No-action relief granted to an entity for its branch from registration as an IB pursuant to CEA Section 4d(g) to provide sufficient time for the Commission to review the entity’s 30.10 Petition, subject to certain con...

Summary: No-action relief granted to an entity for its branch from registration as an IB pursuant to CEA Section 4d(g) to provide sufficient time for the Commission to review the entity’s 30.10 Petition, subject to certain conditions.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Division of Swap Dealer and

Intermediary Oversight

Matthew B. Kulkin

Director

CFTC Letter No. 19-10 No-Action April 02, 2019

Re:

Time-Limited No-Action Position on Introducing Broker Registration –

Commodity Exchange Act Section 4d(g)

Ladies and Gentlemen:

This letter is in response to a request, dated February 12, 2019, for a no-action position

received by the Division of Swap Dealer and Intermediary Oversight (“DSIO”) of the

Commodity Futures Trading Commission (“Commission”) from “A”, a global financial

institution organized under the laws of “Country 1”. “A” is seeking temporary relief from

registration as an introducing broker (“IB”)1 for activities to be undertaken by its

London Branch (“B”) as it realigns its operations consistent with forthcoming regulatory

changes in the United Kingdom (“UK”). Specifically, the relief would permit “B” to

accept futures and options orders from U.S. persons for execution on U.S. designated

contract markets (“DCMs”) to be cleared through its affiliated FCM located in the U.S.,

notwithstanding that “A” has not registered with the Commission as an IB pursuant to

section 4d(g) of the Commodity Exchange Act (“CEA”).2

I.

Regulatory Background

Pursuant to section 4d(g) of the CEA, it is unlawful for any person to act in the capacity

of an IB, unless such person is registered as an IB with the Commission

) to be cleared through its affiliated FCM located in the U.S.,

notwithstanding that “A” has not registered with the Commission as an IB pursuant to

section 4d(g) of the Commodity Exchange Act (“CEA”).2

I.

Regulatory Background

Pursuant to section 4d(g) of the CEA, it is unlawful for any person to act in the capacity

of an IB, unless such person is registered as an IB with the Commission. The CEA and

Commission regulation 1.3 defines an IB as any person that, for compensation or profit,

is engaged in soliciting or accepting orders for the purchase or sale of, among other

financial products, any commodity for future delivery.3

1 For the definition of introducing broker, see Section 1a(31) of the Commodity Exchange Act (“CEA”) and

Commission regulation 1.3. 7 U.S.C. 1a(31) and 17 CFR 1.3. The Commission’s regulations are found in

Chapter 17 of the Code of Federal Regulations, 17 CFR Part 1 et seq.

2 7 U.S.C. § 1 et. seq.

3 See Section 1a(31) of the CEA, 7 U.S.C. 1a(31), and 17 CFR 1.3.

“A”: Time Limited Registration No-Action Position

Page 2

However, Commission regulation 3.10(c)(4) provides an exception from registration as

an IB. Such regulation provides that a person located outside of the U.S. that is exempt

from registration as a futures commission merchant (“FCM”) in accordance with

Commission regulation 30.10 is not required to register as an IB if such person:

(1)

Is affiliated with a registered FCM;

(2)

Introduces only institutional customers on a fully-disclosed basis to a registered

FCM for the purpose of trading on a DCM;

(3)

Has an affiliated FCM that files with the National Futures Association an

acknowledgement that the affiliated FCM will be jointly and severally liable for

any violations of the CEA or the Commission’s regulations committed by such

person in connection with those introducing activities; and

customers on a fully-disclosed basis to a registered

FCM for the purpose of trading on a DCM;

(3)

Has an affiliated FCM that files with the National Futures Association an

acknowledgement that the affiliated FCM will be jointly and severally liable for

any violations of the CEA or the Commission’s regulations committed by such

person in connection with those introducing activities; and

(4)

Does not solicit, or handle customer funds of, any person located in the U.S. for

trading on a DCM.4

Commission regulation 30.10, upon petition, permits the Commission to exempt any

person from any requirement of the Part 30 regulations. Commission regulation 30.10

allows persons located and doing business outside the U.S., who are subject to a

comparable regulatory framework in the country in which they are located, to seek an

exemption from the application of certain of the Part 30 regulations, provided such

exemption would not be contrary to the public interest. If the Commission grants an

exemption, persons outside the U.S. may solicit or accept orders directly from U.S.

customers for foreign futures or options transactions and accept customer money or

other property to secure such transactions without registering as an FCM.

II.

Summary of Request for Relief

Based upon the representations of “A”, DSIO understands the facts to be as follows. “C”,

an existing wholly-owned subsidiary of “A” located in the UK and regulated by the UK

Financial Conduct Authority (the “UK FCA”), previously accepted foreign futures and

options orders from U.S. customers to be executed on foreign boards of trade. “C” is

exempt from registration with the Commission as an FCM pursuant to an order issued

by the Commission to the UK FCA pursuant to Commission regulation 30.10.5 This

4 Commission regulation 3.10(c)(4), 17 CFR 3.10(c)(4).

5 See 68 Fed. Reg. 58583 (Oct. 10, 2003)

options orders from U.S. customers to be executed on foreign boards of trade. “C” is

exempt from registration with the Commission as an FCM pursuant to an order issued

by the Commission to the UK FCA pursuant to Commission regulation 30.10.5 This

4 Commission regulation 3.10(c)(4), 17 CFR 3.10(c)(4).

5 See 68 Fed. Reg. 58583 (Oct. 10, 2003). In the absence of the exemption, “C” would be required to

register as an FCM pursuant to Commission regulation 30.4(a) by virtue of accepting any money,

“A”: Time Limited Registration No-Action Position

Page 3

relief was based, in part, on compliance by “C” with all UK FCA rules. “B” would also be

subject to similar supervision by the UK FCA, particularly regarding its conduct of

business. Pursuant to Commission regulation 3.10(c)(4), “C”, as an FCM exempt from

registration pursuant to Commission regulation 30.10, may not solicit or handle

customer funds of U.S. customers for orders to be executed on a DCM, but may

introduce existing U.S. customers to its affiliated U.S. FCM for trading futures on a

DCM without having to register separately as an IB, provided that certain conditions are

met.

However, effective March 4, 2019, “A” merged “C” with “D”, a “Country 2” entity

regulated by the “Regulator 2”. As a result, “C” dissolved and all futures and options

business was transferred either to “D”, “B”, or “E”, a registered FCM affiliated with “B”.

Following the merger of “C” into “D”, UK-based employees that supported the business

previously conducted through “C” and who are also responsible for futures trading

activities remained in London as employees of “B”.

Although “B” also will be subject to certain UK FCA rules, “B” does not qualify for an

exemption from FCM registration pursuant to the Commission’s 30.10 order to the UK

FCA because “B” also is subject to certain “Country 1” regulatory requirements

business

previously conducted through “C” and who are also responsible for futures trading

activities remained in London as employees of “B”.

Although “B” also will be subject to certain UK FCA rules, “B” does not qualify for an

exemption from FCM registration pursuant to the Commission’s 30.10 order to the UK

FCA because “B” also is subject to certain “Country 1” regulatory requirements. As a

result, “B” separately may not qualify from the exception to IB registration set forth in

Commission regulation 3.10(c)(4).

On December 18, 2018, “A” submitted a petition to the Commission under Commission

regulation 30.10 (the “30.10 Petition”) requesting an exemption from registration as

an FCM for the foreign futures and options activities to be undertaken by its home office

in “Country 1” as regulated by the “Regulator 1”. Should the Commission issue an order

granting “A” an exemption from FCM registration for these activities, “A” may seek to

confirm an exemption from FCM registration for the foreign futures and options

activities of “B” consistent with an order issued by the Commission regarding foreign

brokers subject to bifurcated relief.6 “B” would then be permitted under Commission

securities or property from US customers to margin, guarantee or secure any foreign futures or options

trades or contracts.

6 See Performance of Certain Functions by NFA With Respect to Those Foreign Firms Acting in the

Capacity of a FCM, 70 Fed. Reg. 2621 (Jan. 14, 2005) (the “2005 NFA Order”)

securities or property from US customers to margin, guarantee or secure any foreign futures or options

trades or contracts.

6 See Performance of Certain Functions by NFA With Respect to Those Foreign Firms Acting in the

Capacity of a FCM, 70 Fed. Reg. 2621 (Jan. 14, 2005) (the “2005 NFA Order”). Pursuant to the 2005

NFA Order, the Commission authorized the National Futures Association (‘‘NFA’’) to confirm exemptive

relief to certain firms acting in the capacity of an FCM that are subject to regulation by a foreign futures

authority in a particular jurisdiction to which an order under Commission Rule 30.10 has been issued,

notwithstanding that such firms may be subject, in part, to joint regulation by a second regulator in

another jurisdiction. The Commission previously authorized NFA to confirm exemptive relief solely to

firms subject to regulation by a single foreign futures authority. Here, as a “Country 1” entity, if “A’s”

30.10 Petition were granted, “Regulator 1” would be “A’s” home country regulator and the UK FCA would

be the host country regulator of “B”.

“A”: Time Limited Registration No-Action Position

Page 4

regulation 3.10(c)(4) to engage in limited U.S. futures and options transactions without

having to register separately as an IB.

Based on representations from “A”, DSIO understands that “B” will not accept U.S.

customer money, security, or property in connection with any futures or options

transactions to be executed on a DCM, and will comply with all the regulatory

conditions set forth in Commission regulation 3.10(c)(4). In particular, “B” will accept

orders only from institutional customers and clear all DCM transactions through “E”.

Further, “B” will not otherwise engage in any activity relating to the offer and sale of

foreign futures and options that would require IB registration pursuant to Commission

regulation 30.4(b)

y with all the regulatory

conditions set forth in Commission regulation 3.10(c)(4). In particular, “B” will accept

orders only from institutional customers and clear all DCM transactions through “E”.

Further, “B” will not otherwise engage in any activity relating to the offer and sale of

foreign futures and options that would require IB registration pursuant to Commission

regulation 30.4(b). In connection with the merger, “A” has represented to DSIO that if

the requested relief is not granted there could be detrimental impacts to “B” and its

institutional customers trading on both US markets and foreign markets. 7

Given the foregoing, “A” has requested temporary no-action relief from registration as

an IB for activities to be undertaken by “B” to provide “B” with sufficient time for the

Commission’s review of “A’s” 30.10 Petition.

II.

DSIO No-Action Position

Based on the foregoing facts as represented by “A”, DSIO believes that a time limited no-

action position is warranted while the Commission reviews the outstanding 30.10

Petition from “A”. Accordingly, DSIO will not recommend that the Commission

commence an enforcement action against “A” for the failure of “B” to be registered with

the Commission as an IB until May 4, 2020 or such earlier time that “B” confirms an

exemption from FCM registration pursuant to Commission regulation 30.10 and thus

qualifies for the IB registration exception pursuant to Commission regulation 3.10(c)(4),

subject to the following conditions:

1.

“B” remains authorized and subject to supervision by the UK FCA, and complies

with the applicable provisions of the UK FCA’s Conduct of Business Sourcebook;

2.

“A” continues to be authorized by and subject to supervision by “Regulator 1”;

3.

“B” remains affiliated with “E”, as that term is defined in Commission regulation

3.10(c)(4)(v);

7 “A” has represented that, from the time that the merger was completed through the time pending the

Commission’s review of its 30.10 Petition, U.S

applicable provisions of the UK FCA’s Conduct of Business Sourcebook;

2.

“A” continues to be authorized by and subject to supervision by “Regulator 1”;

3.

“B” remains affiliated with “E”, as that term is defined in Commission regulation

3.10(c)(4)(v);

7 “A” has represented that, from the time that the merger was completed through the time pending the

Commission’s review of its 30.10 Petition, U.S. customers of “C” will be serviced by “E” or “D” in

compliance with Part 30 .

“A”: Time Limited Registration No-Action Position

Page 5

4.

“B” introduces on a fully-disclosed basis to “E” only institutional customers, as

defined by Commission regulation 1.3, for the purpose of trading on a DCM;

5.

“B” does not solicit, and does not handle the customer funds of, any person

located in the U.S. for trading on a DCM; and

6.

“E” files with the NFA an acknowledgement it will be jointly and severally liable

for any violations of the CEA or the Commission’s regulations by “B” in

connection with its introducing activities in accordance with Commission

regulation 3.10(c)(4)(iii).

The DSIO no-action position set forth in this letter will terminate immediately should

“A” withdraw its pending 30.10 Petition or otherwise fail to make a good faith effort to

provide in response to a request from DSIO any additional materials or information in

support of its petition. This letter, and the position taken herein, represents the views of

DSIO only, and do not necessarily represent the position or view of the Commission or

of any other office or division of the Commission. The relief issued by this letter does

not excuse persons relying on it from compliance with any other applicable

requirements contained in the CEA or in Commission regulations. Further, this letter,

and the positions taken herein, is based upon the representations made to DSIO. Any

different, changed, or omitted material facts or circumstances might render this no-

action position void

ion. The relief issued by this letter does

not excuse persons relying on it from compliance with any other applicable

requirements contained in the CEA or in Commission regulations. Further, this letter,

and the positions taken herein, is based upon the representations made to DSIO. Any

different, changed, or omitted material facts or circumstances might render this no-

action position void.

Questions concerning the relief in this letter may be directed to Mathew B. Kulkin,

Director, DSIO at (202) 418-5213 or mkulkin@cftc.gov; Frank Fisanich, Chief Counsel,

DSIO, at (202) 418-5949 or ffisanich@cftc.gov, Andrew Chapin, Associate Chief

Counsel, DSIO at (202) 418-5465 or achapin@cftc.gov, or Scott Lee, Special Counsel,

DSIO at (202) 418-5090 or slee@cftc.gov.

“A”: Time Limited Registration No-Action Position

Page 6

Very truly yours,

_______________________

Matthew B. Kulkin

Director

Division of Swap Dealer and Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

Yvette Christman, Registration

National Futures Association, Chicago