D.
Trade Confirmations and Trading Errors

Exchange members with links to ETS have immediate access to electronic confirmation
in ETS as soon as matching has taken place. Members that do not have a link to ETS are
informed by NP by telephone as soon as practically possible when an Exchange trade is matched.
NP also, as soon as practicably possible, and at the latest within final trade confirmation time,
makes available electronic trade confirmation specifying the respective member’s Exchange
trades on the trading day in question. The final trade confirmation time is the time specified in
the trading schedule by which the trade confirmation must be made available to the member by
NP, currently 5:00 p.m. Norwegian time
acticably possible, and at the latest within final trade confirmation time,
makes available electronic trade confirmation specifying the respective member’s Exchange
trades on the trading day in question. The final trade confirmation time is the time specified in
the trading schedule by which the trade confirmation must be made available to the member by
NP, currently 5:00 p.m. Norwegian time.

If a trade is registered at a price or volume in ETS that at least one of the two parties to
the trade believes to be incorrect, the member must notify NP through telephone to MTS as soon
as possible, and no later than two minutes after the registration of the trade in ETS. In the event
of a late complaint, the trade will be upheld without change and the Exchange members will be
legally bound by the registered trade.

NP is required to pass on timely complaints regarding possibly incorrect trades on an
anonymous basis to the other affected Exchange members to allow them to evaluate the
complaint. If these members consent to a cancellation or change, NP registers the cancellation or
change in ETS. If the other affected Exchange members do not consent, the trade generally will
remain valid and unchanged unless, among other things, the erroneous trade involved a market
maker and was caused by a simultaneous registration or change of several orders by a market
maker or the trade, was matched outside market maker hours or when no market maker was
operative, is outside the theoretical market spread or has a trade volume exceeding the volume
limit in the trade error schedule. With respect to trading through MTS, an Exchange member
claiming that a trade confirmation received from NP contains errors and that consequently the
trade is not legally binding must notify NP immediately, but no later than the final trade
hen no market maker was
operative, is outside the theoretical market spread or has a trade volume exceeding the volume
limit in the trade error schedule. With respect to trading through MTS, an Exchange member
claiming that a trade confirmation received from NP contains errors and that consequently the
trade is not legally binding must notify NP immediately, but no later than the final trade

David Yeres, Esq.
Page 15

complaint time.39 The procedures and guidelines described above regarding correct and timely
complaints in connection with ETS trading errors are generally also applicable to Exchange
trades in ETS based on registration by MTS, as supplemented by some remedies specifically
applicable to MTS trading.

E.
Trade Registration/Audit Trail/Market Data Distribution

Every match that takes place on ETS is immediately disclosed in the system (on the
PowerCLICK screens through VPN). These trades are also registered real-time and
automatically transferred to NP Clearing for clearing through the Clearing Desk Application.
Information about trade registration is saved for 10 years. Real-time and historical data are
available through Market Data Service. The information saved by NP/NP Clearing contains
information about all contracts entered into by each individual participant, including time of
trade, historical price information, volume, and type of contract and accumulated financial
information.

As described above, the transactions are automatically transferred and in real-time
processed to the clearing system, and the information with respect to each completed transaction
is immediately disclosed electronically to all participants. You represent that historically, the
system has been available and open for trading 99.96% of the time, which is in accordance with
NP’s requirements as specified in the servicing contract with the systems provider, OMX
Technology
-time
processed to the clearing system, and the information with respect to each completed transaction
is immediately disclosed electronically to all participants. You represent that historically, the
system has been available and open for trading 99.96% of the time, which is in accordance with
NP’s requirements as specified in the servicing contract with the systems provider, OMX
Technology. Pursuant to the requirements of the Exchange Act 2007, NP makes trade data in all
its listed products (including bids, offers, trade prices and trade quantity) publicly available on its
web-page at no cost, subject to a short delay of approximately 15 minutes. Trade data are also
available for the public without delay through commercial information providers (Reuters,
Montel, etc.). The trade data published also include daily volume, highest/lowest prices, open
interest and closing prices.

F.
Anonymity of Trading

All NP trading is effected with anonymity - the NP order book is an "anonymous order
book" that does not disclose the identity of the traders. NP Clearing enters into the trades as
central counterparty as soon as a trade is matched and consequently anonymity is maintained.
Only NP Clearing and the market surveillance department of NP, all subject to a duty of
confidentiality, know the identity of the traders.

G.
Provisions for Disaster Recovery

NP has taken steps to anticipate and control crisis situations that may arise. To ensure the
continuity of NP’s business system, NP has a geographically-separate disaster recovery site that
is capable of being fully operational if the location at Lysaker is unavailable. NP procedures call
for NP operations to be moved to the disaster recovery site if NP is unable to open the market

39 The final trade complaint time is the time specified in the trading schedule by which a complaint by a member
regarding a trade error must be received by NP.
eparate disaster recovery site that
is capable of being fully operational if the location at Lysaker is unavailable. NP procedures call
for NP operations to be moved to the disaster recovery site if NP is unable to open the market

39 The final trade complaint time is the time specified in the trading schedule by which a complaint by a member
regarding a trade error must be received by NP.

David Yeres, Esq.
Page 16

within three hours. The disaster recovery program for NP and NP Clearing include an overall
disaster plan, an operational disaster plan, and a detailed resource and operational plan in the
event of a disaster. This plan provides for the market and clearing to be fully functioning within
24 hours of any inability to open the market.

The main clearing system, Power SECUR, is operated by OMX AB in Stockholm,
Sweden. NP, NP Clearing and OMX have contractual agreements that a disaster recovery site
will be fully operational within 24 hours in the event of a disaster at OMX AB's main operational
site. This disaster recovery site is positioned outside of Stockholm and contains all the
transaction data necessary for a disaster recovery. NP’s matching platform, Power Click, is also
included in this disaster site. All other NP and NP Clearing systems, gateways and WEB servers
are replicated in a disaster site geographically separated from NP Clearing’s headquarters and
comprise a “hot back up” of the main system.

The disaster recovery program also covers the physical availability of staff for the
systems - NP and NP Clearing have staff situated both at Lysaker, Norway and in Stockholm,
Sweden. The entire clearing system may be operated from either of these two sites, as well as by
the operational staffing situated either at the headquarters or in the disaster site. At least once
every third quarter NP and NP Clearing perform a complete disaster site test
availability of staff for the
systems - NP and NP Clearing have staff situated both at Lysaker, Norway and in Stockholm,
Sweden. The entire clearing system may be operated from either of these two sites, as well as by
the operational staffing situated either at the headquarters or in the disaster site. At least once
every third quarter NP and NP Clearing perform a complete disaster site test. All discrepancies
from plans and performance requirements are reported in due course. NP and NP Clearing also
perform an annual evaluation of the requirements and propose any necessary corrective actions.
Pursuant to the disaster recovery plans, these evaluations and tests are documented and the
results subject to approval.40

H.
Adherence to IOSCO Principles

NP represents that European and Norwegian law set very high standards with respect to
the functioning of regulated markets and that the Principles for the Oversight of Screen-Based
Trading Systems for Derivative Products developed by the Technical Committee of the
International Organization of Securities Commissions (IOSCO Principles) and adopted by the
Commission on November 21, 1990,41 are reflected in the legislation applying to Norwegian
regulated markets (the Exchange Act 2007 and further regulations) and regulatory supervisory
policy with respect to such markets. In addition, NP conducts regular self-assessments based on
the ten IOSCO Principles. In this regard, NP has licensed the OMX CLICK electronic trade
matching system. Commission staff previously has found the OM CLICK electronic trade

40 You represent that NP Clearing has experienced occasional operational disturbances during this past year, but
nothing that caused market closure. None of the incidents caused any loss of transaction data, recovery of
operations has been adequate where there is failure, and all key systems are able to handle volume under stress
conditions
reviously has found the OM CLICK electronic trade

40 You represent that NP Clearing has experienced occasional operational disturbances during this past year, but
nothing that caused market closure. None of the incidents caused any loss of transaction data, recovery of
operations has been adequate where there is failure, and all key systems are able to handle volume under stress
conditions. OMX AB’s performance, which contractually requires the system to be capable of handling stress
volume, is continuously monitored by NP Clearing and the key systems are tested regularly.
41 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 Fed. Reg. 48670 (Nov. 21, 1990).

David Yeres, Esq.
Page 17

matching system to comply with the IOSCO Principles.42 Kredittilsynet, NP’s regulatory
authority, represents that it supports the IOSCO Principles and that the principles are
implemented in the legislation applying to Norwegian regulated markets and in NFSA’s
supervisory policy with respect to such markets.

IV.
SETTLEMENT AND CLEARING

A.
Introduction

NP Clearing, granted a license as a clearinghouse on March 5, 2002, in accordance with
the Norwegian Securities Trading Act of 1997 (STA 1997), provides clearing services for both
Exchange and non-Exchange trades (OTC or bilateral) in listed products.43 NP Clearing
commenced operations as a licensed clearinghouse on March 18, 2002,44 and currently has 415
participants, including clearing members and clearing clients from eleven countries. Clearing
operations are governed by the NP Clearing rules
ities Trading Act of 1997 (STA 1997), provides clearing services for both
Exchange and non-Exchange trades (OTC or bilateral) in listed products.43 NP Clearing
commenced operations as a licensed clearinghouse on March 18, 2002,44 and currently has 415
participants, including clearing members and clearing clients from eleven countries. Clearing
operations are governed by the NP Clearing rules. All contracts traded on NP are cleared by
novation of NP Clearing, which provides central counterparty clearing services whereby it enters
into the trades as counterparty to guarantee settlement.45 The trade settlements are made in cash
for Financial Electricity Contracts and by transfer in the relevant registers of Certificates and
Allowances for EU Allowances. Cash settlement and collateralization is conducted through
settlement banks under agreement with NP. Cash settlements occur through bank accounts
opened with the settlement banks.

B.
The NP Clearing System

Before a trade on NP can be cleared, each counterparty must first open a clearing account
with NP Clearing. The account may be that of a clearing member, an NP member that may trade
and clear on its own behalf, or a clearing client, an entity that is required to place any NP trades

42
See CFTC Staff Letters No. 00-93 (September 21, 2000) granting foreign terminal no-action relief to OM
London.
43 In June 2007, the Norwegian Parliament adopted the revised Norwegian Securities Trading Act of 2007 (STA
2007), which ratified most of the provisions of the STA 1997 and implemented certain additional requirements on
regulated markets promulgated, among others, under the European Markets in Financial Instruments Directive
(MiFID).
44 NP clearing’s license was initially limited to clearing derivative contracts with electrical power as the
underlying commodity
Securities Trading Act of 2007 (STA
2007), which ratified most of the provisions of the STA 1997 and implemented certain additional requirements on
regulated markets promulgated, among others, under the European Markets in Financial Instruments Directive
(MiFID).
44 NP clearing’s license was initially limited to clearing derivative contracts with electrical power as the
underlying commodity. On February 4, 2005, the NP Clearing’s license was expanded to include CO2 derivatives,
and, starting from 2006, the NP Clearing license currently comprises all types of commodity derivatives.
45 As shown above, NP Clearing has a counterparty relation to all participants in the market (utilizing a direct
clearing model or DCM). NP represents that NP Clearing expects to introduce a general clearing model (GCM),
where clearing members may clear trades for clients that have no membership or client relationship directly with NP
Clearing. The GCM is expected to become effective in August 2008. Under the DCM, client trades are registered
with the registered NP Clearing accounts established in the name of individual clients that enter into a contract with
NP Clearing. Under the GCM, however, investment firms and credit institutions (and others) will be able to clear
client and proprietary trades through NP Clearing as “General Clearing Members”, without being required to obtain
membership with NP Clearing. Client trades will be registered in joint client accounts or individual client accounts
established in the name of a General Clearing Member, and a contractual relationship will exist between a particular
General Clearing Member and NP Clearing, rather than directly among the individual clients and NP Clearing.
l Clearing Members”, without being required to obtain
membership with NP Clearing. Client trades will be registered in joint client accounts or individual client accounts
established in the name of a General Clearing Member, and a contractual relationship will exist between a particular
General Clearing Member and NP Clearing, rather than directly among the individual clients and NP Clearing.

David Yeres, Esq.
Page 18

through a client representative.46 Each clearing member or clearing client must have a cash
account with one of the approved settlement banks with the base collateral requirements (Initial
Margin) deposited with that bank. The collateral requirements may be satisfied either by cash
deposited on a pledged cash account (pledged in favor of NP Clearing) or by letters of
credit/guaranties of qualified banking institutions non-pledged bank account in combination with
an on-demand bank guarantee). If the applicant cannot provide enough cash as collateral or, for
example, there is doubt as to whether the pledge over the cash account will be valid and/or
upheld in bankruptcy under the laws of the home state of the applicant, NP Clearing requires the
member to provide appropriate letters of credit/guaranties. You represent that NP Clearing’s
rulebook, information technology structure and operational routines are in compliance with all
national regulations and meet or exceed the IOSCO recommendations for clearing systems.

NP Clearing utilizes a modified version of the SECUR clearing system, Power SECUR,
facilitated by OMX Technology AB in Sweden, for the clearing of the NP market. Power
SECUR includes the entire clearing member, clearing client and product database and is utilized
to record information regarding the members’ and clients’ accounts, as well as all cleared
contracts and open interest
stems.

NP Clearing utilizes a modified version of the SECUR clearing system, Power SECUR,
facilitated by OMX Technology AB in Sweden, for the clearing of the NP market. Power
SECUR includes the entire clearing member, clearing client and product database and is utilized
to record information regarding the members’ and clients’ accounts, as well as all cleared
contracts and open interest. NP Clearing has implemented an adjusted version of the SPAN®
risk model (the SPAN model), which is the basis for the daily margin and settlement
calculations. The results of these calculations are daily and automatically transferred to the
settlement banks for settlement and confirmation purposes. All trades registered in ETS are
automatically transferred to Power SECUR after being matched. A similar procedure applies to
off-exchange trades that are registered in the Clearing Desk Application for confirmation. Upon
confirmation, these trades are automatically transferred to Power SECUR for clearing approval
by NP Clearing.

In order to ensure effective and satisfactory control within the clearing system, NP
Clearing has a process for actively identifying, analyzing and addressing its operational risk,
including risks arising from its outsourced operations and other activities. The clearinghouse
establishes strategy and policy as a result of these processes and, among other things, maintains
close contact with, and regularly schedules and attends Joint Operational Steering Group
Committee meetings with OMX Technology AB. NP Clearing also maintains close contact with
the concentration bank, discussed below, and the settlement banks
d operations and other activities. The clearinghouse
establishes strategy and policy as a result of these processes and, among other things, maintains
close contact with, and regularly schedules and attends Joint Operational Steering Group
Committee meetings with OMX Technology AB. NP Clearing also maintains close contact with
the concentration bank, discussed below, and the settlement banks. A settlement bank may be (i)
any bank which is licensed by the Organization for Economic Cooperation and Development
(OECD), has a minimum BBB+ or similar rating by S&P, Moody’s or Fitch, has a membership
with SWIFT© S.C.R.L (SWIFT)47, and has a direct access to the TARGET248 system for

46 As previously discussed, a client representative is a clearing member approved by NP and NP Clearing to trade
on a clearing client’s behalf, and allocate the trade to a client’s account. The clearing client and the client
representative are jointly responsible for meeting the margin requirements calculated by NP Clearing.
47 SWIFT is a co-operative established by and for the financial industry, setting forth standards for bank
communication. SWIFT is the global provider of secure financial messaging services among various banking
institutions.
48 TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system and was
first introduced in 1999 as the unified payment mechanism for all Euro area countries. TARGET2, the successor to
the original TARGET system, commenced operations in May, 2008. TARGET2 provides real-time processing and
settlement of payments in the Euro currency.
banking
institutions.
48 TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system and was
first introduced in 1999 as the unified payment mechanism for all Euro area countries. TARGET2, the successor to
the original TARGET system, commenced operations in May, 2008. TARGET2 provides real-time processing and
settlement of payments in the Euro currency.

David Yeres, Esq.
Page 19

settlement of payments in Euro currency, or (ii) any Norwegian bank with access to the
Norwegian payment and settlement system and a SWIFT membership.

In order to become a settlement bank, a qualifying bank must enter into a Settlement
Bank Agreement with NP Clearing. The settlement bank participates in the reporting and
settlement systems of NP Clearing, which are established in Euro, in order to effect cash
settlement and cash collateralization for transactions cleared by NP Clearing. In its capacity as a
settlement bank, the bank will be entitled to open Euro cash accounts, as applicable, in the name
of clearing members and clearing clients, and to link such accounts to the NP Euro cash system
by opening a settlement account with the concentration bank. Currently, there are 22 settlement
banks.

Nordea Bank Norge ASA (Nordea) functions as NP Clearing’s concentration bank.
Nordea’s responsibility as such is to effect net settlement between the settlement banks’ various
settlement accounts opened with Nordea. Further, Nordea, through its cash management system,
provides information about the clearing members’ and clearing clients’ balance and payment
instructions among the settlement banks, NP Clearing and Nordea. NP Clearing calculates the
settlement amounts for members and the settlement banks. All settlements between NP Clearing
and the settlement banks take place as a daily net settlement on the respective settlement banks’
settlement accounts in Nordea
information about the clearing members’ and clearing clients’ balance and payment
instructions among the settlement banks, NP Clearing and Nordea. NP Clearing calculates the
settlement amounts for members and the settlement banks. All settlements between NP Clearing
and the settlement banks take place as a daily net settlement on the respective settlement banks’
settlement accounts in Nordea. This settlement is operated by Nordea in accordance with
instructions received from NP Clearing. Settlements between NP Clearing and the members
takes place daily on each member’s cash account in the settlement bank in accordance with
instructions from NP Clearing.

C.
Risk Management

The NP Clearing risk management group (RMG) has the overall responsibility to oversee
NP Clearing counterparties, the margin system and the handling of any default. On a daily basis,
the RMG monitors volatility, counterparties, trades and collateral. RMG may, on short notice,
change risk parameters in the margin model based on rapid changes in volatility or choose to call
for extraordinary margin with one hour notice. Watch list participants are monitored daily with
focus on trading and exposure limits or changes in the daily margin call. NP Clearing calculates
a collateral call once daily, based on a net position, and all participants must cover the collateral
call with cash or a bank guarantee by 11:00 a.m. the next business day. All risk parameters are
updated frequently and the volatility is benchmarked every day against the market volatility
y with
focus on trading and exposure limits or changes in the daily margin call. NP Clearing calculates
a collateral call once daily, based on a net position, and all participants must cover the collateral
call with cash or a bank guarantee by 11:00 a.m. the next business day. All risk parameters are
updated frequently and the volatility is benchmarked every day against the market volatility.

NP conducts stress- and back-testing with respect to both the participants and the risk
parameters to identify any risk exposure of each NP clearing member and to ensure that the risk
parameters are optimal to allow NP Clearing to have a sufficient amount of capital in light of
such risk exposure.49 The risk parameters are determined by RMG with regard to historical

49 Pursuant to the IOSCO recommendation that a central counterparty should maintain sufficient financial
resources to withstand, at minimum, a default by the participants to which it has the largest exposure in extreme but
plausible conditions, NP Clearing stress tests a close out of the largest counterparty, or a close out of the third and
fourth largest counterparties combined, to determine the size of recommended clearing capital and a satisfactory
credit rating among the counterparties.

David Yeres, Esq.
Page 20

volatility data. The paying ability (creditworthiness) of a clearing member is then back-tested
against such risk parameters, which allows NP to evaluate the effectiveness and sufficiency of
the risk parameters with respect to trading activity that will occur in the future by applying such
parameters to the available data on the clearing member's past positions at various assumed price
and volatility levels and evaluating whether the proposed risk parameters would have been
sufficient. NP Clearing calculates a margin requirement on a daily basis in order to cover its
counterparty risk.

D
meters with respect to trading activity that will occur in the future by applying such
parameters to the available data on the clearing member's past positions at various assumed price
and volatility levels and evaluating whether the proposed risk parameters would have been
sufficient. NP Clearing calculates a margin requirement on a daily basis in order to cover its
counterparty risk.

D.
The Margin System

The margin system comprises three main elements: the Initial Margin or base collateral,
the daily margin call, and the extraordinary margin call. The Initial Margin, previously
described, covers overnight risk associated with intra-day position changes not covered by the
previous margin calculation and is mainly dependent on the trading pattern and credit rating of
the counterparty. The Initial Margin must be covered by collateral before trading can begin.50
The daily margin call is calculated daily and covers NP Clearing’s credit and price risk in the
case of a member default and the closing out of open positions. The daily margin call consists of
(a) the mark-to-market value (profit/loss) and (b) the scenario or market risk. The extraordinary
margin call provides for special circumstances, including price fluctuations and changes to the
financial situation, and requires that collateral must be posted within one hour. The liquidation
value is the mark-to-market value (profit or loss) of the portfolio. The profit/loss of futures
contracts is settled every day, and the liquidation value is zero. The liquidation value of a power
option is equal to its current market price. The liquidation value of held options is positive,
while the liquidation value of written options is negative.

The SPAN® model is used in the scenario risk calculation
o-market value (profit or loss) of the portfolio. The profit/loss of futures
contracts is settled every day, and the liquidation value is zero. The liquidation value of a power
option is equal to its current market price. The liquidation value of held options is positive,
while the liquidation value of written options is negative.

The SPAN® model is used in the scenario risk calculation. The scenario risk reflects a
portfolio’s market risk during a close-out period, i.e., how large is the worst-case loss a portfolio
would have during a close-out period of five days, if the prices should move up to three standard
deviations of observed historical price movements. The SPAN® model uses up to 16 price and
volatility scenarios in order to simulate worst case losses for futures, forward and option
positions. The worst-case loss is used as the scenario risk for a position in a contract series.

NP Clearing calculates a separate margin call for the net positions in each contract series.
The SPAN® model allows for netting of margins inter alia for contracts with opposing positions
and overlapping delivery periods, or for different delivery periods with a certain degree of
correlation.51 In special circumstances, NP Clearing can change the risk parameters in SPAN®,
or, as noted above, call for extraordinary margin, with one hour’s notice. Acceptable collateral

50 The purpose of the Initial Margin is similar to the default fund contribution at some other cleared markets. In
contrast however, the Initial Margin only covers the risk of the specific clearing member and cannot be used to
cover other members’ losses.
51 The scenario risk is similar to the initial margin in other cleared markets, but usually the initial margin is semi-
fixed, while the scenario risk varies daily with changes in prices and volatility.
und contribution at some other cleared markets. In
contrast however, the Initial Margin only covers the risk of the specific clearing member and cannot be used to
cover other members’ losses.
51 The scenario risk is similar to the initial margin in other cleared markets, but usually the initial margin is semi-
fixed, while the scenario risk varies daily with changes in prices and volatility.

David Yeres, Esq.
Page 21

to NP Clearing is cash on a pledged cash account and/or an on-demand guarantee according to a
standard template. The cash account will be opened in a bank approved by NP Clearing.

E.
Default Procedures

The collateral call for the previous trading day must be covered by the clearing member
no later than 11.00 a.m. CET on the current trading day. If the deadline is not met, NP Clearing
will declare a default according to the NP Clearing rules and will take all necessary steps to
reduce its counterparty risk.

Pursuant to the NP Clearing rules, RMG has the initial responsibility to handle any
defaults and different responsive actions are taken, depending on the seriousness of the default.
RMG instructs the member to take whatever steps are necessary to remove the cause of the
default and may subsequently cancel the default situation.52 Other possible actions include an
“administrative close out,” under which the participant is forced to close out a position to reduce
its exposure risk but may still operate in the market under the supervision of the clearinghouse.
In the most severe default situation, NP Clearing would exclude the participant from the market
and take over the portfolio and close it out. In both cases, a special default committee, a pre-
defined group whose members have different pre-defined areas of responsibility, would handle
the default. The default committee’s role is to close down a portfolio and minimize the loss for
both the defaulting party and the clearinghouse, with a minimum affect on the market prices
from the market
and take over the portfolio and close it out. In both cases, a special default committee, a pre-
defined group whose members have different pre-defined areas of responsibility, would handle
the default. The default committee’s role is to close down a portfolio and minimize the loss for
both the defaulting party and the clearinghouse, with a minimum affect on the market prices.

In the case of a default by a clearing member, losses are initially covered by the collateral
posted by the defaulting member. Pursuant to the NP Clearing rules, NP Clearing may proceed
with a number of available remedies including, among others, suspension of the clearing member
from NP Clearing; entering into close-out trades for the clearing member’s account for some or
all of the member’s open positions; transference of its clearing clients’ clearing accounts to
another client representative; and/or termination of the clearing member’s membership. Losses
exceeding the collateral are covered by a combination of NP Clearing’s equity and default
insurance. NP Clearing is required by the STA 2007 to maintain a minimum of NOK 50 million
($9.7 million) in its own funds at all times. NP Clearing’s share capital is NOK 500 million
($97.3 million). In addition, NP Clearing has default insurance coverage with Radian Insurance
Inc. in the amount of U.S. $110 million.

V.
THE REGULATORY REGIME IN NORWAY

A.
Regulation of NP

The regulatory requirements for NP are primarily set forth by the Exchange Act 2007, a
continuance of the Exchange Act of 2001 which also incorporates additional rules and
requirements relating to regulated markets and exchanges under the MiFID.53 The stated

52 A minor default always results in an evaluation of the need for an extraordinary margin call
atory requirements for NP are primarily set forth by the Exchange Act 2007, a
continuance of the Exchange Act of 2001 which also incorporates additional rules and
requirements relating to regulated markets and exchanges under the MiFID.53 The stated

52 A minor default always results in an evaluation of the need for an extraordinary margin call.
53 Section 3 (i) of the Exchange Act 2007 sets out the definition of a regulated market which comprises both
licensed exchanges and other regulated market places: “(1) [A] ‘regulated market’ shall mean an undertaking

David Yeres, Esq.
Page 22

that
”54

purpose of the Exchange Act is to “provide the basis for markets for financial instruments
are efficient and orderly and inspire confidence.

The European Union initial approach to the regulation of “regulated markets” was found
in Council Directive 3/22/EEC of May 10, 1993, on investment services in the securities field –
Investment Services Directive (ISD). Among other things, ISD introduced the concept of the
regulated market, aiming to harmonize certain conditions governing the operation of regulated
markets. Further, ISD sets out some basic high-level provisions governing the organization and
conduct of business requirements for investment firms, creating a “European Passport” for these
firms. The European passport means that restrictive legislation in member states preventing
cross frontier branching and freedom of services will have to be dismantled, allowing authorized
European Union investment firms to operate across borders within the European Union
rning the organization and
conduct of business requirements for investment firms, creating a “European Passport” for these
firms. The European passport means that restrictive legislation in member states preventing
cross frontier branching and freedom of services will have to be dismantled, allowing authorized
European Union investment firms to operate across borders within the European Union. MiFID
(Council Directive 2004/39), incorporated into Norwegian law by the Exchange Act 2007 and
STA 2007,55 has the same basic purpose as ISD, but it makes changes to the regulatory
framework to reflect developments in financial services and markets since the ISD was
implemented.56

The Norwegian regulatory regime went further than the ISD and addressed a number of
broad public policy objectives, including protection of market price integrity in regulated
markets and establishment of fair trade practices, now also applicable on a European level under
the MiFID. The prohibitions on insider trading and market manipulation and the general ban on
unfair market practices for commodity derivatives promulgated under the STA 2001, as well as
the Exchange Act 2001 requirement that regulated markets (including NP) establish proper
market surveillance, were motivated by these policy concerns. MiFID introduced similar
requirements on a European level, now implemented in the Exchange Act 2007 and STA 2007.

Further, there are specific provisions in the Exchange Act 2007 requiring exchange
activities to be carried out with due consideration to the principles of efficiency, neutrality and
equal treatment of all participants, as well as to ensure that the market offers a high degree of
transparency and the process of price quotation reflects the current market value of the
instruments listed
7.

Further, there are specific provisions in the Exchange Act 2007 requiring exchange
activities to be carried out with due consideration to the principles of efficiency, neutrality and
equal treatment of all participants, as well as to ensure that the market offers a high degree of
transparency and the process of price quotation reflects the current market value of the
instruments listed. In accordance with the principles-based regulatory approach practiced in
Norway, Section 22 of the Exchange Act 2007 states that an exchange is required to operate such

authorized under section 4 [of the Exchange Act 2007] that decides to list financial instruments in the market and
which organizes or operates a multilateral market for regular trading in the listed instruments in accordance with
laws, regulation and non-discretionary trading rules issued by that market. (2) [An] ‘exchange’ shall mean a
regulated marked licensed under section 33 [of the Exchange Act 2007].”
54 Section 1 of the Exchange Act 2007.
55 The Exchange Act 2001 and 2007 are also partly based on the guidelines issued by the Committee of European
Securities Regulators (CESR) for regulated markets.
56 Under the MiFID, as implemented in Norway to date, investment firms are subject to a full array of detailed
customer protection requirements, including requirements for disclosure, funds protection and trading abuse
prevention. However, these requirements do not presently apply to intermediaries for commodities derivatives.
Thus, an Exchange member that is engaged solely in commodities derivatives intermediation, as opposed to other
financial investment, would not be subject to those requirements.
customer protection requirements, including requirements for disclosure, funds protection and trading abuse
prevention. However, these requirements do not presently apply to intermediaries for commodities derivatives.
Thus, an Exchange member that is engaged solely in commodities derivatives intermediation, as opposed to other
financial investment, would not be subject to those requirements.

David Yeres, Esq.
Page 23

systems for carrying out trading, price quotation, transparency, information distribution and
market surveillance as are necessary in relation to the manner in which the business activities are
organized. NP’s compliance with these principles is evaluated at the judgment of the NFSA.

Among the other provisions of the Exchange Act 2007 rules and conditions applicable to
the business operations of NP are the following: (a) the exchange must be organized as a public
limited liability company; (b) the exchange’s articles of association and amendments thereto
must be approved by the Ministry of Finance; (c) the persons who effectively run the exchange
operations must have relevant experience and be of good repute; (d) the board of directors of the
exchange must ensure that guidelines for the internal control of the exchange are laid down; (e)
employees and officers of an exchange are subject to confidentiality obligations; (f) as a rule, no
one can represent more than ten percent of the share capital or the votes of an exchange; (g) in a
general shareholder meeting, no one can vote for more than ten percent of the votes of the
company or for more than 20 percent of the votes represented in the general meeting; (h) an
exchange must have funds appropriate to the operations conducted; (i) the exchange must have
sufficient liquid/current assets or access to such assets taking into consideration the business of
the exchange at all times; and (j) the exchange must have rules supplementing the law
rcent of the votes of the
company or for more than 20 percent of the votes represented in the general meeting; (h) an
exchange must have funds appropriate to the operations conducted; (i) the exchange must have
sufficient liquid/current assets or access to such assets taking into consideration the business of
the exchange at all times; and (j) the exchange must have rules supplementing the law.

In addition to the Exchange Act 2007, the conduct of trading on NP is governed by other
broad prohibitions on insider trading, price manipulation and improper business methods
generally. Norway is signatory to the European Economic Area (EEA) Treaty57 with the
European Union and, accordingly, the financial directives of the European Union are applicable
in Norway. Most important in this respect is MiFID and the Market Abuse Directive,58
implemented in Norway by the STA 2007, and supplemented by European Commission
Directives and European Commission Regulations that also apply to Norway. The Market
Abuse Directive, which extends to commodity derivatives, prohibits, among other things, misuse
of insider information, market manipulation and the use of unreasonable business methods, and
provides for criminal penalties for certain actions. In furtherance of this prohibition, the
Norwegian Ministry of Finance issued regulations that include a list of “red flags” concerning
market manipulation.

The avoidance of insider trading and market manipulation is a key objective for the
NFSA in its supervision of the financial markets. NFSA has taken an active stance in this
respect in the Norwegian market, and is also actively involved in the works of CESR, the
organization of European financial regulators. CESR has addressed market manipulation and the
types of action that CESR members consider to constitute market manipulation
rket manipulation is a key objective for the
NFSA in its supervision of the financial markets. NFSA has taken an active stance in this
respect in the Norwegian market, and is also actively involved in the works of CESR, the
organization of European financial regulators. CESR has addressed market manipulation and the
types of action that CESR members consider to constitute market manipulation. You represent
that NFSA is following the market manipulation guidelines as set forth by the CESR.59

57 The EEA Treaty is an agreement among member states of European Free Trade Association (EFTA), the
European Community and all member states of the EU, which created the EEA and allowed EFTA member states
(which include Iceland, Norway, Switzerland, and Liechtenstein) to participate in the European Single Market
without joining the EU.
58 Directive 2003/6/EC on insider dealing and market manipulation.
59 You represent that NP monitors the function of its markets, but does not have the primary responsibility for
monitoring the relationship between market intermediaries and their clients. Under Norwegian law, direct
regulation of the intermediaries, to the extent that they are licensed investment firms, is the NFSA’s responsibility.

David Yeres, Esq.
Page 24

With respect to financial requirements, the Exchange Act 2007, as noted above, sets out
only a general capital requirement stating that NP as an exchange at all times shall have its own
funds which provide a satisfactory level of capital adequacy based on the business of the
Exchange. Various factors must be considered when assessing the exchange’s capital adequacy,
including the risk of the business of the exchange, contractual risk, operational risk and other
special risks to which the exchange is exposed
ement stating that NP as an exchange at all times shall have its own
funds which provide a satisfactory level of capital adequacy based on the business of the
Exchange. Various factors must be considered when assessing the exchange’s capital adequacy,
including the risk of the business of the exchange, contractual risk, operational risk and other
special risks to which the exchange is exposed. Further, the Exchange Act 2007 provides that an
exchange shall have a reserve of liquidated assets, or access to such assets, which are adequate
when taking into consideration the business of the exchange. NP’s current share capital is NOK
240 million ($47 million).

B.
Regulation of NP Clearing

The clearing business of NP Clearing is mainly regulated under the Norwegian Securities
Trading Act 2007, pursuant to which clearing operations may only be conducted by a
clearinghouse with an authorization from the Ministry of Finance. Clearing is defined in the
STA 2007 as business activity which consists of entering as a party into, or otherwise
guaranteeing the fulfillment of, agreements related to trading in certain financial instruments
(including derivatives) and commitments related to securities lending.

Among the conditions of the STA 2007 which must be satisfied before authorization as a
clearinghouse under the STA 2007 may be granted and maintained are the following: (a) the
clearinghouse must be organized as a public limited company; (b) the persons who effectively
run the clearing operations must have relevant experience and be of good repute; (c)
authorization as a clearinghouse may be denied if a shareholder with a substantial shareholding
in the clearinghouse is not deemed fit to ensure sound and prudent management of the
clearinghouse;60 (d) the clearinghouse must have a control committee, appointed by the general
membership at its annual meeting, which shall oversee the institution’s operations and ensure
that the clearinghouse complies with laws, regulations, terms and condit
if a shareholder with a substantial shareholding
in the clearinghouse is not deemed fit to ensure sound and prudent management of the
clearinghouse;60 (d) the clearinghouse must have a control committee, appointed by the general
membership at its annual meeting, which shall oversee the institution’s operations and ensure
that the clearinghouse complies with laws, regulations, terms and conditions as well as the
company’s articles of association; (e) the general meeting must lay down instructions for the
control committee, which must be approved by the NFSA; (f) no one can own more than 20 per
cent of the share capital of a clearinghouse;61 (g) a clearinghouse must have a level of funds that
is appropriate to the operations conducted by the clearinghouse (the minimum requirement is
NOK 50 million, or approximately $9.7 million);62 (h) a clearinghouse may only pursue activities
which are naturally related to the performance of clearing operations (the NFSA may request the
clearinghouse to keep business-related activities separate from the clearing business); (i) a
clearinghouse must ensure that it has sufficient security to guarantee the performance of
contracts that it enters into as a party or otherwise guarantees the performance of (the

60 Acquisition of a qualifying holding of the clearinghouse or any increase in the qualifying shareholding whereby
a shareholder’s proportion of the share capital or voting rights reaches or exceeds 20%, 33% or 50% may only take
place after the NFSA been notified in advance.
61 The Ministry of Finance has exempted NP Clearing from this requirement.
62 An amount equivalent to a minimum of 50 percent of the company’s own funds must comprise deposits and
unconditional drawing rights in credit institution at all times.
r’s proportion of the share capital or voting rights reaches or exceeds 20%, 33% or 50% may only take
place after the NFSA been notified in advance.
61 The Ministry of Finance has exempted NP Clearing from this requirement.
62 An amount equivalent to a minimum of 50 percent of the company’s own funds must comprise deposits and
unconditional drawing rights in credit institution at all times.

David Yeres, Esq.
Page 25

clearinghouse shall calculate and require the provision of such security on a continuous basis);
and (j) employees and officers of a clearinghouse are subject to confidentiality obligations. NP
Clearing’s current share capital is NOK 500 million ($97.3 million).

C.
Supervision by Kredittilsynet/NFSA

NP Clearing and NP are both subject to the supervision of Kredittilsynet, the Norwegian
Financial Services Authority, which is an independent government agency that implements and
expands upon laws and decisions emanating from the Parliament (Stortinget), the Government
and the Ministry of Finance, and is also guided by international standards for financial
supervision and regulation.63 Kredittilsynet’s aim is to ensure that financial institutions and
markets function securely and efficiently in the best interest of society and users of financial
services, and that institutions and markets have an appropriate regulatory environment.
According to the Norway Act on the Supervision of Credit Institutions, Insurance Companies
and Securities Trading etc., Kredittilsynet shall “ensure that the institutions it supervises operate
in an appropriate and proper manner in accordance with law and provisions issued pursuant to
law and with the intentions underlying the establishment of the institution, its purpose and
articles of association.”

Kredittilsynet is headed by a Board of Directors comprised of five members and two
alternates appointed for a four-year period by the Ministry of Finance
ons it supervises operate
in an appropriate and proper manner in accordance with law and provisions issued pursuant to
law and with the intentions underlying the establishment of the institution, its purpose and
articles of association.”

Kredittilsynet is headed by a Board of Directors comprised of five members and two
alternates appointed for a four-year period by the Ministry of Finance. Day-to-day operations
are overseen by the Director General, who is also appointed by the Ministry of Finance and is
supplemented by a management team of four deputy directors general, a general counsel and a
head of communications. Kredittilsynet has approximately 200 employees and is organized in
three supervisory departments, an administrative department and support functions at various
levels.

Through its supervision of enterprises and markets, Kredittilsynet strives to promote
financial stability and orderly market conditions and to instill confidence that financial contracts
will be honored and services performed as intended. Kredittilsynet is responsible for the
supervision of banks, finance companies, mortgage companies, insurance companies, pension
funds, investment firms, securities fund management and market conduct in the securities
market, stock exchanges and authorized market places, settlement centers and securities
registers, estate agencies, debt collection agencies, external accountants and auditors. To achieve
its goals Kredittilsynet engages in a wide range of oversight activities, complying with
internationally recognized standards and methods of supervision, including both on- and off-site
inspections and supervision.

The supervision of NP Clearing by Kredittilsynet is authorized in the STA 2007 and the
supervision of NP by Kredittilsynet is manifested in the Exchange Act 2007.64 Both NP Clearing

63 Kredittilsynet was established in 1986 as the first integrated supervisory authority for the financial markets in
the western world
ervision, including both on- and off-site
inspections and supervision.

The supervision of NP Clearing by Kredittilsynet is authorized in the STA 2007 and the
supervision of NP by Kredittilsynet is manifested in the Exchange Act 2007.64 Both NP Clearing

63 Kredittilsynet was established in 1986 as the first integrated supervisory authority for the financial markets in
the western world.
64 NP is subject to the same rules and regulatory regime as the Oslo Stock Exchange, and thus is on the list of
Norwegian-regulated markets reported to the European Commission in accordance with MiFID.

David Yeres, Esq.
Page 26

and NP are at all times obligated to furnish Kredittilsynet with such information as the NFSA
may require about matters related to their respective business and activities. In particular,
Kredittilsynet monitors the capital levels of both institutions and NP and NP Clearing are
required to report key figures in semi-annual and annual reports. NP and NP Clearing are
required to conduct and report to Kredittilsynet annual risk evaluations and audits. Kredittilsynet
also approves NP rules and rule changes prior to implementation and may also, on its own
initiative and without notification, undertake on-site inspections.

Kredittilsynet periodically performs reviews of NP and NP Clearing to ensure that they
meet the legal requirements under their licenses and applicable laws. These reviews typically
begin with written questions and document requests, followed by on-site meetings where
Kredittilsynet may present additional questions. The reviews are documented in a formal report
that the supervised institution is allowed to comment on before the conclusions are made public.
This process of review is, to a large extent, standardized for all regulated entities (banks,
insurance companies, investment firms, exchanges, clearinghouses etc.) and carried out by
specialized teams at Kredittilsynet.

D
ent additional questions. The reviews are documented in a formal report
that the supervised institution is allowed to comment on before the conclusions are made public.
This process of review is, to a large extent, standardized for all regulated entities (banks,
insurance companies, investment firms, exchanges, clearinghouses etc.) and carried out by
specialized teams at Kredittilsynet.

D.
Regulatory Regime Governing Intermediaries

Section 3-9 of the STA 2007, which prohibits unfair business methods in trading in
financial instruments and is applicable to all Norwegian market participants including non-
licensed intermediaries/brokers handling client orders, regulates trade practice matters with
respect to trades in financial instruments including exchange trades and OTC trades in NP’s
listed products. Provisions of the STA 2007 applicable to investment firms require that such
firms implement procedures and arrangements which provide for the prompt, fair and
expeditious execution of client orders relative to other client orders or orders for the firm’s own
account. Client orders are to be executed in the order received, without undue delay, and
according to fair criteria where clients and proprietary orders are not treated differently without
proper cause. Investment firms are required to make and retain voice recordings in connection
with their provision of investment and ancillary services and to retain other types of
documentation related to such services. Further, investment firms in Norway are required to
report to Kredittilsynet as quickly as possible, and no later than the close of the following
working day, details of transactions in any financial instruments traded on a regulated market.
The reports must include details of the names and numbers of the financial instruments bought or
sold, the quantity, the dates and times of execution and the transaction prices and the identity of
the investment firms concerned
et as quickly as possible, and no later than the close of the following
working day, details of transactions in any financial instruments traded on a regulated market.
The reports must include details of the names and numbers of the financial instruments bought or
sold, the quantity, the dates and times of execution and the transaction prices and the identity of
the investment firms concerned. Section 9-11(3) of the STA 2007, which applies to NP clearing
members that are authorized investment firms, expressly requires that the customer accounts and
proprietary accounts of such investment firms be segregated.

In addition, the Norwegian Securities Trading Regulations 2007 (STR 2007) imposes,
among other things, strict recordkeeping requirements with respect to reception and execution of
client orders. Investment firms carrying out client orders are required to, among other things:
(a) promptly and accurately record and allocate client orders; (b) execute otherwise comparable
client orders promptly and sequentially unless the characteristics of the order or prevailing
market conditions make it impracticable to do so, or the interests of the client require otherwise;

David Yeres, Esq.
Page 27

enforcement.68 Thus, for example, although the STA 2007 and STR 2007 include strict
(c) inform the client about any material difficulty relevant to the proper execution of the order
promptly upon becoming aware of the difficulty; (d) where responsible for overseeing the
settlement of an executed order, take reasonable steps to ensure that any client funds received in
the settlement are promptly and correctly delivered to the appropriate client’s account; and (e)
not misuse, and take reasonable steps to prevent the misuse of, information relating to pending
client orders. In compliance with the STR 2007, most Norwegian investment firms maintain
electronic records of all customer orders and trades
reasonable steps to ensure that any client funds received in
the settlement are promptly and correctly delivered to the appropriate client’s account; and (e)
not misuse, and take reasonable steps to prevent the misuse of, information relating to pending
client orders. In compliance with the STR 2007, most Norwegian investment firms maintain
electronic records of all customer orders and trades.

Norwegian law strictly prohibits intermediaries (as well as others) from engaging in
insider trading practices. The generally applicable provisions of the STA 2007, for instance,
require persons possessing inside information to handle such information with due care, to not
disclose the information to unauthorized persons, and to not give advice about trading in
financial instruments to which the information relates. In addition, persons possessing such
information may neither directly nor indirectly, for their own or a third party account, purchase
or sell financial instruments or incite others to do so. The general prohibition on insider trading
prohibits any intermediary or a client with prior knowledge of an order placed by another client
to trade in advance of the order’s execution, provided the initial client order is likely to have an
effect on the market.65 All regulatory insider trading provisions are enforced by NSFA and NP.
The STA 2007 also contains a general prohibition on market manipulation, as well as attempts to
manipulate, applicable to all persons, including both licensed and unlicensed intermediaries.66
This provision is also enforced by NSFA and NP.67

Finally, as previously noted, under the Norwegian law and consistent with general
European practice, a market place or exchange is no

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/CFTC_L08_14. Check the current official text before relying on it. Not legal advice.