The Division of Market Oversight issued a letter granting no-action relief to permit the International Maritime Exchange ASA (Imarex or the Exchange) to make its electronic trading and order matching system (Trayport)...

Summary: The Division of Market Oversight issued a letter granting no-action relief to permit the International Maritime Exchange ASA (Imarex or the Exchange) to make its electronic trading and order matching system (Trayport), and its Application Program Interface (API), available via direct access to Exchange trading 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 Imarex trading members in the U.S. that qualify as “eligible contract participants” (ECP) (as defined in Section 1a(12) of the CEAct) trading for their proprietary accounts; Imarex trading members that are registered as futures commission merchants (FCM) that submit orders to Trayport for execution from or on behalf of U.S. customers that qualify 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 Trayport from or on behalf of U.S. customers that qualify as ECPs; and Imarex trading 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 ECPs or accounts of U.S. customers that qualify as 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 Trayport.

ion 4.13 or 4.14, that submit orders for execution on behalf of U.S. pools they operate that qualify as ECPs or accounts of U.S. customers that qualify as 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 Trayport.

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. 10-20

No-Action

May 11, 2010

Division of Market Oversight

Carolyn H. Jackson, Esq.

Counsel

Allen & Overy LLP

One Bishops Square

London E1 6AD United Kingdom

Re:

International Maritime Exchange ASA, Request for No-Action Relief from

Contract Market Designation and Derivatives Transaction Execution Facility Registration

Requirements

Dear Ms. Jackson:

This is in response to your letter dated September 30, 2009 to the Division of Market

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

By this correspondence, you request, on behalf of the International Maritime Exchange ASA

(Imarex or the Exchange) that the Division confirm that it will not recommend that the

Commission take enforcement action against Imarex or its members2 if Imarex 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 trading members in the United States3 of Imarex’s electronic trading and order matching

1

Letter from Carolyn H

tion 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 trading members in the United States3 of Imarex’s electronic trading and order matching

1

Letter from Carolyn H. Jackson, Esq., Allen & Overy LLP, to Steven Schoenfeld, Director, Division of Market

Oversight, Commodity Futures Trading Commission (September 30, 2009).

2

For purposes of this letter and the relief provided herein, references to a member of Imarex shall include any

affiliate of any Imarex member that has been granted access by the Imarex member to the trading system. An

affiliate of an Imarex member shall mean any person, as that term is defined in section 1a(28) of the Commodity

Exchange 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. Imarex represents that, as a

condition of access to the trading system, such affiliates would be required to comply with the Imarex Rulebook and

that Imarex members remain responsible to Imarex for ensuring their affiliates’ compliance.

3

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

United States, its territories and possessions.

x represents that, as a

condition of access to the trading system, such affiliates would be required to comply with the Imarex Rulebook and

that Imarex members remain responsible to Imarex for ensuring their affiliates’ compliance.

3

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

United States, its territories and possessions.

Carolyn H. Jackson, Esq.

Page 2

system (Trayport) and application program interface (API) (collectively, the trading system).

(no-action request).

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

from the United States to trading members that:

1.

trade in the U.S. for their proprietary accounts, as defined in Commission Regulation

1.3(y), on Trayport and Market Place Services (MPS)5 and that qualify as “eligible contract

participants” as defined in Section 1a(12) of the Act (ECP);6

2.

are registered with the Commission as futures commission merchants (FCM) or are

exempt from such registration pursuant to Commission Rule 30.10 (Rule 30.10 Firms)7 and that

submit orders for U.S. customers8 that qualify as ECPs to the trading system for execution;

3.

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

trading advisors (CTA), or are exempt from such registration pursuant to Commission Rules 4.13

or 4.14, and that submit orders for execution on behalf of U.S. pools they operate that qualify as

4

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

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

5

MPS is Imarex’s telephone-based service for trading. The Division recognizes that MPS, as described below, is

not direct access, but is describing MPS in this relief letter based upon its inclusion in the request for no-action

relief

rein, the term “direct access” refers to the explicit grant of

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

5

MPS is Imarex’s telephone-based service for trading. The Division recognizes that MPS, as described below, is

not direct access, but is describing MPS in this relief letter based upon its inclusion in the request for no-action

relief.

6

As further discussed below, because Imarex currently operates as an Exempt Commercial Market (ECM)

pursuant to Section 2(h)(3) of the Act, Imarex members currently must qualify as “eligible commercial entities” as

defined in Section 1a(11) of the Act (ECE). Imarex represents that it intends, subsequent to the issuance of this no-

action relief letter, to modify its membership criteria for both U.S. and non-U.S. trading members.

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 (2009).

8

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).

ormation 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 (2009).

8

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).

Carolyn H. Jackson, Esq.

Page 3

ECPs or accounts of U.S. customers that qualify as 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.

are registered with the Commission as FCMs or are Rule 30.10 Firms that accept orders

through automated order routing systems (AORS)9 from U.S. customers that qualify as ECPs for

transmission to the trading system.10

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).11 The Division has

reviewed Imarex’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.12

In connection with its no-action request, Imarex has forwarded the following information

to the Division:

•

General information about Imarex and the Imarex Group, including its history, location

and organization;

•

Information about membership criteria;

9

For purposes of this letter, the term “AORS” means any system of computers, software

their trading systems from the

U.S.12

In connection with its no-action request, Imarex has forwarded the following information

to the Division:

•

General information about Imarex and the Imarex Group, including its history, location

and organization;

•

Information about membership criteria;

9

For purposes of this letter, the term “AORS” means any system of computers, software or other devices that

allows entry of orders through another party (an intermediary) for transmission to an Imarex computer, the Imarex

API, or other automated device where, without substantial human intervention, trade matching or execution takes

place.

10

Imarex has requested a no-action position to provide immediate, interim relief for it 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. Imarex has accordingly requested 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 Imarex would be

subject to those rules or guidelines in such an event. Imarex has additionally acknowledged 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.

11

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).

12 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.

11

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).

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

32829, 32830 (June 18, 1999).

Carolyn H. Jackson, Esq.

Page 4

•

Information about various aspects of Imarex’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 Imarex’s home country regulatory regime and information regarding

Imarex’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 Imarex and its

regulator are parties;

•

Imarex and NOS Clearing ASA (NOS Clearing or NOS) Rulebooks;

•

Imarex’s Articles of Association

•

The Norwegian Act on Regulated Markets of June 29, 2007 (Stock Exchange Act);

•

The Stock Exchange Regulations;

•

The Norwegian Securities Trading Act of June 29, 2007 (STA 2007);

•

Regulations to the Securities Trading Act (Securities Trading Regulations);

•

Commission Order dated January 11, 2002 re NOS: Recognition of Multilateral Clearing

Organization;

•

Certification of an authorized representative of Imarex as to the truth and completeness of

the material facts set forth in the request for no-action relief; and

•

An undertaking of authorized representatives of Imarex to notify the Commission staff if,

prior to the issuance of no-action relief requested, any material representation made in such

request ceases to be true and complete

•

Certification of an authorized representative of Imarex as to the truth and completeness of

the material facts set forth in the request for no-action relief; and

•

An undertaking of authorized representatives of Imarex to notify the Commission staff if,

prior to the issuance of no-action relief requested, any material representation made in such

request ceases to be true and complete.

The Division also received separately from Finanstilsynet, the Norwegian Financial

Supervisory Authority (NFSA), Imarex’s regulatory authority, a representation regarding

information-sharing with the CFTC in connection with the granting of direct access to Imarex’s

trading system from the U.S. This representation is described below in section VII.

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

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

the regulatory regime in Norway, and the information-sharing arrangements applicable to Imarex

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 Imarex's representations and information

Carolyn H. Jackson, Esq.

Page 5

provided by Imarex and has not conducted an independent review to confirm their accuracy.13

Commission staff, however, did conduct a due diligence on-site visit at Imarex and NOS

Clearing on January 12, 2010, to meet Exchange and clearing staff and discuss issues relevant to

the request for no-action relief with respect to Imarex’s activities. Separately, Commission staff

met with representatives of Imarex’s regulatory authority on January 13, 2010, and discussed,

among other things, the Norwegian regulatory approach to the licensing of regulated markets,

such as Imarex, and ongoing oversight thereof.

I.

GENERAL INFORMATION REGARDING IMAREX

A

s relevant to

the request for no-action relief with respect to Imarex’s activities. Separately, Commission staff

met with representatives of Imarex’s regulatory authority on January 13, 2010, and discussed,

among other things, the Norwegian regulatory approach to the licensing of regulated markets,

such as Imarex, and ongoing oversight thereof.

I.

GENERAL INFORMATION REGARDING IMAREX

A.

Imarex and the Imarex Group

Imarex is a Norwegian public limited company authorized by the Norwegian Ministry of

Finance as a “regulated market” under the Norwegian Act on Regulated Markets of June 29,

2007 (the Stock Exchange Act).14 Imarex is regulated by Finanstilsynet, the Norwegian

Financial Supervisory Authority. Imarex lists cash-settled derivatives contracts related to prices

quoted for freight and bunker fuel, and acts as a central market for trading in the listed products.

Imarex, established on the initiative of the former Chief Executive Officer (CEO) of the Imarex

Group, a former freight broker, with the support of several major Norwegian shipping

companies, was incorporated as a public limited liability company under the laws of Norway on

February 25, 2000. Imarex was licensed by the Ministry of Finance upon recommendation by

the NFSA pursuant to the Exchange Act of 2001 and became operational as a regulated market in

March 2002.15 Initially tanker derivatives were traded, but eventually dry cargo and bunker fuel

derivatives were added

mpanies, was incorporated as a public limited liability company under the laws of Norway on

February 25, 2000. Imarex was licensed by the Ministry of Finance upon recommendation by

the NFSA pursuant to the Exchange Act of 2001 and became operational as a regulated market in

March 2002.15 Initially tanker derivatives were traded, but eventually dry cargo and bunker fuel

derivatives were added.

Imarex is wholly owned by Imarex ASA (the Imarex Group), a Norwegian public limited

liability company whose shares are listed on the Oslo Stock Exchange and which includes, in

addition to Imarex, the main wholly-owned subsidiaries NOS Clearing, Nena AS16 and Spectron

Group Limited (Spectron).17 Imarex currently employs approximately 40 people and is managed

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

made by Imarex 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.

14

The Stock Exchange Act superseded the Norwegian Stock Exchange Act of 2001 (the Exchange Act 2001)

under which Imarex first became subject to regulation as a “regulated market.” Imarex, as a public limited liability

company, is regulated by the Act on Public Limited Liability Companies 1997 No 45. Its operation as a regulated

market, however, is regulated by the Stock Exchange Act.

15 Prior to its licensing, Imarex operated as an unregulated trading facility.

16 Nena AS is an independent European energy analysis entity that provides price prognoses and fundamental

market analyses to major utilities and trading entities throughout Europe

Public Limited Liability Companies 1997 No 45. Its operation as a regulated

market, however, is regulated by the Stock Exchange Act.

15 Prior to its licensing, Imarex operated as an unregulated trading facility.

16 Nena AS is an independent European energy analysis entity that provides price prognoses and fundamental

market analyses to major utilities and trading entities throughout Europe.

17 In 2008 Imarex ASA acquired the London-based Spectron, which operates one of the world’s largest

marketplaces for energy, thereby substantially increasing the footprint of the Imarex Group in the commodity

Carolyn H. Jackson, Esq.

Page 6

by a Managing Director (MD), who has held the position since January 2008 and has over 25

years of experience in the financial derivatives markets in London and Oslo, working primarily

with financial derivatives in the oil and energy sector.

Imarex is governed by a five-member Board of Directors (Board), the minimum number

mandated by the Stock Exchange Act, which also requires that all directors have relevant

qualifications and professional experience, have no criminal record, and have not behaved in

such a way as to suggest an inability to act properly as a director.18 All members of the Board

have been evaluated and have been found to be fit and proper for their positions by

Finanstilsynet. The directors are elected at the annual general shareholders meeting of Imarex by

Imarex Group, the 100% owner of Imarex. The Imarex Group Board has eight members, of

which three are elected by and among the employees of Imarex Group and the remaining five are

elected by majority vote at the general shareholders meeting of Imarex Group.19 The Imarex

Group Board complies with customary corporate governance requirements for listed companies

shareholders meeting of Imarex by

Imarex Group, the 100% owner of Imarex. The Imarex Group Board has eight members, of

which three are elected by and among the employees of Imarex Group and the remaining five are

elected by majority vote at the general shareholders meeting of Imarex Group.19 The Imarex

Group Board complies with customary corporate governance requirements for listed companies.

Since Imarex was founded, the Imarex Group has grown from a small Norwegian-based

freight derivatives market place to a large diversified group providing an electronic trading

platform and clearing for physical and derivative commodity transactions worth over $200

billion per year and is one of the fastest growing commodity markets in the world. In 2008, the

Imarex Group reported revenues of Norwegian Kroner (NOK) 660 million (approximately $116

million) and earnings before interest, taxes, depreciation and amortization of NOK 114 million

(approximately $20 million). Of this, Imarex’s revenue was NOK 132 million (approximately

$23 million) and its profit before tax was NOK 23 million (approximately $4 million).

The trading and clearing customers of the Imarex Group include all the relevant

commodity trading houses as well as the world’s largest ship owners, oil refiners, banks and

financial investment institutions. The Imarex Group is headquartered in Oslo, and has

subsidiaries in England, Singapore, Germany, Switzerland, Italy, Norway, and the U.S. In

addition to the Imarex-operated regulated marketplace for freight derivatives, the Imarex Group

includes a multilateral trading facility for energy derivatives operated by Spectron Energy

Services AS, regulated by the UK Financial Services Authority. The Imarex Group currently has

approximately 270 employees in the combined companies located in 12 cities around the world.

markets. Spectron's marketplace permits trading in both the cash market and in financially- and physically-settled

futures contracts

trading facility for energy derivatives operated by Spectron Energy

Services AS, regulated by the UK Financial Services Authority. The Imarex Group currently has

approximately 270 employees in the combined companies located in 12 cities around the world.

markets. Spectron's marketplace permits trading in both the cash market and in financially- and physically-settled

futures contracts.

18 Section 6-11a of the Act on Public Limited Liability Companies 1997 No 45 also requires that a board of

directors reflect each gender and, in the case of a board of directors with five members, there must be at least two

members of each gender. There are no additional requirements with respect to representation of shareholders or the

public.

19 Imarex ASA has approximately 525 shareholders.

Carolyn H. Jackson, Esq.

Page 7

B.

Products

Imarex proposes to make available for trading by direct access from the U.S. the products

admitted to trading in Trayport (the listed products), all of which are cash-settled. Imarex

represents that all listed products would be futures contracts pursuant to the CEA and rules

promulgated thereunder. Imarex has two categories of listed products:

1.

futures contracts related to prices quoted for shipping freight worldwide, published by the

Baltic Exchange and Platts; and

2.

futures contracts related to bunker fuel price references published by Platts.

The listed products qualify as financial instruments under the STA 2007, implementing

the Markets in Financial Instruments Directive (MiFID)20. Imarex’s license to list financial

instruments, issued by the Ministry of Finance based upon the recommendation of the NFSA, is

limited to certain types of commodity derivatives and derivatives relating to climatic variables,

freight rates, emission allowances or inflation rates or other official economic statistics

2007, implementing

the Markets in Financial Instruments Directive (MiFID)20. Imarex’s license to list financial

instruments, issued by the Ministry of Finance based upon the recommendation of the NFSA, is

limited to certain types of commodity derivatives and derivatives relating to climatic variables,

freight rates, emission allowances or inflation rates or other official economic statistics. Imarex

cannot therefore list shares or bonds or derivatives contracts with shares or bonds as the

underlying. The terms of these contracts generally have no nexus to the United States, nor do

they, at this time, raise any particular U.S. regulatory interest or need for enhanced information-

sharing or market surveillance.21

C.

Presence in the United States

Imarex filed notice with the Commission as an ECM on June 15, 2001 and received an

acknowledgment of its notice by letter from the Division on September 14, 2001. It is currently

operating as an ECM. In addition, NOS Clearing was recognized by the Commission on

November 11, 2002 as a Multilateral Clearing Organization (MCO) pursuant to the Federal

Deposit Insurance Corporation Improvement Act, Section 409 of which provides that an MCO

for over-the-counter derivatives, which includes those that are exempt from regulation pursuant

to Section 2(h) of the CEA, may operate in the U.S. if the MCO is supervised by a foreign

financial regulator that the Commission, or one of several other U.S. financial regulators, has

determined satisfies appropriate standards. The Commission issued its order regarding NOS on

January 11, 2002 and it was published in the Federal Register on January 17, 2002.22

20 MiFID, which became effective on November 1, 2007, is a European Union (EU) directive which provides a

harmonized regulatory regime for investment services across the 30 member states of the European Economic Area

(the 27 member states of the EU plus Iceland, Norway and Liechtenstein) (EEA)

ding NOS on

January 11, 2002 and it was published in the Federal Register on January 17, 2002.22

20 MiFID, which became effective on November 1, 2007, is a European Union (EU) directive which provides a

harmonized regulatory regime for investment services across the 30 member states of the European Economic Area

(the 27 member states of the EU plus Iceland, Norway and Liechtenstein) (EEA). The main objectives of MiFID are

to increase competition and consumer protection in investment services.

21 However, the Division notes that the New York Mercantile Exchange (NYMEX), a CFTC-regulated DCM,

offers several of the same contracts. Although there is no direct linkage between them, both the NYMEX and the

Imarex contracts settle based upon the same indices published by the Baltic Exchange or Platts. See note 69.

22 67 Fed. Reg. 2419 (January 17, 2002).

Carolyn H. Jackson, Esq.

Page 8

To properly serve its trading members located in the U.S., Imarex has maintained an

office in Houston, Texas since 2006 operating as Imarex, Inc. (the Houston Office), a wholly-

owned subsidiary of Imarex. The Houston Office currently employs two individuals whose

function is identical to the MPS function at the Exchange in Norway. Thus, U.S.-based trading

members currently can place orders by telephone to the Houston Office, subsequent to which the

Imarex employee places the order into the trading system for the trading member.

Pursuant to a grant of direct access no-action relief, Imarex and NOS intend to permit

non-natural persons resident in the U.S. to act as trading members with Imarex and as clearing

members with NOS with direct access to the trading and clearing systems of Imarex and NOS,

respectively. All such non-natural persons will be required to be ECPs. Imarex does not intend

to permit any individuals, i.e., natural persons resident in the U.S., regardless of whether or not

they are ECPs, to act as trading members. Entities located in the U.S

g members with Imarex and as clearing

members with NOS with direct access to the trading and clearing systems of Imarex and NOS,

respectively. All such non-natural persons will be required to be ECPs. Imarex does not intend

to permit any individuals, i.e., natural persons resident in the U.S., regardless of whether or not

they are ECPs, to act as trading members. Entities located in the U.S. will have access to

Imarex’s trading systems, either directly through Trayport or via telephone through MPS, and

will have access to NOS’s clearing system, either directly as (direct) clearing members (DCM)

or general clearing members (GCM) or indirectly as clients of a GCM, for clearing of electronic

transactions and MPS-brokered transactions in the listed products. Imarex's English language

website is located at: http://www.exchange.imarex.com.23

II.

MEMBERSHIP

A.

Introduction

Direct access to the Imarex markets is limited to trading members, who may trade for

their own accounts or for the accounts of clients. Trading members, as well as their clients for

whom they act, will be required to be ECPs if resident in the U.S. In addition, trading on

Trayport may not commence until NOS Clearing has approved the trading member and opened a

clearing account for registering the trading member’s trades.

B.

Trading (Exchange) Members

Trading members are entities that have entered into a Trading Membership Agreement

with Imarex and have satisfied Imarex’s membership requirements. No individuals, i.e., natural

persons, whether U.S. resident or not, are permitted to be trading members. In executing the

Trading Membership Agreement the member submits to and agrees to be bound by the Imarex

Exchange Trading Rulebook (Imarex Rulebook).

The basic criteria that members of regulated markets must meet are set out in Section

26(3) of the Stock Exchange Act, which implements the MiFID. A regulated market may admit

investment firms and credit institutions as members

ng members. In executing the

Trading Membership Agreement the member submits to and agrees to be bound by the Imarex

Exchange Trading Rulebook (Imarex Rulebook).

The basic criteria that members of regulated markets must meet are set out in Section

26(3) of the Stock Exchange Act, which implements the MiFID. A regulated market may admit

investment firms and credit institutions as members. A member must have a prudent level of

23 Imarex’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, Imarex’s website provides the

public with access to various market data and a link to the Imarex ASA website which includes a link to the Imarex

Rulebook.

Carolyn H. Jackson, Esq.

Page 9

a.

funds, an appropriate organization, sufficient technical systems and otherwise be deemed fit to

participate in trading with respect to the obligations that membership represents.24 Imarex’s

trading membership criteria are stricter and go further than those stipulated in the Stock

Exchange Act in that Imarex, which operates as an ECM, currently requires that all trading

members, whether U.S. resident or not, be ECEs.25 Imarex represents that all trading members

of Imarex are experienced professionals in the derivatives markets and fit for membership under

the above criteri

The Imarex Rulebook requires entities admitted to trading membership to demonstrate to

Imarex that they are fit and proper for trading pursuant to MiFID requirements. A trading

member that is not an EEA investment firm or credit institution must at all times have a

registered place of business in the jurisdiction in which the trading and clearing activities of the

trading member will be conducted

Imarex Rulebook requires entities admitted to trading membership to demonstrate to

Imarex that they are fit and proper for trading pursuant to MiFID requirements. A trading

member that is not an EEA investment firm or credit institution must at all times have a

registered place of business in the jurisdiction in which the trading and clearing activities of the

trading member will be conducted. A trading member must at all times be appropriately

authorized, or sufficiently regulated with respect to capital adequacy, fitness, and probity.

Imarex considers a person to be appropriately authorized or sufficiently regulated for this

purpose if it is an EEA investment firm or credit institution which has appropriately exercised a

right under a single market directive applicable in the EEA to establish a branch or provide

services in Norway; or a person other than an EEA investment firm or credit institution which

has such licenses, registrations, authorizations, and approvals required in order for it to trade on

the markets.

An entity seeking trading membership must submit a written application and represent

that it: (i) has the necessary power and authority and legal right to enter into the Trading

Membership Agreement, to effect trading in accordance with the Imarex Rulebook, and to

perform its obligations with respect to Exchange trading; (ii) has taken all necessary actions to

authorize the execution, delivery, and performance of the Trading Membership Agreement and

the related contracts entered into; and (iii) holds any public licenses needed to conduct its affairs

under the Imarex Trading Rules.

Imarex represents that it intends, subsequent to the issuance of this no-action relief letter,

to modify its membership criteria for both U.S. and non-U.S. trading members as specified in its

Rulebook. All U.S. trading members and any client on whose behalf the U.S. trading member is

trading will be required to be ECPs. Imarex further represents that it will require that all non-

U.S

es.

Imarex represents that it intends, subsequent to the issuance of this no-action relief letter,

to modify its membership criteria for both U.S. and non-U.S. trading members as specified in its

Rulebook. All U.S. trading members and any client on whose behalf the U.S. trading member is

trading will be required to be ECPs. Imarex further represents that it will require that all non-

U.S. trading members trading for their own accounts qualify as either an ECP or as a

“professional client” as defined in STA 2007 implementing MiFID. According to STA 2007,

professional clients are either “eligible counterparties” (banks, investment firms, etc.) or

companies satisfying at least two of the following three criteria: (i) balance sheet of no less than

24 A regulated market may also admit other legal and physical persons as members, subject to such person: (a)

being deemed a fit person; (b) having sufficient expertise with respect to trading and transactions; (c) having, where

appropriate, sufficient organizational arrangements in place; and (d) having sufficient financial resources with

respect to the position the person intends to assume in the market.

25 As further discussed below, Imarex’s membership criteria will be modified once this no-action relief is granted

and the Exchange ceases to operate as an ECM. Until then, Imarex will require both U.S. and non-U.S. trading

members to be ECEs as required under the current Rulebook and in compliance with Imarex's status as an ECM.

ct to the position the person intends to assume in the market.

25 As further discussed below, Imarex’s membership criteria will be modified once this no-action relief is granted

and the Exchange ceases to operate as an ECM. Until then, Imarex will require both U.S. and non-U.S. trading

members to be ECEs as required under the current Rulebook and in compliance with Imarex's status as an ECM.

Carolyn H. Jackson, Esq.

Page 10

EUR 20 million (approximately $ 29 million); (ii) annual revenues (turnover) of no less than

EUR 40 million (approximately $ 58 million) and equity of no less than EUR 2 million

(approximately $ 2.9 million); or (3) other institutional investors specialised in investing in

financial instruments.26 In addition, all non-U.S. trading members acting on behalf of clients will

remain subject to the current requirement that they be licensed as investment firms and as such

be “eligible counterparties” as defined in STA 2007.27

C.

Clearing Members

To trade listed products directly on the Trayport trading platform, a trading member must

also be a clearing member of NOS, meeting the requirements for clearing with respect to the

relevant contracts. NOS offers two categories of clearing membership: DCMs and GCMs.

DCMs are approved to clear trades for their own account. GCMs are approved to clear trades for

their own account and for the accounts of clients.28 Clearing members will either also be trading

members of Imarex or meet the requirements for clearing members set out in the NOS Rulebook,

which includes the requirement that the GCM be licensed by and subject to supervision from a

relevant public or similar independent authority

for their own account. GCMs are approved to clear trades for

their own account and for the accounts of clients.28 Clearing members will either also be trading

members of Imarex or meet the requirements for clearing members set out in the NOS Rulebook,

which includes the requirement that the GCM be licensed by and subject to supervision from a

relevant public or similar independent authority.

Pursuant to the NOS Rulebook, a clearing member must, among other things, (i) have

one or more traders/trading representatives (defined below); (ii) have employees or contracted

advisers who are experienced in trading and clearing of derivative products cleared by the

clearing member; (iii) have all licenses, registrations, authorizations and approvals necessary or

desirable (in the opinion of NOS) in order to participate in the markets; (iv) have existed for at

least one year; (v) be able to pay its debts as they fall due; (vi) have a minimum net capital

equivalent to EUR one million (approximately $ 1.4million); (vii) establish at least one clearing

account with NOS (a GCM must establish at least one client clearing account and may also

establish one or more proprietary clearing accounts); (viii) establish at least one margining

account, collateral account and settlement account; (ix) provide base collateral in accordance

with the NOS Rulebook; and (x) not be in default of the terms of a contract or other obligation to

NOS. NOS may, in its sole discretion, waive or impose such additional clearing membership

requirements with respect to an applicant for clearing membership or existing clearing member

as it sees fit.

26 Imarex represents that it believes that non-U.S. entities should be able to make the representations with respect

to professional client status even though, in certain instances, the criteria are more stringent than qualifying as an

ECP

pose such additional clearing membership

requirements with respect to an applicant for clearing membership or existing clearing member

as it sees fit.

26 Imarex represents that it believes that non-U.S. entities should be able to make the representations with respect

to professional client status even though, in certain instances, the criteria are more stringent than qualifying as an

ECP.

27 Imarex represents that it will file a notice to the Commission to withdraw as an ECM no later than five business

days following receipt of this no-action relief letter. Imarex further represents that it will update its Rulebook to

incorporate the new membership criteria and post such updated Rulebook on its website by no later than three

business days following acknowledgement from the Division of its withdrawal as an ECM.

28 Such client trades are registered in “omnibus” client accounts or individual client accounts established in the

name of the GCM. Thus, a contractual relationship exists between that GCM and NOS, and not among the

individual clients and NOS.

Carolyn H. Jackson, Esq.

Page 11

As part of the membership process, the applicant must submit proper documentation,

including its annual report. NOS evaluates the applicant’s financial soundness based mainly on

the applicant’s annual report and audited financial statements, in addition to any available

quarterly or semi-annual accounts or reports.29 The financial evaluation is used to decide the size

of the initial call for collateral which must be posted by the applicant before trading and clearing

may commence (base collateral). The base collateral is a fixed amount set to cover overnight

risk, i.e., risk in excess of daily variation margin and mark-to-market settlements. Pursuant to

the NOS Rulebook, the minimum base collateral is set at EUR 100,000 (approximately $

140,000)

the size

of the initial call for collateral which must be posted by the applicant before trading and clearing

may commence (base collateral). The base collateral is a fixed amount set to cover overnight

risk, i.e., risk in excess of daily variation margin and mark-to-market settlements. Pursuant to

the NOS Rulebook, the minimum base collateral is set at EUR 100,000 (approximately $

140,000). If the applicant is unable to post the base collateral that NOS requires, NOS will reject

the application. NOS continuously monitors the member’s financial situation; if NOS, in its sole

discretion, determines that a member fails to maintain appropriate financial soundness, and/or its

equity ratio is low, NOS will increase the base collateral to a level which it finds is sufficient for

clearing the participant’s level of trading activity. All active members are subject to an annual

review and must, at a minimum, provide their annual reports.

A clearing member must have all licenses, registrations, authorizations and approvals

necessary in order to participate in the markets. Each clearing member must appoint at least one

trader or trading representative. A trader must be an officer or employee of the clearing member

making the appointment. A trading representative is a third party agent of the appointing

clearing member. A clearing member may not trade on the market except through a validly

appointed trader or trading representative. Each clearing member is responsible for all acts and

omissions of a trader or trading representative appointed by it with respect to trading and

clearing.

All contracts traded at Trayport (electronic transactions) are cleared by a process of

novation through which NOS replaces the buyer of the contract as counterparty to the seller and

replaces the seller of the contract as counterparty to the buyer. In addition, trading members may

trade via the MPS

f a trader or trading representative appointed by it with respect to trading and

clearing.

All contracts traded at Trayport (electronic transactions) are cleared by a process of

novation through which NOS replaces the buyer of the contract as counterparty to the seller and

replaces the seller of the contract as counterparty to the buyer. In addition, trading members may

trade via the MPS. A contract traded through the MPS has the same characteristics/product

specification as contracts traded electronically and is legally regarded as listed/admitted to

trading. Most transactions entered through MPS are cleared with NOS, although some are also

cleared with other clearing houses such as the London Clearing House and NYMEX.

D.

Trading Representatives

The Imarex and NOS Rulebooks stipulate that all trading and clearing members must

appoint either a trader or a trading representative who is identified to both Imarex and NOS as

permitted to trade on the behalf of the member. While, as previously stated, a trader is an

employee of a member who is approved to trade for the account of such member, a trading

representative is a third party agent of the member who also has full authority to act for the

account of the member. The system thus permits a member to grant a third party a power of

attorney to trade on its behalf.

29 You represent that NOS’s stated objective is not to have any uncovered risk in relation to any members.

is approved to trade for the account of such member, a trading

representative is a third party agent of the member who also has full authority to act for the

account of the member. The system thus permits a member to grant a third party a power of

attorney to trade on its behalf.

29 You represent that NOS’s stated objective is not to have any uncovered risk in relation to any members.

Carolyn H. Jackson, Esq.

Page 12

For example, a GCM, typically an investment bank, may appoint a person employed by

one of its clients as a trading representative. Within the limits agreed upon between the client

and the GCM (limits not visible to Imarex or NOS), the client may then trade cleared contracts in

the name of and based on the financial strength of the GCM. For the purposes of NOS and

Imarex, the GCM remains fully and legally responsible for all such contracts entered into by its

client trading representative. Thus, the appointment of a trading representative does not impact

the risk of NOS or the original counterparty to the contract. 30

III.

OVERVIEW OF THE IMAREX TRADING SYSTEM

At the outset, the Division notes that the description of Imarex’s trading system as set

forth herein is based upon representations made by Imarex or its representatives. The Division

has not performed an independent assessment of the security or soundness of the trading system

in connection with this request. Nonetheless, Commission staff did observe trading system and

MPS operations during a demonstration conducted during the staff’s onsite visit. Imarex

operates a fully automated electronic trading system called Trayport that is supplied by Trayport

Ltd. 31

A.

Introduction

Access to Trayport is granted to trading members through fixed lines or internet

connections

on with this request. Nonetheless, Commission staff did observe trading system and

MPS operations during a demonstration conducted during the staff’s onsite visit. Imarex

operates a fully automated electronic trading system called Trayport that is supplied by Trayport

Ltd. 31

A.

Introduction

Access to Trayport is granted to trading members through fixed lines or internet

connections. Alternatively, trading members may also place orders to buy and sell listed

products through MPS, Imarex’s telephone-based system for Exchange trading.32 Imarex’s

trading hours for trading on Trayport, as published in Imarex’s Rulebook, are 24 hours per day,

every day, except for eight holidays.

B.

Trayport

Trading members may place (register) orders electronically in Trayport. An order is a

binding offer to buy or sell a certain number of contracts that is subject to automatic matching

without any further acceptance from the trading member. Trading members may place either

limit orders, in which the trading member offers to buy or sell at a specific price or range of

prices, or conditional orders, in which the trading member may impose certain requirements that

must be met before the order can be matched. Trading members may also enter iceberg orders,

30 You represent that Imarex will amend its Rulebook to ensure that a trading member/clearing member (including

a GCM) must be an FCM or Rule 30.10 Firm in order to appoint U.S. resident persons as trading representatives or

act as intermediaries for such clients.

31 You represent that the Trayport trading platform is the industry standard for the energy and freight markets,

with approximately 12,000 screens connected in various markets. Trayport, a supplier of multi-asset class electronic

trading systems, provides market infrastructure to, in addition to Imarex, BlueNext, OMIP (the MIBEL Derivatives

Exchange), the New Zealand Stock Exchange and Sibex

31 You represent that the Trayport trading platform is the industry standard for the energy and freight markets,

with approximately 12,000 screens connected in various markets. Trayport, a supplier of multi-asset class electronic

trading systems, provides market infrastructure to, in addition to Imarex, BlueNext, OMIP (the MIBEL Derivatives

Exchange), the New Zealand Stock Exchange and Sibex. Access to Imarex is provided through approximately

1,500 of these screens worldwide.

32 With MPS, discussed further below, Imarex employees subsequently register the orders in Trayport.

Carolyn H. Jackson, Esq.

Page 13

in which the trading member enters multiple limit or conditional orders simultaneously, but only

the first of the orders is visible to other trading members. Once the first such order is filled, the

next order in the sequence becomes visible. An order entered into Trayport is either

automatically matched with one or more orders previously entered in the order book or inserted

into the order book.

To register an order in Trayport, the trading member must enter the following

information: (i) the listed product designated by ticker; (ii) whether the order is to buy or sell;

(iii) the volume limit (number of lots); (iv) the price limit; (v) an expiration date (or that the

order is valid until cancelled); and (vi) if it is a conditional order, the conditions for the order.

An order is deemed registered and becomes binding when the trading member placing the order

has received an electronic confirmation of the registration through Trayport. A confirmed order

is valid for the day on which it is recorded, unless the order specifies another expiration day or

specifies that the order is valid until cancelled. A valid order remains in the order book and is

subject to matching until the specified expiration day arrives or the order is cancelled by the

trading member and the cancellation has been electronically confirmed

ugh Trayport. A confirmed order

is valid for the day on which it is recorded, unless the order specifies another expiration day or

specifies that the order is valid until cancelled. A valid order remains in the order book and is

subject to matching until the specified expiration day arrives or the order is cancelled by the

trading member and the cancellation has been electronically confirmed.

Orders are automatically ranked in Trayport: the order with the best price always has

priority and order book orders at the same price are ranked by time of registration (first

registered, first matched) unless the first registered order is a conditional order. A contract is

automatically entered into for the account of the trading member when that member enters a

registered order that is matched to an order in the order book. A matching order is an opposite

order for the same product series at the same price as a previously registered order, or with a

lower price limit when the first order is a buy order, or with a higher price limit if it is a sell

order. In the event that a new sell order is registered with a price that is lower than the best buy

price then registered in Trayport, the order will be matched at the buy price. In the event that a

new registered buy order price is higher than the best sell order price then registered in Trayport,

the order will be matched at the sell order price.

Each trading member provides written authorization/power of attorney for the individuals

it will permit to have access to Trayport. Based upon such authorization, Imarex provides each

such individual with a unique user name and password. Each trading member is responsible for

all orders registered from any log-on identification designated for its traders or trading

representatives, and for all contracts based on such orders. Imarex reserves the right to cancel

orders if it appears that a member has entered or traded at an off-market price

thorization, Imarex provides each

such individual with a unique user name and password. Each trading member is responsible for

all orders registered from any log-on identification designated for its traders or trading

representatives, and for all contracts based on such orders. Imarex reserves the right to cancel

orders if it appears that a member has entered or traded at an off-market price. Transactions in

Trayport are anonymous, i.e., while Imarex informs members of orders registered and contracts

entered into in Trayport by displaying such orders and contracts, it does not display the identity

of a trading member in connection with any order made or contract entered into by such trading

member through Trayport.

C.

MPS

Trading on the MPS, Imarex’s telephone-based service for trading both listed and non-

listed products, occurs when trading members call in orders for listed products or interest orders

(orders that are non-binding indications of interest) for non-listed products by telephone to

Carolyn H. Jackson, Esq.

Page 14

Imarex employees at the MPS. The MPS, which seeks to facilitate trading in listed products and

actively seeks to narrow the spread of prices on an anonymous basis, is available to all trading

members and is provided by Imarex employees assisted by Trayport. An order placed with the

MPS is a binding offer to buy or sell a specified number of lots in a listed product. The MPS

prioritizes orders before interest orders and prioritizes them by time, based on the time when the

MPS receives each order. The matching of orders in listed products placed with the MPS

follows the procedures described above for orders entered into Trayport.33

Orders and interest orders posted to the MPS are treated anonymously; disclosure of

participants occurs only with respect to bilateral contracts in non-listed products

ders and prioritizes them by time, based on the time when the

MPS receives each order. The matching of orders in listed products placed with the MPS

follows the procedures described above for orders entered into Trayport.33

Orders and interest orders posted to the MPS are treated anonymously; disclosure of

participants occurs only with respect to bilateral contracts in non-listed products. All

conversations with MPS personnel are taped and stored for later reference in the event of

possible disputes about orders or trades.34 Imarex is registered with the Norwegian Data

Inspectorate, a government agency, and maintains the stored data in accordance with applicable

legislation and regulation.

D.

Trade Confirmations and Trading Errors

Pursuant to the relevant provisions set forth in the Imarex Rulebook, trading members

with a link to Trayport are sent electronic confirmations through Trayport as soon as order

matching has taken place. Order matching at the MPS is confirmed by the MPS over the

telephone.

Imarex may cancel or alter an erroneous contract registration by the end of the following

day if the contract is the result of an erroneous order registration by the trading member or

Imarex personnel that is considered to be significantly deviated from prevailing market levels. A

trading member who believes that a contract is erroneous or that an electronically confirmed

33 The MPS also facilitates bilateral trading in non-listed products. An interest order reflects an indication of

interest in non-listed products and, unless otherwise agreed, is posted by the MPS on the Imarex Bulletin Board,

which is published to Exchange members. Such orders are matched through communication between trading

members and the MPS, i.e., when all concerned trading members approve, the MPS matches the order and confirms

the contract

ed products. An interest order reflects an indication of

interest in non-listed products and, unless otherwise agreed, is posted by the MPS on the Imarex Bulletin Board,

which is published to Exchange members. Such orders are matched through communication between trading

members and the MPS, i.e., when all concerned trading members approve, the MPS matches the order and confirms

the contract. The confirmed order is legally binding between the trading members when matched, unless the

confirmed order is expressly made subject to the fulfillment of a condition. The settlement of uncleared contracts in

non-listed products takes place directly between the parties. To be cleared, matched orders in both listed and non-

listed products must be preapproved by the relevant clearing house. The MPS also facilitates the clearing of

contracts made outside Trayport that substantially comply with the terms of listed products, subject to the approval

of the relevant clearing house.

Imarex represents that it will, subsequent to the issuance of this no-action relief letter, modify its Rulebook to

replace all references to listed and non-listed products with the term contracts. Under the modified Rulebook,

contract will be defined as either a cleared or uncleared contract which is listed by Imarex, the terms of which are

specified in a product specification included in Appendix 5 of the Rulebook. Contracts will continue to be

transacted either on Trayport or through the MPS, with subsequent registration in Trayport. The terms listed and

non-listed products are being eliminated because all products are considered listed on Imarex, whether the contract

is executed through Trayport or MPS and whether it is cleared or not.

34 The taped conversations are retained in storage for seven years.

tracts will continue to be

transacted either on Trayport or through the MPS, with subsequent registration in Trayport. The terms listed and

non-listed products are being eliminated because all products are considered listed on Imarex, whether the contract

is executed through Trayport or MPS and whether it is cleared or not.

34 The taped conversations are retained in storage for seven years.

Carolyn H. Jackson, Esq.

Page 15

contract is not legally binding upon the trading member must make a written complaint to

Imarex immediately, but not later than the close of trading on the next trading day. Failure to

make a timely complaint is deemed to be acceptance of a contract. Complaints regarding

subsequent actions by Imarex with respect to matched orders or the cancellation of contracts

must be reported to Imarex within three hours from the time of matching or cancellation on

trading days and no later than one hour after the daily close of Imarex.

E.

Trade Registration/Audit Trail/Market Data Distribution

Every match that takes place on the Trayport platform is immediately disclosed in the

Trayport system. These trades are also registered in real-time and are automatically registered

with NOS for clearing.35 A trade that takes place on the Trayport platform or through the MPS is

immediately logged in Imarex’s back-office system, the New Back Office System (NBOS).

NBOS is a post-execution trade confirmation and invoicing platform built in-house by Spectron

Services Limited (a subsidiary of Spectron) for the real time processing of energy and freight

trades. Following the acquisition of Spectron by Imarex ASA in March 2008, NBOS has been

enhanced to accommodate the specific business needs of Imarex, in particular with regard to the

complexities of freight forward agreements

ion trade confirmation and invoicing platform built in-house by Spectron

Services Limited (a subsidiary of Spectron) for the real time processing of energy and freight

trades. Following the acquisition of Spectron by Imarex ASA in March 2008, NBOS has been

enhanced to accommodate the specific business needs of Imarex, in particular with regard to the

complexities of freight forward agreements.

[REDACTED]

As required by the Norwegian Bookkeeping Act, all invoices and trade information

(accounting materials) are stored safely for no less than 10 years. As part of the audit of

Imarex’s annual accounts, Imarex’s auditor reviews the records and books and other relevant

information stored by Imarex. The Trayport trading platform and NBOS record the details of

each order entered into the system from original entry of the order until the contract is sent for

clearing, including any changes to the order made during that time and all trade matching

information. Every keystroke made while using Trayport is recorded. The records are kept for

at least five years.

Information about trades is saved for later reference. Real-time and historical data are

available through Imarex Market Services. The information stored by Imarex includes data

35 You represent that the system has historically had exceptionally low downtime, well within Imarex’s

requirement of less than 30 minutes downtime per calendar month.

cords are kept for

at least five years.

Information about trades is saved for later reference. Real-time and historical data are

available through Imarex Market Services. The information stored by Imarex includes data

35 You represent that the system has historically had exceptionally low downtime, well within Imarex’s

requirement of less than 30 minutes downtime per calendar month.

Carolyn H. Jackson, Esq.

Page 16

about all contracts entered into by each individual participant, including the time of the trade,

historical price information, volume, contract origin, type of contract, and accumulated financial

information. Accordingly, for every participant it is possible to identify all tax and financial

information for each contract. Imarex sells trade data in its listed products to commercial

information providers including Bloomberg and Reuters, which subsequently make the data

available to their subscribers. However, because the spot markets for freight and bunker fuel oil

(i.e., the cash markets the indices reflect) exist outside of exchanges or regulated markets (as

opposed to, for instance, the Nordic electricity markets), public access to information from these

markets can be limited. 36

F.

Anonymity of Trading

All Imarex trading is anonymous, except when the MPS facilitates bilateral trades in

MPS-brokered contracts. The Imarex order book is an anonymous order book that does not

disclose the identity of the traders. NOS enters into an electronic trade as central counterparty as

soon as matching is reported to NOS, and consequently anonymity is maintained for cleared

trades. Only NOS and the Imarex market surveillance function, both of which are subject to a

duty of confidentiality, know the identities of the parties to each contract. All contracts cleared

by NOS, including MPS-brokered contracts, are anonymous

ers into an electronic trade as central counterparty as

soon as matching is reported to NOS, and consequently anonymity is maintained for cleared

trades. Only NOS and the Imarex market surveillance function, both of which are subject to a

duty of confidentiality, know the identities of the parties to each contract. All contracts cleared

by NOS, including MPS-brokered contracts, are anonymous. However, should any party to an

MPS-brokered contract require the contract to be cleared at a clearing house other than NOS, the

parties to the contract themselves may agree to waive anonymity.

G.

Provisions for Disaster Recovery

Imarex has taken steps to anticipate and control crisis situations that may arise. To

ensure the continuity of Imarex’s business system, Imarex has a geographically separate disaster

recovery site that is capable of being fully operational if required. The separate overall disaster

recovery programs for Imarex and NOS address a series of disaster scenarios, including an

overall disaster plan, an operational disaster plan, and a detailed resource and operational plan

due to a disaster. The last plan provides for the Imarex marketplace to be fully functioning

immediately following any disruption to the market.

All Imarex and NOS systems, gateways and web servers are replicated in disaster sites

located in London and Oslo, respectively, and the installation is a “hot back up” of the main

system. The program also covers the physical availability of the systems. Imarex and NOS

regularly perform complete disaster site tests. All discrepancies from plans and performance

requirements are reported and corrective action is taken. Imarex and NOS also perform an

annual evaluation of the requirements of the disaster plan, and propose remedies when necessary.

According to the plans, these evaluations and tests are documented and approved.

36 The contracts traded on Imarex use well-established indices as their underlying commodity

cies from plans and performance

requirements are reported and corrective action is taken. Imarex and NOS also perform an

annual evaluation of the requirements of the disaster plan, and propose remedies when necessary.

According to the plans, these evaluations and tests are documented and approved.

36 The contracts traded on Imarex use well-established indices as their underlying commodity. These indices are

constructed based on non-public information provided by brokers in the spot market. Since the information

provided by such brokers is not available to the public elsewhere, the indices themselves likely are the most reliable

public indicator for the price development in the spot markets. All relevant spot indices are available to anyone

wishing to subscribe to this information from the index providers.

Carolyn H. Jackson, Esq.

Page 17

H.

Adherence to IOSCO Principles

You represent that Imarex adheres to the Principles for the Oversight of Screen-Based

Trading Systems for Derivative Products developed by the Technical Committee of the

International Organization of Securities Commissions (IOSCO Principles) and adopted by the

Commission on November 21, 1990.37 Further, you represent that European and Norwegian law

set very high standards with respect to the functioning of regulated markets and that the IOSCO

Principles are reflected in the legislation applying to Norwegian regulated markets (the Stock

Exchange Act and regulations thereunder) as well as in Finanstilsynet's supervisory policy with

respect to such markets. Clearing operations are governed by the NOS Rulebook.

Finanstilsynet, Imarex’s regulatory authority, is an IOSCO member and supports the IOSCO

Principles. 38

IV.

SETTLEMENT AND CLEARING

A.

Introduction

NOS Clearing is a Norwegian licensed clearing house providing clearing services for

exchange trades and non-exchange trades in listed products

policy with

respect to such markets. Clearing operations are governed by the NOS Rulebook.

Finanstilsynet, Imarex’s regulatory authority, is an IOSCO member and supports the IOSCO

Principles. 38

IV.

SETTLEMENT AND CLEARING

A.

Introduction

NOS Clearing is a Norwegian licensed clearing house providing clearing services for

exchange trades and non-exchange trades in listed products. NOS is currently licensed in

accordance with the STA 2007 which, together with the Stock Exchange Act, implemented

MiFID. MiFID, which became effective on November 1, 2007, is an EU directive which

provides a harmonized regulatory regime for investment services across the 30 member states of

the EEA (the 27 member states of the EU plus Iceland, Norway and Liechtenstein). The main

objectives of MiFID are to increase competition and consumer protection in investment services.

As previously stated, clearing operations are governed by the NOS Rulebook. The NOS

Rulebook, the information technology structure, and operational routines are in compliance with

all national regulations and meet or exceed the IOSCO recommendations for clearing systems.

NOS commenced operations as a licensed clearing house in 1990 under the Securities Trading

Act 1985. Under its current license, NOS may carry out clearing of commodity derivatives and

other derivatives products. NOS currently has 250 Clearing Members from 31 countries. As

previously noted, on January 11, 2002, NOS was recognized by the Commission as a

Multilateral Clearing Organization (MCO) pursuant to the Federal Deposit Insurance

Corporation Improvement Act, Section 409.

37 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)

the Federal Deposit Insurance

Corporation Improvement Act, Section 409.

37 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). Imarex represents that it routinely conducts self-

assessments to evaluate compliance with the IOSCO Principles.

38 Letter from Eirik Bunaes, Deputy Director General and Britt Hjellegjerde, Head of Section, Finanstilsynet, to

Duane C. Andresen, Senior Special Counsel, Division of Market Oversight, Commodity Futures Trading

Commission (January 15, 2010). In its letter, the NFSA also represents that the IOSCO Principles are implemented

in the legislation applying to Norwegian regulated markets and in Finanstilsynet’s supervisory policy with respect to

such markets.

Carolyn H. Jackson, Esq.

Page 18

B.

The NOS Clearing System

The clearing services of NOS include central counterparty clearing services through

which NOS enters into the trades as counterparty to guarantee settlement. All trade settlements

with respect to Imarex listed contracts are made in cash (USD). Cash settlement and

collateralization is conducted through a settlement bank. Consequently, NOS does not itself

receive any deposits of cash, as all cash deposits and cash settlements occur through sub-

accounts opened by NOS with the settlement bank.

All contracts entered into by a clearing member are recorded in a clearing account in the

name of the clearing member. The clearing account records the clearing member’s contracts and

forms the basis for NOS’s assessment of the combined risk of the clearing member’s contract

portfolio, which in turn forms the basis for the calculation of that clearing member's margin

requirements

bank.

All contracts entered into by a clearing member are recorded in a clearing account in the

name of the clearing member. The clearing account records the clearing member’s contracts and

forms the basis for NOS’s assessment of the combined risk of the clearing member’s contract

portfolio, which in turn forms the basis for the calculation of that clearing member's margin

requirements. Where the clearing member is also a trading member and trades for its own

account and for the accounts of others, NOS will open a client clearing account, a sub-account to

the clearing account of a GCM, in which the contracts of each client of the GCM are recorded

separately from the contracts of other clients of such GCM and from the contracts entered into by

the GCM on its own book. The client clearing accounts are all opened in the name of the GCM,

which is the sole responsible counterparty to NOS for the contracts registered therein. No

contractual relationship exists between NOS and the clients of the GCM.

The clearing operations of NOS utilize a clearing system facilitated by NOS. Central

counterparty clearing is achieved by novation of trades to NOS. All trades registered in Trayport

are automatically reported to NOS by Imarex and constitute electronic transactions. Electronic

transactions reported to NOS within clearing hours as defined by NOS will automatically be

subject to clearing with NOS, whereas an electronic transaction reported to NOS outside clearing

hours requires approval by NOS before being confirmed as a cleared contract. Confirmation of

clearing of such electronic transactions is made available by NOS once the transaction is

approved and recorded at NOS. An OTC Transaction may be reported to NOS by any Market as

defined in the NOS Rulebook (Imarex is such a Market) and is subject to approval by NOS

before being confirmed as a cleared contract. Confirmation of clearing will be provided by NOS

to each clearing member

tion of

clearing of such electronic transactions is made available by NOS once the transaction is

approved and recorded at NOS. An OTC Transaction may be reported to NOS by any Market as

defined in the NOS Rulebook (Imarex is such a Market) and is subject to approval by NOS

before being confirmed as a cleared contract. Confirmation of clearing will be provided by NOS

to each clearing member.

For each clearing account, NOS calculates the margin requirements and the daily

settlement amounts. Each clearing member must have a Collateral and Settlement Account with

an approved settlement bank and must deposit the collateral requirements with that bank. The

collateral requirements may be satisfied either by cash deposited in this account or by Letters of

Credit/Guarantees. Imarex has stated that if the applicant cannot provide enough cash as

collateral or, for example, there is doubt as to whether the cash pledge will be valid and/or

upheld in bankruptcy under the laws of the home state of the applicant, NOS will require the

member to provide Letters of Credit/Guarantees.39

39

For margining purposes, Letters of Credit on the terms required by NOS and issued by banks with a Standard &

Poor rating of A- or better are given equal value as cash. For settlement of the contracts, all of which are cash-

settled, only cash is accepted.

Carolyn H. Jackson, Esq.

Page 19

In order to become a settlement bank, a qualifying bank must enter into a Settlement

Bank Agreement with NOS. The settlement bank participates in the reporting and settlement

systems of NOS, which are established in USD, EUR, GBP and NOK, in order to effect cash

settlement and cash collateralization for transactions cleared by NOS. In its capacity as a

settlement bank, the bank is entitled to open Collateral and Settlement Accounts

ualifying bank must enter into a Settlement

Bank Agreement with NOS. The settlement bank participates in the reporting and settlement

systems of NOS, which are established in USD, EUR, GBP and NOK, in order to effect cash

settlement and cash collateralization for transactions cleared by NOS. In its capacity as a

settlement bank, the bank is entitled to open Collateral and Settlement Accounts. These accounts

are established as client accounts of NOS with the settlement bank through which NOS acts as

creditor with respect to the settlement bank but the funds are fully segregated from NOS’s

proprietary assets. Currently DNB NOR Bank ASA and its subsidiaries (together, DNB) serve

as NOS’s main settlement bank. Trades in Imarex-listed contracts are settled in USD and are all

settled by DNB. All settlements between NOS and the settlement bank take place on a daily

basis.

C.

Risk Management

NOS’s clearing concept differs from some other clearing organizations with regard to

how potential counterparty losses are covered. First, NOS does not maintain a guarantee fund or

reserve fund to which clearing members contribute. Second, NOS does not enforce a mutual

loss-sharing scheme among its members. Instead, a conservative and best practice margining

methodology, the collateral pledging requirements, the proactive risk management, and NOS’s

risk-bearing capital act as a buffer between any defaulting counterparty and all other clearing

members. Since NOS’s own risk-bearing capital is at risk, and not that of the members, Imarex

has stated that NOS has a significant interest in ensuring that risk management routines applied

at all times provide for the accurate measurement, reasonable control and satisfactory protection

against risks arising within the clearing organization.

According to STA 2007, a clearing house must have risk capital appropriate for the risk

exposure assumed by the clearing house

mbers, Imarex

has stated that NOS has a significant interest in ensuring that risk management routines applied

at all times provide for the accurate measurement, reasonable control and satisfactory protection

against risks arising within the clearing organization.

According to STA 2007, a clearing house must have risk capital appropriate for the risk

exposure assumed by the clearing house. There are also regulations with respect to the

investment management of clearing house capital. Imarex has stated that in addition, NOS

adheres to international standards and recommendations for clearing houses, including the

European Association of Central Counterparty Clearing Houses (EACH) standards of risk

management for its members. These standards establish guidelines regarding the financial

resources of clearing houses. In addition, the Bank for International Settlements (BIS) and

IOSCO have established Recommendations for Central Counterparties, and Imarex has stated

that NOS adheres to these as well.

In order to achieve control within the clearing system, NOS has a process for actively

identifying, analyzing, and addressing its operational risks, including risks arising from its

outsourced operations and other activities. NOS establishes strategy and policy as a result of

these processes. The risk management group at NOS has the overall responsibility to oversee

NOS counterparties and margining requirements, as well as to handle any defaults.40 On a daily

40 The risk management group consists of four full-time positions: Risk Manager (One year with NOS, 20 years

prior experience from capital market risk management); one senior credit risk analyst (seven years with NOS, prior

risk management experience from the NFSA and from Norges Bank Investment Management (Norway's $350bn

ning requirements, as well as to handle any defaults.40 On a daily

40 The risk management group consists of four full-time positions: Risk Manager (One year with NOS, 20 years

prior experience from capital market risk management); one senior credit risk analyst (seven years with NOS, prior

risk management experience from the NFSA and from Norges Bank Investment Management (Norway's $350bn

Carolyn H. Jackson, Esq.

Page 20

basis, the risk management group monitors volatility, counterparties, trades, and collateral. NOS

has the authority to change risk parameters in the margin model on short notice based on rapid

changes in volatility or to make extraordinary margin calls with one hour’s notice. Watch list

participants are monitored daily with a focus on trading and exposure limits or changes in the

daily margin call.

NOS calculates a daily collateral call once a day, based on a net position. All participants

must cover the collateral call with cash or a bank guarantee within the deadlines set forth in

NOS’s clearing cycle. All risk parameters are updated frequently and the volatility is

benchmarked every day against market volatility. NOS risk management stress tests and back

tests both the participants and the risk parameters frequently to ensure that NOS has sufficient

risk capital and understands the risk-taking of its counterparties, as well as to ensure that the risk

parameters are sufficient, efficient and optimal. NOS calculates a margin requirement on a daily

basis in order to cover its counterparty risk.41

D.

The Margin System

The margin system has two main elements: the base collateral and the margin

requirement. The base collateral is intended to cover overnight risk associated with intra-day

position changes not covered by the previous margin calculation

ficient, efficient and optimal. NOS calculates a margin requirement on a daily

basis in order to cover its counterparty risk.41

D.

The Margin System

The margin system has two main elements: the base collateral and the margin

requirement. The base collateral is intended to cover overnight risk associated with intra-day

position changes not covered by the previous margin calculation. The level is mainly dependent

on the trading pattern and credit rating of the counterparty. This margin must be covered by

collateral before trading can begin. Imarex has described the base collateral as analogous to the

default fund contribution at some other cleared markets. In contrast, however, the base collateral

only covers the risk of the specific clearing member and cannot be used to cover other members’

losses.

The margin requirement is calculated on a daily basis and is intended to cover NOS’s

credit and price risk in the case of a member default and the closing out of the member’s open

positions. The daily margin call consists of the mark-to-market value (accumulated profit/loss)

and the scenario risk that reflects a portfolio’s market risk during a close-out period, i.e., the

worst-case loss a portfolio could suffer during a close-out period of five days if the prices should

move up to three standard deviations of observed historical price movements. NOS uses up to

14 price and volatility scenarios in order to simulate worst-case losses for futures, forwards and

option positions. The worst-case loss is used as the scenario risk for a position in a contract

series. In special circumstances, NOS can change the risk parameters or call for extraordinary

margin, with a minimum of one hour’s notice. Acceptable collateral to NOS is cash on the

Collateral and Settlement Account or Letters of Credit conforming to a standard template.

sovereign wealth fund)); one market risk analyst (four years with NOS); and one senior market risk analyst (15 years

with NOS)

n special circumstances, NOS can change the risk parameters or call for extraordinary

margin, with a minimum of one hour’s notice. Acceptable collateral to NOS is cash on the

Collateral and Settlement Account or Letters of Credit conforming to a standard template.

sovereign wealth fund)); one market risk analyst (four years with NOS); and one senior market risk analyst (15 years

with NOS).

41 Pursuant to the NOS Rulebook, NOS may, at its sole discretion, issue extraordinary and intra-day margin calls.

To date, NOS has not issued extraordinary or intra-day margin calls as a result of market movements. Members are,

however, required to provide additional margin if, during a clearing day, they want to trade contracts the margin for

which would not be covered by the collateral held by NOS prior to such trade.

Carolyn H. Jackson, Esq.

Page 21

E.

Default Procedures

The collateral call for the previous trading day must be covered by the clearing member

no later than the deadline set forth in the clearing cycle. If the deadline is not met, NOS will

declare a default according to the NOS Rulebook and take all necessary steps to reduce its

counterparty risk.

NOS risk management has the initial responsibility to handle any defaults according to

the NOS Rulebook. Depending on the seriousness of the default, there are different actions to be

taken. For example, NOS can close out the defaulting member’s positions or it can force the

defaulting member to close out its positions. NOS can permit the defaulting member to continue

to operate in the market, but with all transactions supervised and managed by NOS.

Alternatively, NOS may exclude the defaulting member from the market while NOS takes over

the portfolio and closes it out. NOS can also suspend the defaulting member and require that

Imarex suspend the member from trading in listed products. In such cases as described above,

NOS has a special default committee that will be responsible for handling the default

supervised and managed by NOS.

Alternatively, NOS may exclude the defaulting member from the market while NOS takes over

the portfolio and closes it out. NOS can also suspend the defaulting member and require that

Imarex suspend the member from trading in listed products. In such cases as described above,

NOS has a special default committee that will be responsible for handling the default. The

default committee is a pre-defined group whose members have different pre-defined

responsibilities. The default committee’s role is to close out a portfolio and to minimize losses

for both the defaulting party and for NOS with a minimum effect 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. Losses exceeding the collateral are covered by a combination

of NOS’s equity and default insurance. NOS’s own capital is NOK 330 million (approximately

$55 million). In addition, NOS has default insurance coverage with Swiss Re Insurance Inc., in

the amount of $75 million.

V.

THE REGULATORY REGIME IN NORWAY

A.

Regulation of Imarex

The business of Imarex is regulated primarily by the Stock Exchange Act which sets out

the definition of a regulated market which comprises both licensed exchanges and other

regulated marketplaces.42 The stated objective of the Stock Exchange Act is to “provide the

basis for markets for financial instruments that are efficient and orderly and inspire

confidence.”43

42 Section 3(1) of the Stock Exchange Act states: “A regulated market shall mean an undertaking authorized

under section 4 [of the Stock Exchange Act] that decides to list financial instruments in the market, and which

organizes or operates a multilateral system facilitating regular trading in the listed instruments in accordance with

laws, regulations and non-discretionary trading rules issued by that market.”

43 Section 1 of the Stock Exchange Act

ated market shall mean an undertaking authorized

under section 4 [of the Stock Exchange Act] that decides to list financial instruments in the market, and which

organizes or operates a multilateral system facilitating regular trading in the listed instruments in accordance with

laws, regulations and non-discretionary trading rules issued by that market.”

43 Section 1 of the Stock Exchange Act. Pursuant to Section 2.2(1) of the STA 2007, derivatives are included

within the definition of financial instruments. Pursuant to Section 2.2(5), Derivatives means: (i) options, futures,

swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or

yields, or other derivative instruments, financial indices or financial measures which may be settled physically or in

cash; (ii) commodity derivatives; (iii) credit derivatives; (iv) financial contracts for differences; and (v) other

Carolyn H. Jackson, Esq.

Page 22

The EU approach to the regulation of “regulated markets” is contained in MiFID.

Among other things, MIFID defines the concept of the regulated market and harmonizes

conditions governing the operation of regulated markets. MiFID creates a “European Passport”

for the cross-border activities of regulated markets within the EEA. This means that restrictive

legislation in EU member states impeding cross-border branching and freedom of regulated

markets is largely dismantled, allowing EEA-regulated markets to operate cross-border within

the EU based on their home state license and supervised by their home state regulator.

The Norwegian regulatory regime is based upon the STA 2007 and the Stock Exchange

Act, with further regulations implementing MiFID requirements and other relevant EEA

directives

ranching and freedom of regulated

markets is largely dismantled, allowing EEA-regulated markets to operate cross-border within

the EU based on their home state license and supervised by their home state regulator.

The Norwegian regulatory regime is based upon the STA 2007 and the Stock Exchange

Act, with further regulations implementing MiFID requirements and other relevant EEA

directives. There are specific provisions in the Stock Exchange Act requiring regulated markets

to be operated 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. A regulated market is required to operate such 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. Imarex’s

compliance with these principles is evaluated by the NFSA.

Among the provisions of the Stock Exchange Act rules and conditions applicable to the

business operations of Imarex are the following: (i) a regulated market must be organized as a

public limited liability company; (ii) the person(s) who effectively run(s) the market operator

(the members of the board of directors and top management) must have relevant experience and

be of good repute; (iii) the board of directors must ensure that guidelines for the internal control

of the market are established; (iv) the regulated market must have internal rules and provide

remedies to ensure that conflicts of interest are identified and handled, that significant risks are

identified and handled, that non-discretionary trading rules are in place, and that the market has

proper systems including back-up solutions and effective settlement procedures for transactions;

trol

of the market are established; (iv) the regulated market must have internal rules and provide

remedies to ensure that conflicts of interest are identified and handled, that significant risks are

identified and handled, that non-discretionary trading rules are in place, and that the market has

proper systems including back-up solutions and effective settlement procedures for transactions;

(v) employees and officers of an exchange are subject to confidentiality obligations; (vi)

acquisition of ownership of 10% or more of the share capital or the votes of a regulated market

must be reported to the NFSA in advance; (vii) a regulated market must have funds appropriate

to the operations conducted; and (viii) the regulated market must have sufficiently liquid/current

assets or access to such assets taking into consideration the business of the market operator at all

times. In addition, a regulated market must submit its rules and business terms, as well as any

changes thereto, to NFSA and must establish effective arrangements and procedures to ensure

routine surveillance of its members’ compliance with the market’s own rules (market

surveillance).

In addition to the Stock Exchange Act, the conduct of trading members on Imarex is also

governed by other broad prohibitions on insider trading, further discussed below, price

manipulation, and improper business methods. Norway is a signatory to the EEA Treaty with

instruments not otherwise encompassed by this subsection but having the same characteristics as other derivative

financial instruments.

on to the Stock Exchange Act, the conduct of trading members on Imarex is also

governed by other broad prohibitions on insider trading, further discussed below, price

manipulation, and improper business methods. Norway is a signatory to the EEA Treaty with

instruments not otherwise encompassed by this subsection but having the same characteristics as other derivative

financial instruments.

Carolyn H. Jackson, Esq.

Page 23

the EU, and, accordingly, the financial directives of the EU are applicable in Norway.44 The

most important EU directive with respect to market abuse is the Market Abuse Directive,

implemented in Norway by STA 2007.45 This Directive is supplemented by European

Commission Directives and European Commission Regulations that also apply to Norway. STA

2007, which extends to commodity derivatives, prohibits, among other things, misuse of insider

information pertaining to listed financial instruments, market manipulation and the use of

unreasonable business methods, and provides criminal penalties for the two former activities. In

furtherance of this prohibition, the Norwegian Ministry of Finance has issued regulations that

include a list of “red flags” concerning market manipulation.

The red flags represent factors that must be taken into account in the assessment of

whether orders to trade or transactions constitute market manipulation under the STA 2007

ovides criminal penalties for the two former activities. In

furtherance of this prohibition, the Norwegian Ministry of Finance has issued regulations that

include a list of “red flags” concerning market manipulation.

The red flags represent factors that must be taken into account in the assessment of

whether orders to trade or transactions constitute market manipulation under the STA 2007.

These factors include, among others, (i) whether or to what extent orders or transactions

undertaken represent a significant proportion of the daily trading volume in the relevant financial

instrument on the regulated market concerned, in particular when these orders or transactions

lead to a significant change in the price of the financial instrument, (ii) whether or to what extent

orders or transactions undertaken by individuals with a significant buying or selling position in a

financial instrument lead to a significant change in the price of the financial instrument or related

derivatives or underlying assets admitted to trading on a regulated market, (iii) whether

transactions undertaken lead to no change in beneficial ownership of a financial instrument

admitted to trading on a regulated market, (iv) whether or to what extent orders or transactions

undertaken include position reversals in a short period and represent a significant proportion of

the daily trading volume in the relevant financial instrument on the regulated market concerned,

and such orders or transactions may be associated with significant changes in the price of a

financial instrument admitted to trading on a regulated market, (v) whether or to what extent

orders or transactions undertaken are concentrated within a short time span in the trading session

and lead to a price change which is subsequently reversed, (vi) whether or to what extent orders

change the best bid or offer prices in a financial instrument admitted to trading on a regulated

market, or more generally change the order book available to market participants, and

r to what extent

orders or transactions undertaken are concentrated within a short time span in the trading session

and lead to a price change which is subsequently reversed, (vi) whether or to what extent orders

change the best bid or offer prices in a financial instrument admitted to trading on a regulated

market, or more generally change the order book available to market participants, and the orders

are removed before they are executed, and (vii) whether or to what extent orders or transactions

are undertaken at or around a specific time when reference prices, settlement prices or valuations

are calculated and lead to price changes which have an effect on such prices or valuations.

Preventing insider trading and market manipulation is a key objective for the NFSA in its

supervision of the financial markets. The NFSA is also actively involved in the works of the

organization of European financial regulators, the Committee of European Securities Regulators

(CESR). CESR has addressed market manipulation and provided guidance and information on

the common operation of the Directive, addressing types of action that CESR members consider

44 The EEA Treaty is an agreement among member states of the European Free Trade Association (EFTA), the

European Community and the member states of the EU, which created the EEA and allowed EFTA member states

(which include Norway) to participate in the European Single Market without joining the EU.

45 Directive 2003/6/EC on insider dealing and market manipulation.

CESR members consider

44 The EEA Treaty is an agreement among member states of the European Free Trade Association (EFTA), the

European Community and the member states of the EU, which created the EEA and allowed EFTA member states

(which include Norway) to participate in the European Single Market without joining the EU.

45 Directive 2003/6/EC on insider dealing and market manipulation.

Carolyn H. Jackson, Esq.

Page 24

to constitute market manipulation. You represent that NFSA is following the market

manipulation guidelines as set forth by the CESR.46

With respect to financial requirements, the Stock Exchange Act, as noted above, sets out

only a general capital requirement that Imarex as a regulated market 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 Imarex’s capital adequacy,

including the risk of the business of Imarex, contractual risk, operational risk and other special

risks to which Imarex is exposed. Further, the Stock Exchange Act provides that a regulated

market shall have a reserve of liquid assets, or access to such assets, which are adequate when

taking into consideration the business of the regulated market. Imarex’s current share capital is

NOK 12,078 million (approximately $2.119 million).

B.

Regulation of NOS Clearing

The clearing business of NOS Clearing is mainly regulated under the STA 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

ch 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 may be granted and maintained are the following: (i) the clearinghouse must be

organized as a public limited company; (ii) the persons who effectively run the clearing

operations must have relevant experience and be of good repute; (iii) 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;47

(iv) the clearinghouse must have a control committee, appointed by the shareholders at its

annual general 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; (v) the general meeting must lay down instructions for the control

committee, which must be approved by the NFSA; (vi) no one can own more than 20 per cent of

the share capital of a clearinghouse;48 (vii) a clearinghouse must have a level of funds that is

appropriate to the operations conducted by the clearinghouse (the minimum requirement is NOK

46 You represent that Imarex 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

d by the clearinghouse (the minimum requirement is NOK

46 You represent that Imarex 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.

47 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.

48 The Ministry of Finance has exempted NOS Clearing from this requirement provided that the ownership

restriction is complied with at the Imarex ASA ownership level.

Carolyn H. Jackson, Esq.

Page 25

50 million, or approximately $9.7 million);49 (viii) a clearinghouse may only pursue activities

which are naturally related to the performance of clearing operations (the NFSA may request that

the clearinghouse keep non-clearing business-related activities separate from the clearing

business); (ix) 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 clearinghouse shall calculate and require the provision of such security on a continuous

basis); and (x) employees and officers of a clearinghouse are subject to confidentiality

obligations. NOS Clearing’s current share capital is NOK 290 million (approximately $51

million).

C

antee the

performance of contracts that it enters into as a party or otherwise guarantees the performance of

(the clearinghouse shall calculate and require the provision of such security on a continuous

basis); and (x) employees and officers of a clearinghouse are subject to confidentiality

obligations. NOS Clearing’s current share capital is NOK 290 million (approximately $51

million).

C.

Supervision by Finanstilsynet/NFSA

NOS Clearing and Imarex are both subject to the supervision of Finanstilsynet which is

an independent government agency that implements and expands upon laws enacted by 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.50

NFSA’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 service providers are

afforded an appropriate framework for their operations. According to the Norway Act on the

Supervision of Credit Institutions, Insurance Companies and Securities Trading etc.,

Finanstilsynet 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.”

Finanstilsynet 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 for a six

year term and is supplemented by a management team of four deputy directors general, a general

counsel and a head of communications

ynet 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 for a six

year term and is supplemented by a management team of four deputy directors general, a general

counsel and a head of communications. Finanstilsynet has approximately 235 employees and is

organized in four supervisory departments headed by the deputy directors general and support

functions at various levels. Through its supervision of enterprises and markets, Finanstilsynet

strives to promote financial stability and orderly market conditions and to instill confidence that

financial contracts will be honored and services performed as intended.51 To achieve its goals

49 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. The Ministry of Finance has issued further regulations,

which have promulgated the Capital Adequacy Directive’s (CAD) definition of a clearing house’s own funds. CAD

is an EU directive that aims to establish uniform capital requirements for both banking firms and non-bank securities

firms based primarily on the Basel II capital requirements standards. CAD is applicable to Norway by means of the

EEA Treaty.

50 Finanstilsynet, then known as Kredittilsynet, was established in 1986 as an integrated supervisory authority for

the Norwegian financial markets.

51 Finanstilsynet 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

eans of the

EEA Treaty.

50 Finanstilsynet, then known as Kredittilsynet, was established in 1986 as an integrated supervisory authority for

the Norwegian financial markets.

51 Finanstilsynet 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

Carolyn H. Jackson, Esq.

Page 26

Finanstilsynet 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 NOS Clearing by Finanstilsynet is authorized in the STA 2007 and the

supervision of Imarex by Finanstilsynet is manifested in the Stock Exchange Act.52 Both NOS

Clearing and Imarex are at all times obligated to furnish Finanstilsynet with such information as

it may require about matters related to their respective business and activities. In particular,

NFSA monitors the capital levels of both institutions and Imarex and NOS Clearing are required

to report key figures in semi-annual and annual reports. Imarex and NOS are required to conduct

and report to NFSA annual risk evaluations and audits. Finanstilsynet also approves Imarex

rules and rule changes prior to implementation and may, on its own initiative and without

notification, undertake on-site inspections.

Finanstilsynet periodically performs reviews of Imarex to ensure that it meets the legal

requirements under its license and applicable laws. These reviews typically begin with written

questions and document requests, followed by on-site meetings where NFSA may present

additional questions. The reviews are documented in a formal report that Imarex is allowed to

comment on before the conclusions are made public

iodically performs reviews of Imarex to ensure that it meets the legal

requirements under its license and applicable laws. These reviews typically begin with written

questions and document requests, followed by on-site meetings where NFSA may present

additional questions. The reviews are documented in a formal report that Imarex 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 Finanstilsynet.53

D.

Regulatory Regime Governing Intermediaries

Sections 9-1 and 9-24 of STA 2007 require that investment firms or credit institutions

within the EEA must obtain a public license in order to operate as a broker/broker dealer or

provide other investment services in commodity derivatives and other derivatives contracts

which, such as the Imarex listed products, constitute financial instruments.54 Section 3-9 of the

market, stock exchanges and authorized market places, settlement centers and securities registers, estate agencies,

debt collection agencies, external accountants and auditors.

52 The rules and regulatory regime to which Imarex is subject also apply to the Oslo Stock Exchange (which,

however, is subject to certain additional rules relating to the use of the “exchange” designation), and Imarex is on

the list of Norwegian regulated markets reported to the European Commission in accordance with MiFID.

53 Under Norwegian law, there is no specific requirement concerning how often the NFSA should visit a regulated

market such as Imarex or NOS as a clearing house. On average, the NFSA visits Imarex and NOS collectively once

or twice yearly. Once every two or three years, the NFSA will conduct a full review of Imarex

gulated markets reported to the European Commission in accordance with MiFID.

53 Under Norwegian law, there is no specific requirement concerning how often the NFSA should visit a regulated

market such as Imarex or NOS as a clearing house. On average, the NFSA visits Imarex and NOS collectively once

or twice yearly. Once every two or three years, the NFSA will conduct a full review of Imarex. In addition, Imarex

as part of its regular compliance duties, provides information to the NFSA and there is frequent communication

between the two parties regarding various matters of compliance. The NFSA engages in regular phone

conversations with Imarex Group and the two parties have a running dialogue on matters both small and large

54 Section 9-2 of STA 2007 provides for exceptions from the authorization requirement for certain firms dealing

mainly in derivatives. The exceptions apply to, among others, anyone who has trading on his own account in

commodities or commodity derivatives as his main business, provided that the undertaking is not part of a group the

main business of which is the provision of other investment services or banking services; provides investment

services consisting exclusively in trading on his own account on the derivatives market and the spot market,

Carolyn H. Jackson, Esq.

Page 27

STA 2007, which prohibits unreasonable 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 Imarex’s listed

products.

The Norwegian Securities Trading Regulations impose, among other things, strict

recordkeeping requirements with respect to reception and execution of client orders

pants 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 Imarex’s listed

products.

The Norwegian Securities Trading Regulations impose, 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: (i) promptly and accurately

record and allocate client orders; (ii) 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; (iii) inform the client about

any material difficulty relevant to the proper execution of the order promptly upon becoming

aware of the difficulty; (iv) 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 (v) not misuse, and take reasonable

steps to prevent the misuse of, information relating to pending client orders. In compliance with

the Securities Trading Regulations, most Norwegian investment firms maintain electronic

records of all customer orders and trades.55 The STA 2007 also requires all investment firms in

Norway to file electronic reports with Finanstilsynet.

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

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. All regulatory insider trading provisions are enforced by NFSA. 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.56

This provision is enforced by NFSA and Imarex.57

provided that his sole purpose is to hedge his own positions on the derivatives market and provided that clearing

members or clearing houses on the same markets enter as parties to or otherwise guarantee the performance of

contracts; or trades for the accounts of other members on the derivatives markets, or quotes prices for such

members, provided that clearing members or clearing houses on the same markets enter as parties to or otherwise

guarantee the performance of contracts entered into or prices quoted.

55 Any investment firm that does not maintain electronic records is required to maintain hard copy records

ontracts; or trades for the accounts of other members on the derivatives markets, or quotes prices for such

members, provided that clearing members or clearing houses on the same markets enter as parties to or otherwise

guarantee the performance of contracts entered into or prices quoted.

55 Any investment firm that does not maintain electronic records is required to maintain hard copy records.

56 Although the STA 2007 does not expressly address the concept of “wash sales”, it does contain a broad general

prohibition on market manipulation practices and prohibits any “transactions or orders to trade which give, or are

likely to give, false, incorrect or misleading signals as to the supply of, demand for or price of financial instruments,

or which secure the price of one or several financial instruments at an abnormal or artificial level” as well as “any

Carolyn H. Jackson, Esq.

Page 28

Finally, as previously noted, under Norwegian law and consistent with general European

practice, a market place or exchange is not responsible for the supervision of handling of client

orders by intermediaries. Rather, the federal regulator responsible for licensing and supervision

of the investment firms (NFSA) conducts all relevant surveillance and enforcement.

VI.

IMAREX AND NOS CLEARING INTERNAL REGULATIONS

A.

Market and Trade Surveillance

In addition to the provisions of Norwegian statutory law, the Imarex and NOS Clearing

rulebooks further regulate the obligations and rights of the market participants in trading and

clearing and settlement processes and assure compliance with government regulations. Pursuant

to Section 27 of the Stock Exchange Act, which requires all regulated markets to establish an

internal market surveillance function, the Ministry of Finance has issued regulations setting forth

market surveillance guidelines

egulate the obligations and rights of the market participants in trading and

clearing and settlement processes and assure compliance with government regulations. Pursuant

to Section 27 of the Stock Exchange Act, which requires all regulated markets to establish an

internal market surveillance function, the Ministry of Finance has issued regulations setting forth

market surveillance guidelines.

Imarex’s market surveillance is carried out in accordance with the Exchange’s Market

Surveillance Guidelines, which have been submitted to and reviewed by Finanstilsynet and

which are designed to ensure that Imarex’s market surveillance fulfills the requirements set by

applicable legislation and regulation. According to the guidelines, market surveillance at Imarex

is designed to prevent market abuses such as insider trading and market manipulation by

ensuring that all orders and transactions are genuine, real and non-fictitious, not based on the

misuse of inside information,58 and that no members misuse the anonymity provided by the

trading system.

Pursuant to the Stock Exchange Act, Imarex can require members to provide all the

information that Imarex may require to operate the marketplace and to investigate suspicious

activities. Such information must be given regardless of any contractual duty of confidentiality

to which the member may be subject. A member that does not provide Imarex with such

information may, pursuant to the Stock Exchange Act, be fined, sentenced for up to one year in

prison, or both. Imarex may also suspend from trading or terminate the membership of a trading

transactions entered into or orders to trade given in relation to any form of misleading conduct.” Imarex represents

that the broad scope of this prohibition should effectively encompass a prohibition on any “wash trading”, as defined

under the CEA

transactions entered into or orders to trade given in relation to any form of misleading conduct.” Imarex represents

that the broad scope of this prohibition should effectively encompass a prohibition on any “wash trading”, as defined

under the CEA.

57 The Imarex Rulebook requires that Imarex monitor all trading on the markets in order to, among other things,

“facilitate fair and orderly trading and detect and prevent conduct that may involve insider dealing, market

manipulation or other market abuse.”

58 Surveillance guards against misuse of insider information by monitoring trading activity to detect contracts

matched on terms which could reflect that traders are acting on such information. Such behavior may include a

trading member suddenly changing its trading pattern as compared to its historic trading activity or matching

contracts on off-market terms, for example at a price which is substantially higher/lower than the prevailing market

prices.

Carolyn H. Jackson, Esq.

Page 29

member. In addition, under STA 2007, a person who does not provide Finanstilsynet with

required information may also be fined, sentenced for up to one year in prison, or both.

The Market Surveillance Committee (MSC) at Imarex is chaired by the Market

Surveillance Officer (MSO). The current MSO has been with Imarex for more than 4 ½ years

and has an advanced degree from the Norwegian School of Economics and Business

Administration as well as extensive experience from the financial shipping market

ay also be fined, sentenced for up to one year in prison, or both.

The Market Surveillance Committee (MSC) at Imarex is chaired by the Market

Surveillance Officer (MSO). The current MSO has been with Imarex for more than 4 ½ years

and has an advanced degree from the Norwegian School of Economics and Business

Administration as well as extensive experience from the financial shipping market. Having

followed Imarex's trading members closely since taking up the post, the MSO is familiar with

their trading patterns and habits.59 In addition to the MSO, the MSC includes two additional

members selected by the Board: a committee member with extensive experience from the

shipping market and an attorney. The MSO and one committee member are employed by Imarex

and report directly to Imarex’s Board. The second committee member is employed by the

Imarex Group and, in these market surveillance matters, also reports to Imarex’s Board.

The MSO continuously monitors the market conduct of trading participants and

investigates possible breaches of the Imarex Rulebook and the prohibitions on market

manipulation and insider trading. Imarex does not employ its own accounting/auditing team or

legal counsel; these functions are supplied by the Imarex Group, which employs two full-time

legal professionals, one certified auditor and an accounting staff of three at the same office

location as Imarex. In London, Spectron, whose IT team provides technical market supervision

for the Imarex trading system, employs additional resources in the form of one UK qualified

attorney and several professionals with auditor/accounting background.

Neither Imarex nor its regulators utilize a routine large trader reporting regime and do not

rely upon computerized trade practice surveillance. Rather, Imarex relies on a team of

professionals with significant market experience to identify and follow up on suspicious market

activity

s in the form of one UK qualified

attorney and several professionals with auditor/accounting background.

Neither Imarex nor its regulators utilize a routine large trader reporting regime and do not

rely upon computerized trade practice surveillance. Rather, Imarex relies on a team of

professionals with significant market experience to identify and follow up on suspicious market

activity. MSC members have access to a computer system that allows them to access and

routinely monitor trading data for all contracts traded. In addition, each of the two trading desks,

Tanker and Dry Bulk, has a Desk Manager who is also responsible for monitoring on his own set

of computer screens, as part of the general supervision of the market, the actual transacted prices

of contracts and reporting to the MSC any prices that deviate from the acceptable volatility

range. Should any contract observed by the Desk Manager appear to be other than a legitimate

contract (an irregular action),60 the Desk Manager will immediately notify the MSO, who will

investigate.61

59 The MSO was approved by Finanstilsynet on December 9, 2009.

60 The Imarex Market Surveillance Instruction defines irregular action to include, among other things: (i) misuse

of inside information; (ii) market manipulation; (iii) use of unreasonable business methods; (iv) a transaction that

constitutes a violation of the Rulebook; (v) an act other than a transaction that constitutes a violation of the

Rulebook; and (vi) any other activity by a trading member which Imarex, in its reasonable opinion, believes

constitutes an attempt to irregularly and unjustifiably influence the market.

61 You represent that suspicious trading has not been identified more than a few times per year and, as such,

suspicious trading represents a negligible percentage of overall trading at Imarex.

olation of the

Rulebook; and (vi) any other activity by a trading member which Imarex, in its reasonable opinion, believes

constitutes an attempt to irregularly and unjustifiably influence the market.

61 You represent that suspicious trading has not been identified more than a few times per year and, as such,

suspicious trading represents a negligible percentage of overall trading at Imarex.

Carolyn H. Jackson, Esq.

Page 30

The MSO conducts a review of trading twice daily, reviewing contracts matched

following the prior review, as well as contracts matched in Trayport outside of office hours.62 At

least once each week the MSO is required to review the trading members’ positions to determine

if a possible concentration of positions exists. If so, the MSO will investigate to determine if

such concentration constitutes an irregular action. At least quarterly, the MSO is required to

perform a routine review of at least five randomly chosen trading members that have entered into

contracts during the preceding six months to evaluate compliance with the Imarex Rulebook.

Market surveillance undertakes formal reporting of suspected breaches on laws and regulations

to the Norwegian supervisory authorities according to the requirements in the licenses. Any

sanctions imposed are published after taking effect.

Imarex’s surveillance program focuses largely on two areas. With respect to insider

trading, market participants are prohibited from trading when possessing insider information or

from misuse of insider information. The STA 2007 defines insider information as any

information of a precise nature relating to financial instruments, the issuers thereof or other

circumstances which has not been made public and is not commonly known in the market and

which is likely to have a significant effect on the price of those financial instruments or related

financial instruments

or

from misuse of insider information. The STA 2007 defines insider information as any

information of a precise nature relating to financial instruments, the issuers thereof or other

circumstances which has not been made public and is not commonly known in the market and

which is likely to have a significant effect on the price of those financial instruments or related

financial instruments. Inside information on commodity derivatives means information of a

precise nature which is not publicly available or commonly known and which directly or

indirectly concerns one or several commodity derivatives, and which the participants in the

market where the commodity derivatives are traded would expect to receive in accordance with

Finanstilsynet’s view on accepted market practice on the market in question. 63 NFSA guidelines

indicate that insider information with respect to commodity derivatives includes “any

information which an investor reasonably would use as part of the basis for its investment

decision.”

With respect to market manipulation, market participants are prohibited from engaging in

market manipulation as defined in applicable Norwegian law, a definition which stems from the

definition of market manipulation contained in the EU Market Abuse Directive, 64 which sets

forth a common framework for handling insider dealing and market manipulation in the EU and

the proper disclosure of information to the market. The public regulations on market

surveillance, which are included in the regulations to the Stock Exchange Act, regulate tasks that

the market surveillance department performs. The main task of the market surveillance team is

to monitor the orders of market participants and trades in the Imarex regulated market. If there is

suspicion of any breach, the team gathers information and investigates according to the

procedures described below

which are included in the regulations to the Stock Exchange Act, regulate tasks that

the market surveillance department performs. The main task of the market surveillance team is

to monitor the orders of market participants and trades in the Imarex regulated market. If there is

suspicion of any breach, the team gathers information and investigates according to the

procedures described below.

62 You represent that Imarex staff in Houston and Singapore will be monitoring the trading activity on Trayport

outside of Norwegian office hours.

63 “Information which participants would expect to receive” means information which is normally made available

to market participants or information the publication of which is required by statute, regulations or other regulatory

regime, including private law regulation and practices on the commodity derivatives market concerned or the

underlying commodity derivatives market.

64 EU Market Abuse Directive 2003/6/EC.

Carolyn H. Jackson, Esq.

Page 31

The Imarex Rulebook states that each trading member represents and warrants that it will

not engage in any form of illegal trading activity, including but not limited to trading that is

based upon inside information or market manipulation as defined in Norwegian law

incorporating the EU Market Abuse Directive. Pursuant to the Rulebook, Imarex's MSC has the

responsibility to take action on attempts at insider dealing or market manipulation. Imarex can

cancel, reverse or disregard any trade if the MSC determines that the trade has been executed

using insider information or is an attempt to manipulate the market, and trading members may be

suspended if found to have acted in such a manner.

B.

Investigation and Enforcement

The Imarex regulated market is continuously monitored by a team of individuals with

significant market experience, as well as legal training

rd any trade if the MSC determines that the trade has been executed

using insider information or is an attempt to manipulate the market, and trading members may be

suspended if found to have acted in such a manner.

B.

Investigation and Enforcement

The Imarex regulated market is continuously monitored by a team of individuals with

significant market experience, as well as legal training. If the team discovers conduct that

appears to be in breach of the applicable rules, it must conduct a further investigation. Such

investigation entails contacting the members having concluded a trade and, if necessary, asking

for a written explanation of the events that triggered the investigation. If the matter is not

resolved after the initial investigation, a case will be opened. Imarex will continue to investigate,

seeking to obtain additional information from the relevant market participants and, if relevant,

other parties and authorities.

Imarex's enforcement powers over its members are those provided for in the Rulebook

and in the Stock Exchange Act. Pursuant to the Imarex Rulebook, Imarex may cancel, reverse or

disregard trades if the trades have been made utilizing improper trading practices and/or attempts

to manipulate the markets in any way. Imarex may cancel or alter a contract that is the result of

an erroneous order.65 Imarex may suspend members found to have violated the rules and/or

engaged in undue trading practices and/or attempts to manipulate the markets in any way.

Imarex may also terminate the membership of a member and may suspend or withdraw a

member’s trading rights immediately if it suspects market abuse.

If Imarex, after its review and investigation of suspicious activity, concludes that a

violation of the rules or prohibitions against insider trading or market manipulation likely has

occurred, it will send a report to the NFSA for further investigation, which may result in

additional sanctions or reporting to the public prosecution authority (Økokrim)

iately if it suspects market abuse.

If Imarex, after its review and investigation of suspicious activity, concludes that a

violation of the rules or prohibitions against insider trading or market manipulation likely has

occurred, it will send a report to the NFSA for further investigation, which may result in

additional sanctions or reporting to the public prosecution authority (Økokrim). Finanstilsynet

has a separate unit generally responsible for investigating insider trading violations and instances

of market manipulation (this unit is separate from the unit responsible for surveillance and

regulation of Imarex, investment firms and other regulated institutions) that is staffed

accordingly. Under the Securities Trading Regulations, Finanstilsynet has an expansive set of

powers that permit it to investigate and pursue market abuses, including, among others, authority

to order any party, including non-members, to disclose information and present documents,

authority to order the surrender of unlawful gain, and authority to impose violation penalties.

65 Any action to cancel or alter a contract must be determined by the management of Imarex in consultation with

the Board.

Carolyn H. Jackson, Esq.

Page 32

C.

Price Developments Monitoring

Imarex represents that the product listing mechanism adopted by the Exchange allows for

early detection of manipulative practices without heavy reliance on computerized surveillance

processes. For each Imarex-listed product there are a number of different series with different

delivery periods listed. The pricing in the different products series in each main product

typically represents an established pattern over extended periods of time, which allows Imarex

and market participants to detect from one minute to the next if traded prices deviate from the

pattern. All trading and price developments are carefully monitored by qualified Imarex

personnel

ith different

delivery periods listed. The pricing in the different products series in each main product

typically represents an established pattern over extended periods of time, which allows Imarex

and market participants to detect from one minute to the next if traded prices deviate from the

pattern. All trading and price developments are carefully monitored by qualified Imarex

personnel. Historically, any significant price developments have been effectively and promptly

identified by Imarex following internal investigations and analysis. Traders and market

participants also play an important role in identifying significant price developments that are not

warranted by changed circumstances or availability of new information on the market and

provide leads for further investigation by Imarex’s personnel.

The limited number of listed products on Imarex differentiates Imarex from a number of

other derivative markets with a much broader scope of listed products, such as stock derivatives

markets offering derivatives products in a variety of underlying references or commodity

markets, where derivatives are listed for a large number of commodities. You represent that,

arguably, computer-based surveillance systems play a significantly greater role in these larger

and more diversified derivative markets, as they must simultaneously monitor price

developments in a large number of non-related products and require a “trigger” when significant

price developments occur. Finally, you represent that since the Imarex market opened, market

surveillance has reviewed several contracts for potential market manipulation cases and that none

of Imarex’s investigations of deviating market prices have thus far resulted in the discovery of

actual attempts at market manipulation.

VII

on-related products and require a “trigger” when significant

price developments occur. Finally, you represent that since the Imarex market opened, market

surveillance has reviewed several contracts for potential market manipulation cases and that none

of Imarex’s investigations of deviating market prices have thus far resulted in the discovery of

actual attempts at market manipulation.

VII.

INFORMATION-SHARING

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

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

directly from Imarex pursuant to the terms and conditions of the no-action relief granted herein.

Moreover, Imarex, in its no-action request, undertakes to provide the Commission, on an as

needed basis, information necessary to evaluate the continued eligibility of Imarex and its

members for the no-action relief; or to enable the Commission to carry out its duties under the

Act and CFTC regulations. Imarex is a signatory to the Exchange International Information

Sharing Memorandum of Understanding and Agreement dated March 15, 1996, a framework for

over 60 futures exchanges and clearing organizations worldwide to share information relevant to

managing global market emergencies.

With respect to information sharing among the regulatory authorities, additional

information relevant to Imarex and Imarex’s market participants will be available to the

Commission and its staff under the terms of the information-sharing arrangement to which both

the CFTC and the NFSA are parties, the IOSCO Multilateral Memorandum of Understanding

Concerning Consultation and Cooperation and the Exchange of Information (MMOU) dated

ng the regulatory authorities, additional

information relevant to Imarex and Imarex’s market participants will be available to the

Commission and its staff under the terms of the information-sharing arrangement to which both

the CFTC and the NFSA are parties, the IOSCO Multilateral Memorandum of Understanding

Concerning Consultation and Cooperation and the Exchange of Information (MMOU) dated

Carolyn H. Jackson, Esq.

Page 33

May, 2002. By letter dated January 15, 2010, the Finanstilsynet confirmed that the NFSA will,

upon request from the Commission or any division thereof, provide the Commission with

information, as regulated by the MMOU, in connection with the placement in the U.S. of

electronic facilities providing access to a regulated market supervised by NFSA.66

VIII. CONCLUSION

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

has reviewed and considered Imarex's direct access no-action request and the information and

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

furnished by Imarex indicate that Imarex and its members are subject to oversight in Norway by

a regulatory regime that is responsible for enforcing regulatory objectives that generally are

equivalent to those in the U.S.; that the regulatory regime provides basic protections for

customers trading on Imarex’s market and for the integrity of the market itself; that Imarex and

its regulatory authority employ surveillance, compliance and enforcement mechanisms designed

to ensure compliance with statutes and Imarex’s and the regulatory authority’s rules and

regulations; that Imarex adheres to the IOSCO Principles; and that adequate information-sharing

arrangements applicable to the activities of Imarex are in place.67

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

no-action request, the Division has determined that granting direct access no-action relief to

Imarex and its members would

y’s rules and

regulations; that Imarex adheres to the IOSCO Principles; and that adequate information-sharing

arrangements applicable to the activities of Imarex are in place.67

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

no-action request, the Division has determined that granting direct access no-action relief to

Imarex and its members would not be contrary to the public interest. Accordingly, subject to

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

Commission institute enforcement action against Imarex or its trading members if Imarex does

not seek designation as a DCM or registration as a DTEF pursuant to Sections 5 or 5a,

respectively, of the Act or comply with any other section of the Act or Commission regulations

relating specifically to DCMs or DTEFs if:

1.

Imarex trading members that qualify as ECPs trade for their proprietary accounts as

defined in Commission Regulation 1.3(y) through Trayport and MPS in the U.S.;

2.

Imarex trading members that are registered with the CFTC as FCMs or are Rule 30.10

Firms submit orders to the trading system for execution from or on behalf of U.S. customers that

qualify as ECPs;

3.

Imarex trading members that are registered with the CFTC as CPOs or CTAs, or that are

66 Letter from Eirik Bunaes, Deputy Director General and Britt Hjellegjerde, Head of Section, Finanstilsynet, to

Duane C. Andresen, Senior Special Counsel, Division of Market Oversight, Commodity Futures Trading

Commission (January 15, 2010).

67

The Division notes that the foregoing is not intended to be an exhaustive list of the factors relevant to its

decision to grant the direct access no-action relief requested by Imarex nor of the factors that the Division might

consider when analyzing no-action requests from other exchanges

ecial Counsel, Division of Market Oversight, Commodity Futures Trading

Commission (January 15, 2010).

67

The Division notes that the foregoing is not intended to be an exhaustive list of the factors relevant to its

decision to grant the direct access no-action relief requested by Imarex nor of the factors that the Division might

consider when analyzing no-action requests from other exchanges. No-action requests, by their nature, require case-

by-case evaluation and the Division's conclusion regarding any particular no-action request will be based upon the

facts and circumstances presented at the time of its review of that request.

Carolyn H. Jackson, Esq.

Page 34

exempt from such CPO or CTA registration pursuant to Commission Regulation 4.13 or 4.14,

submit orders on behalf of U.S. pools they operate that qualify as ECPs or accounts of U.S.

customers that qualify as 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.

Imarex trading members that are registered with the CFTC as FCMs or are Rule 30.10

Firms accept orders transmitted via AORS for submission to the trading system from or on

behalf of U.S. customers that qualify as ECPs.

The Division's no-action position shall become effective immediately with respect to the

following Imarex contracts:

Tanker Futures

Underlying

Index provider

Available series

TD3

Baltic Exchange

6M / 6Q / 2Y

TD5

Baltic Exchange

6M / 6Q / 2Y

TD7

Baltic Exchange

6M / 6Q / 2Y

TD8

Baltic Exchange

6M / 6Q / 2Y

TD9

Baltic Exchange

6M / 6Q / 2Y

TD11

Baltic Exchange

6M / 6Q / 2Y

TD16

Baltic Exchange

6M / 6Q / 2Y

TD17

Baltic Exchange

6M / 6Q / 2Y

TC2

Baltic Exchange

6M / 6Q / 2Y

TC4

Platts

6M / 6Q / 2Y

TC5

Platts

6M / 6Q / 2Y

TC6

Baltic Exchange

6M / 6Q / 2Y

TC11

Baltic Exchange

6M / 6Q / 2Y

TD3_TCE

Balt

2Y

TD7

Baltic Exchange

6M / 6Q / 2Y

TD8

Baltic Exchange

6M / 6Q / 2Y

TD9

Baltic Exchange

6M / 6Q / 2Y

TD11

Baltic Exchange

6M / 6Q / 2Y

TD16

Baltic Exchange

6M / 6Q / 2Y

TD17

Baltic Exchange

6M / 6Q / 2Y

TC2

Baltic Exchange

6M / 6Q / 2Y

TC4

Platts

6M / 6Q / 2Y

TC5

Platts

6M / 6Q / 2Y

TC6

Baltic Exchange

6M / 6Q / 2Y

TC11

Baltic Exchange

6M / 6Q / 2Y

TD3_TCE

Baltic Exchange

6M / 6Q / 3Y

Dry Bulk Futures

Underlying

Index provider

Available series

Baltic Dry Index

BDI

Baltic Exchange

4M / 4Q / 4Y

C4

Baltic Exchange

12M / 3Y

C4 AVG

Baltic Exchange

4M / 6Q / 3Y

C7

Baltic Exchange

12M / 3Y

C7 AVG

Baltic Exchange

4M / 6Q / 3Y

P2A

Baltic Exchange

6M

P3A

Baltic Exchange

6M

CS4TC

Baltic Exchange

4M / 4Q / 2 halfY / 5Y

Carolyn H. Jackson, Esq.

Page 35

PM4TC

Baltic Exchange

4M / 4Q / 2 halfY / 5Y

HS6TC

Baltic Exchange

4M / 4Q / 2 halfY / 5Y

SM6TC

Baltic Exchange

4M / 4Q / 2 halfY / 5Y

Bunker Oil Futures

Underlying

Index provider

Available series

RDM35FO

Platts

6M / 6Q / 2Y

NWE10FO

Platts

6M / 6Q / 2Y

SPO180FO

Platts

6M / 6Q / 2Y

SPO380FO

Platts

6M / 6Q / 2Y

USG30FO

Platts

6M / 6Q / 2Y

If additional futures and option contracts become available for trading through the trading

system, Imarex may make such futures and option contracts available for trading by direct access

from the U.S. in accordance with the provisions of the Commission's “Notice of Revision of

Commission Policy Regarding the Listing of New Futures and Option Contracts by Foreign

Boards of Trade that have Received Staff No-Action Relief to Provide Direct Access to their

Automated Trading Systems from Locations in the United States”68 and (for option contracts)

“Notice of Additional Conditions on the No-Action Relief When Foreign Boards of Trade That

Have Received Staff No-Action Relief To Permit Direct Access to Their Automated Trading

Systems From Locations in the United States List for Trading From the U.S

No-Action Relief to Provide Direct Access to their

Automated Trading Systems from Locations in the United States”68 and (for option contracts)

“Notice of Additional Conditions on the No-Action Relief When Foreign Boards of Trade That

Have Received Staff No-Action Relief To Permit Direct Access to Their Automated Trading

Systems From Locations in the United States List for Trading From the U.S. Linked Futures and

Option Contracts and a Revision of Commission Policy Regarding the Listing of Certain New

Option Contracts.”69

68 71 Fed. Reg. 19877 (April 18, 2006); corrected at 71 Fed. Reg. 21003 (April 24, 2006). The Notice of Revision

does not apply to broad-based stock index futures and option contracts that are covered by Section 2(a)(1)(C) of the

Act. Foreign boards of trade are required to seek and receive written supplemental no-action relief from

Commission staff prior to offering or selling such contracts through U.S.-located trading systems. Additionally,

should the Exchange propose to make available pursuant to the no-action relief granted in this letter a contract which

settles against any price, including the daily or final settlement price, of (1) a contract listed for trading on a CFTC-

regulated DCM or DTEF, or (2) a contract listed for trading on an ECM that has been determined to be a significant

price discovery contract (linked contract), the Division will impose additional conditions that must be met for the

no-action relief to continue in effect for those contracts.

69 74 Fed. Reg. 3570 (January 21, 2009). The Division recognizes that none of Imarex’s currently listed contracts

are linked contracts as that term is defined. See Id. at 3571. However, the NYMEX, a CFTC-regulated DCM,

offers several of the same contracts. The Division notes that both the Imarex and NYMEX contracts are settled

based upon the same indices published by the Baltic Exchange and Platts

ed. Reg. 3570 (January 21, 2009). The Division recognizes that none of Imarex’s currently listed contracts

are linked contracts as that term is defined. See Id. at 3571. However, the NYMEX, a CFTC-regulated DCM,

offers several of the same contracts. The Division notes that both the Imarex and NYMEX contracts are settled

based upon the same indices published by the Baltic Exchange and Platts. Therefore, although the Division has

determined that, with respect to these contracts traded on both exchanges, it does not see a current need for enhanced

market surveillance or additional information sharing with Imarex, the Division may revisit the issue in the future to

determine if such a need has arisen. In addition, the Division notes that as part of Imarex’s direct information-

sharing obligations to the Commission pursuant to the conditions attached to this no-action relief, Imarex will

provide immediate and direct response to inquiries from Commission staff regarding potential market abuse

associated with these identically settled contracts.

Carolyn H. Jackson, Esq.

Page 36

The scope of the Division's no-action position is restricted to providing relief from the

requirement that Imarex obtain DCM designation or DTEF registration pursuant to Sections 5

and 5a, respectively, of the CEA and regulatory requirements that flow specifically from the

DCM designation and DTEF registration requirements if the above-referenced contracts are

made available in the U.S. for trading through Trayport in the manner set forth herein. The

Division's no-action position does not extend to any other provision of the Act, any other

Commission regulations or orders, or to any registered futures association rules and does not

excuse Imarex or its members from compliance with any applicable requirements thereunder.

Nor does the no-action position alter, restrict, or expand the coverage of existing Commission

exemptions for particular products

s no-action position does not extend to any other provision of the Act, any other

Commission regulations or orders, or to any registered futures association rules and does not

excuse Imarex or its members from compliance with any applicable requirements thereunder.

Nor does the no-action position alter, restrict, or expand the coverage of existing Commission

exemptions for particular products.

The Division specifically notes that its no-action position does not alter the general

requirement that a firm operating pursuant to the no-action relief provided herein must be

appropriately registered or exempt from such registration to engage in the offer or sale of a

foreign futures contract or a foreign option transaction for or on behalf of a U.S. customer. For

example, nothing in this letter is intended to alter current Commission rules that require that any

foreign firm that clears trades on a fully-disclosed basis on behalf of U.S. persons (including

where the U.S. person is a non-clearing member of a foreign board of trade trading solely for its

own account) be a registered FCM or a Rule 30.10 Firm.70 However, if a foreign firm solely

carries accounts on behalf of U.S. customers that are the foreign firm’s or any registered FCM’s

proprietary accounts (as defined in Rule 1.3(y)) or the foreign firm is either a member of the

relevant foreign board of trade or is a foreign affiliate of a registered FCM and its sole contact

with a U.S. customer is that it carries the FCM's omnibus account, then the firm need not register

under Rule 30.4 nor confirm relief under Rule 30.10.

Moreover, the Division's no-action position does not amend, revise, or negate the

obligations of CPOs, CTAs, FCMs and Rule 30.10 Firms under the CEA, Commission

regulations, or Rule 30.10 orders. For example, Rule 30.10 Firms continue to be prohibited from

maintaining a presence in the U.S. Thus, Rule 30.10 Firms cannot provide direct access to

Trayport in the U.S

lief under Rule 30.10.

Moreover, the Division's no-action position does not amend, revise, or negate the

obligations of CPOs, CTAs, FCMs and Rule 30.10 Firms under the CEA, Commission

regulations, or Rule 30.10 orders. For example, Rule 30.10 Firms continue to be prohibited from

maintaining a presence in the U.S. Thus, Rule 30.10 Firms cannot provide direct access to

Trayport in the U.S. (although they can accept orders overseas from customers located in the

U.S. that submit such orders by telephone or through an AORS located in the U.S.). FCMs or

Rule 30.10 Firms who solicit or accept orders from U.S. customers for trading on Trayport

remain responsible for, among other things, complying with risk disclosure, the handling and

allocating of customer orders, and the segregation of customer funds.

The Division's no-action position does not affect the Commission's ability to bring

appropriate action for fraud or manipulation. The Division specifically notes that the use of

AORSs to transmit orders to Trayport shall be subject to all existing Commission rules and

70 At this time, the Commission has not issued a Rule 30.10 order to Imarex permitting its members to conduct

brokerage activities on behalf of U.S. persons without having to register as an FCM. However, an Imarex member

otherwise may qualify as a Rule 30.10 firm pursuant to other orders issued by the Commission pursuant to Rule

30.10. See, e.g., 67 FR 30785 (May 8, 2002) (permitting firms authorized by Eurex Deutschland to solicit and

accept orders from U.S. persons for otherwise permitted transactions on all non-U.S. exchanges where such

members are authorized to conduct business on behalf of customers pursuant to German law).

y as a Rule 30.10 firm pursuant to other orders issued by the Commission pursuant to Rule

30.10. See, e.g., 67 FR 30785 (May 8, 2002) (permitting firms authorized by Eurex Deutschland to solicit and

accept orders from U.S. persons for otherwise permitted transactions on all non-U.S. exchanges where such

members are authorized to conduct business on behalf of customers pursuant to German law).

Carolyn H. Jackson, Esq.

Page 37

regulations and to any future rules or guidance issued by the Commission or the Division.

Finally, this letter does not address issues that might arise under the Securities Act of 1933, the

Securities Exchange Act of 1934, or any other applicable federal securities law or rule

promulgated thereunder.

The Division's no-action position is subject to compliance with the following conditions:

1.

Imarex will continue to satisfy the criteria for a regulated market supervised by NFSA

according to the

This text is long and has been trimmed here. Open the source document for the complete record.