Foreign Futures and Foreign Options Transactions

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30

Foreign Futures and Foreign Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is proposing to amend the Commission's regulations to clarify

when foreign futures and options brokers who are members of a foreign

board of trade must register or obtain an exemption from registration.

The Commission proposes to modify Rule 30.4(a) by clarifying that

foreign futures and options brokers, including those with U.S. bank

branches, are not required to register as futures commission merchants

(FCMs) pursuant to Rule 30.4, or seek Rule 30.10 relief, if they fall

generally into the following categories: those that carry customer

omnibus accounts for U.S. FCMs; those that carry U.S. affiliate

accounts which are proprietary to the foreign futures and options

broker; and those that carry U.S. accounts which are proprietary to a

U.S. FCM. In addition, proposed Rule 30.10(a) will specify

representations that must be made by a foreign futures and options

broker that has U.S. bank branches in order to obtain a Rule 30.10

comparability exemption or to come within the registration exception of

Rule 30.4.

DATES: Comments must be received by October 25, 1999.

ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary of the Commission, Commodity Futures Trading

Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In

addition, comments may be sent by facsimile transmission to facsimile

number (202) 418-5521, or by electronic mail to [email protected].

Reference should be made to ``Commission Rules 30.1, 30.4 and 30.10--

Registration and Exemption.''.

eir views and comments to

Jean A. Webb, Secretary of the Commission, Commodity Futures Trading

Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In

addition, comments may be sent by facsimile transmission to facsimile

number (202) 418-5521, or by electronic mail to [email protected].

Reference should be made to ``Commission Rules 30.1, 30.4 and 30.10--

Registration and Exemption.''.

FOR FURTHER INFORMATION CONTACT:

Laurie Plessala Duperier, Special Counsel, or Susan A. Elliott, Staff

Attorney, Division of Trading and Markets, Commodity Futures Trading

Commission, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone:

(202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

In 1987, the Commission adopted a new Part 30 to its

regulations.\1\ Part 30 governs, generally, the solicitation and sale

of foreign futures \2\ and foreign

option \3\ contracts to customers \4\ located in the United States.

These rules were promulgated pursuant to sections 2(a)(1)(A), 4(b) and

4c of the Commodity Exchange Act (``Act''), which vested the Commission

with exclusive jurisdiction over the offer and sale, in the United

States, of options and futures contracts traded on or subject to the

rules of a board of trade, exchange or market located outside of the

United States.

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\1\ 52 FR 28980 (August 5, 1987). CFTC regulations may be found

at 17 CFR Ch. I (1999).

\2\ ``Foreign futures'' as defined in Part 30 means ``any

contract for the purchase or sale of any commodity for future

delivery made, or to be made, on or subject to the rules of any

foreign board of trade.'' Commission Rule 30.1(a)

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\1\ 52 FR 28980 (August 5, 1987). CFTC regulations may be found

at 17 CFR Ch. I (1999).

\2\ ``Foreign futures'' as defined in Part 30 means ``any

contract for the purchase or sale of any commodity for future

delivery made, or to be made, on or subject to the rules of any

foreign board of trade.'' Commission Rule 30.1(a).

\3\ ``Foreign option'' as defined in Part 30 means ``any

transaction or agreement which is or is held out to be of the

character of, or in commonly known to the trade as, an `option',

`privilege', `indemnity', `bid', `offer', `put', `call', `advance

guaranty', or `decline guaranty,' made or to be made on or subject

to the rules of any foreign board of trade.'' Commission rule

30.1(b).

\4\ Pursuant to Commission Rule 30.1(c), ``Foreign futures or

foreign options customer'' means ``any person located in the United

States, its territories or possessions who trades in foreign futures

or foreign options: Provided, That an owner or holder of a

proprietary account as defined in paragraph (y) of [Commission rule]

1.3 shall not be deemed to be a foreign futures or foreign options

customer within the meaning of Secs. 30.6 and 30.7 of this part.''

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When it adopted Part 30, the Commission recognized that many

complexities would need to be addressed by the staff in the years after

adoption of these rules.\5\ Soon after the final rulemaking for Part 30

was published, the staff of the Division of Trading and Markets (the

``Division'') published several interpretative letters and no-action

positions regarding the application of the registration requirements of

Part 30 to foreign firms, and their ability to obtain an exemption from

certain of the requirements of Part 30, pursuant to Rule 30.10. The

Commission now proposes to codify some of those interpretations and

positions

ivision of Trading and Markets (the

``Division'') published several interpretative letters and no-action

positions regarding the application of the registration requirements of

Part 30 to foreign firms, and their ability to obtain an exemption from

certain of the requirements of Part 30, pursuant to Rule 30.10. The

Commission now proposes to codify some of those interpretations and

positions. Each of the interpretative letters discussed below will

cease to have any prospective applicability if the proposed rules are

adopted. Those who properly relied on interpretative statements in the

past must henceforth comply with the proposed rules if adopted. Since

no-action letters may only be relied on by the entity seeking the no-

action position, the entities who received the no-action letters

discussed below may continue to rely on the relief provided. All other

persons were, and are, required to comply with Commission rules.

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\5\ ``The Commission is mindful that the implementation of a

regulatory scheme such as this is an evolving process, particularly

as the issues are numerous and complex. Accordingly, the Commission

invites affected persons to seek interpretations of the rules, no-

action positions and exemptions, as appropriate. In this regard, the

Commission has determined to retain the general exemptive provision

set forth in rule 30.10, as proposed.'' 52 FR at 28980-28981 (August

5, 1987).

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A. Registration Required by Rule 30.4(a)

ites affected persons to seek interpretations of the rules, no-

action positions and exemptions, as appropriate. In this regard, the

Commission has determined to retain the general exemptive provision

set forth in rule 30.10, as proposed.'' 52 FR at 28980-28981 (August

5, 1987).

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A. Registration Required by Rule 30.4(a)

Rule 30.4(a) requires anyone who solicits or accepts orders and/or

money for foreign futures and options contracts from foreign futures

and options U.S. customers to register as an FCM. Rule 30.4(e) requires

registered FCMs to maintain an office in the United States which is

managed by an individual domiciled in the United States and registered

with the Commission as an associated person (``AP''). Rule 30.10 allows

any person to seek exemption form any provision of Part 30.

Shortly after Part 30 was adopted, it became clear that it might

not be necessary for certain conduct to trigger the registration

requirements of Rule 30.4(a). For example, foreign futures and options

brokers that did nothing more than carry the customer omnibus account

of a U.S. FCM fell within the registration provisions of Rule 30.4(a).

As a result, the staff issued an interpretation in CFTC Letter 87-7 to

make clear that a member of a foreign board of trade (or an affiliate

of a U.S firm that is authorized to carry accounts under relevant

foreign law), whose only contact with foreign futures and option

customers was limited to carrying the customer omnibus account of a

U.S. FCM, would not be required to register as an FCM under Rule

30.4(a). The Division reasoned that registration should not be required

in that circumstance because of the presence of an ``intervening

registrant [i.e., a U.S. FCM] to whom the rules would be fully

applicable.'' \6\ In other words, U.S. foreign futures and option

customers would continue to have a relationship with and be clients of

the U.S

not be required to register as an FCM under Rule

30.4(a). The Division reasoned that registration should not be required

in that circumstance because of the presence of an ``intervening

registrant [i.e., a U.S. FCM] to whom the rules would be fully

applicable.'' \6\ In other words, U.S. foreign futures and option

customers would continue to have a relationship with and be clients of

the U.S. FCM for which the foreign firm was carrying the omnibus

account, and would not have direct contact with the foreign futures and

options broker. Specifically, the Division stated:

\6\ CFTC Letter 87-7, [1987-1990 Transfer Binder] Comm. Fut. L.

Rep. (CCH) para. 23,972 (November 17, 1987). The scope of CFTC

Letter 87-7 was limited to foreign exchange members and US FCMs'

offshore affiliates which were licensed, authorized or otherwise

subject to regulation in the offshore jurisdiction. With regard to

affiliates, CFTC Letter 87-7 required the affiliate to identify to

the CFTC and to the National Futures Association (``NFA'') the

foreign clearing member through which the affiliate conducts

business in order to ensure an adequate audit trail so that

transactions may be traceable to the foreign exchange.

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[W]here an FCM transfers its customer omnibus account to an

offshore firm which is either a member or a foreign exchange or is

an offshore affiliate of a U.S. FCM licensed or authorized by the

offshore jurisdiction where it is located, and such foreign exchange

member's or affiliate's contact with foreign futures and options

customers is limited to carrying the customer omnibus account of a

U.S. FCM for execution on the foreign exchange, such activity should

not bring it within the scope of the foreign futures and options

rules.\7\

\7\ Id. at 34,407-8.

ensed or authorized by the

offshore jurisdiction where it is located, and such foreign exchange

member's or affiliate's contact with foreign futures and options

customers is limited to carrying the customer omnibus account of a

U.S. FCM for execution on the foreign exchange, such activity should

not bring it within the scope of the foreign futures and options

rules.\7\

\7\ Id. at 34,407-8.

The Division sought to resolve other issues through the no-action

process. For instance, CFTC Letter 87-7 was limited to the transfer of

customer omnibus accounts to foreign firms and the existence of U.S.

branches resulted in the bank being characterized as ``present'' in the

United States.\8\ Thus, despite the relief offered in CFTC Letter 87-7,

foreign banks that, as brokers, carried US FCMs' customer omnibus

accounts, could not take advantage of that relief if the banks had bank

branches in the United States. In CFTC Letter 89-11, the Division

stated that it would not recommend an enforcement action against a

foreign bank with U.S. bank branches if the foreign bank availed itself

of the relief of CFTC Letter 87-7.\9\ The Division's no-action position

was contingent upon three undertakings by the foreign bank: (1) the

U.S. branches would not solicit or accept orders for foreign futures

contracts or options or engage in any activities subject to regulation

by the Commission, except in connection with proprietary trading

conducted by its U.S. branches; (2) the foreign bank would provide upon

request of the Commission or the National Futures Association, access

to the books and records of the U.S. branches to ensure compliance with

undertaking (1); and (3) the bank would designate an agent for the

purpose of accepting delivery and service of any communication from the

Commission relating to the foreign firm's activities in carrying the

omnibus accounts.\10\

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sociation, access

to the books and records of the U.S. branches to ensure compliance with

undertaking (1); and (3) the bank would designate an agent for the

purpose of accepting delivery and service of any communication from the

Commission relating to the foreign firm's activities in carrying the

omnibus accounts.\10\

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\8\ See discussion of CFTC Letter 89-5, infra.

\9\ CFTC Letter 89-11, [1987-1990 Transfer Binder] Comm. Fut. L.

Rep. (CCH) para. 24,516 (August 15, 1989).

\10\ The letter emphasized: ``The Division further understands

that each such U.S. Branch is subject to extensive regulation,

including reporting and recordkeeping requirements and examinations,

either under state banking laws or under federal law by the Office

of the Comptroller of the Currency.''

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Still other ambiguities arose with regard to foreign firms. In the

Part 30 rules, there is no specific provision relating to registration

requirements for foreign futures and options brokers handling

proprietary accounts. Commission Rule 3.10(c) provides a general

exemption from FCM registration for persons trading solely for

proprietary accounts, which is arguably applicable to foreign futures

and options brokers.\11\ Shortly after the

Commission adopted Part 30, an interpretative letter was requested

regarding foreign firms soley carrying U.S. customer foreign futures

and options accounts that would be proprietary accounts to the foreign

firm

neral

exemption from FCM registration for persons trading solely for

proprietary accounts, which is arguably applicable to foreign futures

and options brokers.\11\ Shortly after the

Commission adopted Part 30, an interpretative letter was requested

regarding foreign firms soley carrying U.S. customer foreign futures

and options accounts that would be proprietary accounts to the foreign

firm. In CFTC Letter 88-15,\12\ Division staff determined that, subject

to certain conditions, ``in instances where a foreign firm solely

carries accounts on behalf of customers in the United States which may

be deemed to be proprietary accounts of the foreign firm, such foreign

firm should not be subject to the registration requirement of Rule

30.4, or be required to apply for exemptive relief therefrom pursuant

to Rule 30.10 based on comparability of regulation in the foreign

jurisdiction.'' \13\ The Division further stated that such a firm

would, however, remain subject to all other applicable provisions of

the Act and rules, regulations and orders thereunder.

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\11\ Rule 3.10(c) provides: ``A person trading solely for

proprietary accounts, as defined in 1.3(y) of this chapter, is not

required to register as a futures commission merchant: Provided that

such person remains subject to all other provisions of the Act and

of the rules, regulations and orders thereunder.''

\12\ CFTC Letter 88-15, [1987-1990 Transfer Binder] Comm. Fut.

L. Rep. (CCH) para. 24,296 (August 10, 1988).

\13\ The requestor of the letter had a U.S. affiliate whose

account it carried; both firms were in turn wholly owned by a parent

company. The term ``proprietary account'' as defined in rule 1.3(y),

17 CFR 1.3(y) (1998), includes an account carried on the books and

records of a corporation or other type of association for a

``business affiliate that directly or indirectly is controlled by or

is under common control with, such . .

U.S. affiliate whose

account it carried; both firms were in turn wholly owned by a parent

company. The term ``proprietary account'' as defined in rule 1.3(y),

17 CFR 1.3(y) (1998), includes an account carried on the books and

records of a corporation or other type of association for a

``business affiliate that directly or indirectly is controlled by or

is under common control with, such . . . corporation or

association.''

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While the staff previously has addressed the situation where a

foreign firm carries its own ``proprietary'' account, it has not issued

an interpretative letter relating to the applicability of the Rule 30.4

registration requirement to a foreign futures and options broker when

the foreign futures and options broker carries the proprietary account

of a U.S. FCM that is not proprietary to the foreign firm. Pursuant to

Rule 30.4a, a U.S. FCM trading its proprietary account through a

foreign futures and options broker is a ``U.S. foreign futures and

options customer,'' requiring the foreign futures and options broker to

register in order to carry the firm's proprietary account.\14\ The

logic of CFTC Letter 87-7, however, suggests that certain foreign

futures and options brokers carrying FCM proprietary accounts similarly

should not be required to register or to obtain a Rule 30.10 exemption.

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g the foreign futures and options broker to

register in order to carry the firm's proprietary account.\14\ The

logic of CFTC Letter 87-7, however, suggests that certain foreign

futures and options brokers carrying FCM proprietary accounts similarly

should not be required to register or to obtain a Rule 30.10 exemption.

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\14\ Rule 30.1(c) exempts an owner or holder of a proprietary

account from the definition of foreign futures and options, cutomer

only with regard to the disclosure requirements of Rule 30.6 and the

secured amount requirement of Rule 30.7. Owners or holders of

proprietary accounts currently are not excluded from the definition

for purposes of Rule 30.4, thereby triggering the registration

requirement for foreign futures and options brokers who do business

with them.

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The registration relief in CFTC Letter 87-7 was limited by its

terms to a foreign firm which either was a member of a foreign board of

trade or was an offshore affiliate of a U.S. FCM licensed, authorized

or otherwise subject to regulation in the offshore jurisdiction where

it was located. The staff took this position because, among other

things, there would be no contact by a foreign firm with the FCM's

customers and the U.S. FCM will have engaged in all sales practices and

remain responsible for compliance with the Part 30 rules. Similarly,

sales practice considerations are not of particular concern where an

FCM opens a firm account (i.e., noncustomer account) with a foreign

board of trade member. U.S. FCMs are professionals in the commodities

industry and therefore should be familiar with the risks of trading

foreign commodity futures and options contracts

nd

remain responsible for compliance with the Part 30 rules. Similarly,

sales practice considerations are not of particular concern where an

FCM opens a firm account (i.e., noncustomer account) with a foreign

board of trade member. U.S. FCMs are professionals in the commodities

industry and therefore should be familiar with the risks of trading

foreign commodity futures and options contracts. The FCM does not need

the added protections afforded by requiring the foreign firm to

register as an FCM, provided of course that the foreign firm is a

member of a foreign board of trade or a registered affiliate of the

U.S. FCM. Moreover, where the foreign firm carries the proprietary

account of a U.S. FCM, the requirement of registration and the

attendant capital and customer funds rules are not necessary because

the foreign jurisdiction generally has already imposed rules to protect

the foreign clearing house.

B. Availability of Rule 30.10 Exemptions to Foreign Firms With U.S.

Bank Branches

Those persons located outside the United States that solicit or

accept orders directly from United States customers for foreign futures

or options transactions and that are subject to a comparable regulatory

scheme in the country in which they are located \15\ may apply under

Appendix A to Rule 30.10 for relief from the registration requirements

of Rule 30.4. Rule 30.10 and Appendix A thereto have been the basis for

exemptions granted to a number of foreign firms that, along with their

governmental agency or self-regulatory organization, have demonstrated

that their particular foreign regulatory program is comparable to that

of the Commission.

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\15\ Appendix A, ``Interpretative Statement with Respect to the

Commission's Exemptive Authority Under Sec. 30.10 of Its Rules,''

CCH para. 2707, 57 FR 49644 (November 2, 1992) (Emphasis added.)

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program is comparable to that

of the Commission.

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\15\ Appendix A, ``Interpretative Statement with Respect to the

Commission's Exemptive Authority Under Sec. 30.10 of Its Rules,''

CCH para. 2707, 57 FR 49644 (November 2, 1992) (Emphasis added.)

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Although the Commission orders granting general Rule 30.10

exemptive relief from FCM registration have applied only with respect

to persons located outside of the United States, the Division has

permitted foreign futures and options brokers with U.S. bank branches

to obtain a Rule 30.10 exemption under certain conditions. In CFTC

Letter 89-5,\16\ the Division stated that it would not recommend

enforcement action if a division or branch of a foreign bank is de

facto treated as a separate entity by the Office of the Comptroller of

the Currency (OCC) and has no involvement with U.S. foreign futures and

options customers. Under those circumstances, the branch could be

treated by the bank as though it were a subsidiary or affiliate,\17\

and the foreign firm would be eligible for an exemption under Rule

30.10. The Division staff has required foreign firms with U.S. bank

branches that are seeking confirmation of Rule 30.10 relief to make

representations which ensure that the U.S. branch does not solicit or

otherwise have contact with U.S. customers for transactions governed by

Commission rules. In so doing, the Division noted that the bank branch

``is viewed as a separate legal entity in many respects under the

federal bank regulatory scheme.'' \18\

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e

representations which ensure that the U.S. branch does not solicit or

otherwise have contact with U.S. customers for transactions governed by

Commission rules. In so doing, the Division noted that the bank branch

``is viewed as a separate legal entity in many respects under the

federal bank regulatory scheme.'' \18\

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\16\ CFTC Letter 89-5, [1987-1990 Transfer Binder] Comm. Fut. L.

Rep. (CCH) para. 24,271 (December 5, 1988).

\17\ In CFTC Letter 88-3, the Division distinguished between a

foreign firm having U.S. divisions (which are ``legally part of the

firm itself''), and a foreign firm with a U.S. subsidiary or

affiliate (which ``is a separate legal entity.'') [1987-1999

Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 24,085 (January 15,

1988). The letter stated that while a foreign firm with a U.S.

branch or division would not be eligible for Rule 30.10 relief, a

foreign firm with a U.S. subsidiary or affiliate would be eligible

for a 30.10 exemption. Id. The Division modified that position in

CFTC Letter 89-5 by recognizing that branches and divisions are

often operated separately and in a manner analogous to a subsidiary.

CFTC Letter 89-5 at 36,071. Foreign firms with separately

incorporated U.S. subsidiaries or affiliates must follow the

guidelines in CFTC Advisory 41-93 (July 26, 1993) when petitioning

for Rule 30.10 relief. See CFTC Letter 93-65, [1992-1994 Transfer

Binder] Comm. Fut. L. Rep. (CCH) para. 25,784 (July 26, 1993).

\18\ CFTC Letter 89-5, id. at p. 36,071.

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firms with separately

incorporated U.S. subsidiaries or affiliates must follow the

guidelines in CFTC Advisory 41-93 (July 26, 1993) when petitioning

for Rule 30.10 relief. See CFTC Letter 93-65, [1992-1994 Transfer

Binder] Comm. Fut. L. Rep. (CCH) para. 25,784 (July 26, 1993).

\18\ CFTC Letter 89-5, id. at p. 36,071.

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In the ten years following the issuance of CFTC Letter 89-5, staff

has issued several no-action letters to foreign firms with U.S. bank

branches permitting them to obtain confirmation of Rule 30.10 relief.

Since that time, the staff has not become aware of problems with

foreign firms using their U.S. bank branches inappropriately.

Therefore, the Commission proposes to codify the procedure by which

foreign firms with U.S. bank branches may obtain 30.10 relief. Doing so

will obviate the need for affected persons to seek interpretative

relief or a non-action position, and will

thus utilize Commission resources more efficiently.

II. The Proposed Amendments

The Commission believes it can provide clarity to its registration

requirements under Part 30 by specifically addressing, in Rule 30.4,

when registration by a foreign futures and options broker is not

required. As discussed earlier, the Commission proposes to amend Rule

30.4(a) to clarify that it does not require registration by certain

foreign futures and options brokers that carry U.S. foreign futures and

foreign options customer omnibus accounts of U.S. FCMs and have no

customer contact, including foreign brokers with U.S. bank branches.

The Commission also proposes to amend Rule 30.4(a) to clarify that a

foreign firm that carries a U.S. FCM's proprietary account, or a

foreign firm which trades for its own proprietary account (including

U.S. affiliates whose accounts are ``proprietary'' to the foreign

firm), need not register as an FCM so long as certain conditions are

met

, including foreign brokers with U.S. bank branches.

The Commission also proposes to amend Rule 30.4(a) to clarify that a

foreign firm that carries a U.S. FCM's proprietary account, or a

foreign firm which trades for its own proprietary account (including

U.S. affiliates whose accounts are ``proprietary'' to the foreign

firm), need not register as an FCM so long as certain conditions are

met. Such foreign firms would, however, otherwise remain subject to

provisions of Part 30 that are not dependent upon registration as an

FCM, such as the antifraud provision of Rule 30.9. While the Commission

is proposing to permit foreign brokers to carry ``proprietary''

accounts in the broader sense of the term (as defined in Rule 1.3(y)),

not just firm trading accounts or ``house'' accounts \19\, the

Commission invites comment on the advisability of limiting the

exemption to house accounts only.\20\

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\19\ Firm trading or ``house'' accounts are defined as

``proprietary'' in Rule 1.17(b)(3) for regulatory capital purposes,

while ``proprietary accounts'' comprise a broader category in the

Rule 1.3(y) definition.

\20\ When an FCM executes trades for its proprietary account

with a foreign firm, funds other than those of the FCM are at risk

(e.g., of affiliates and employees as per CFTC Rule 1.3(y)). One can

assume that the class of persons defined by Rule 1.3(y) is in a

relationship of trust and confidence to the FCM and thus the same

considerations that would permit the FCM to open an account with

foreign firm registering as an FCM also apply to the FCM's

proprietary accounts.

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ject to regulation under Part 30 or engage in any clerical

duties related thereto. If any U.S. division, office or branch desires

to engage in such activities, it will only do so through an appropriate

CFTC registrant;

(4) The foreign futures and options broker will maintain outside

the United States all contract documents, books and records regarding

foreign futures and option transactions;

(5) The foreign futures and options broker and each of its U.S.

bank branches, offices or divisions agree to provide upon request of

the Commission, the NFA or the U.S. Department of Justice, access to

their books and records for the purpose of ensuring compliance with the

foreign undertakings and consents to make such records available for

inspection at a location in the United States within 72 hours after

service of the request; \21\ and

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\21\ The Commission has recognized that Japanese and Hong Kong

laws require that original books and records of any firm located

within either country be maintained within the local jurisdiction.

See CFTC Letter 95-83 [1994-1996 Transfer Binder] Comm. Fut. L. Rep.

(CCH) para.26,559 at 43,490 (September 20, 1995) (no-action position

permitting the Japanese and Hong Kong affiliates of a U.S. FCM to

accept directly foreign futures and options orders from certain

sophisticated U.S. customers); 62 FR 47792 (September 11, 1997)

(extending the relief under CFTC Letter 95-83 to the Japanese and

Hong Kong affiliates of all U.S. FCMs)

Binder] Comm. Fut. L. Rep.

(CCH) para.26,559 at 43,490 (September 20, 1995) (no-action position

permitting the Japanese and Hong Kong affiliates of a U.S. FCM to

accept directly foreign futures and options orders from certain

sophisticated U.S. customers); 62 FR 47792 (September 11, 1997)

(extending the relief under CFTC Letter 95-83 to the Japanese and

Hong Kong affiliates of all U.S. FCMs). For the purpose of this

rulemaking, the Commission proposes to allow foreign futures and

options brokers in Japan and Hong Kong to satisfy the books and

records requirement by: (1) providing within 72 hours authenticated

copies of its books and records upon request of a Commission

representative; (2) providing within 72 hours access to original

books and records in the foreign jurisdiction; (3) waiving objection

to the admissibility of the copies as evidence in a Commission

action against the foreign futures and options broker; and (4)

agreeing in the event of a proceeding to provide a witness to

authenticate copies of books and records given to the Commission.

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(6) Although it will continue to engage in normal commercial

activities, no U.S. bank branch, office or division of the foreign

futures and options broker will establish relationships in the United

States with the applicant's foreign futures and options customers for

the purpose of facilitating or effecting transactions in foreign

futures and option contracts in the United States.

Similarly, any foreign futures and options broker that would not be

required to register under the proposed Rule 30.4(a) because it solely

carries a U.S. customer omnibus account, its own proprietary account,

or a U.S. FCM's proprietary account, will not be required to register

solely because it has U.S. bank branches provided that it files with

the NFA, Vice President, Registration & Membership, the above

representations in accordance with Rule 30.10(b)

be

required to register under the proposed Rule 30.4(a) because it solely

carries a U.S. customer omnibus account, its own proprietary account,

or a U.S. FCM's proprietary account, will not be required to register

solely because it has U.S. bank branches provided that it files with

the NFA, Vice President, Registration & Membership, the above

representations in accordance with Rule 30.10(b).

The Commission solicits comment regarding the number of foreign

futures or options brokers' non-bank branches located in the United

States, as well as information concerning their activities.\22\ The

Commission also requests comment on the advisability of expanding the

relief provided by the proposed rule amendments to foreign futures and

options brokers with any type of U.S. branch, not just bank branches.

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\22\ The rationale for providing relief to foreign firms with

bank branches in the U.S. is that those branches are otherwise

regulated by the banking authorities. Although this rationale would

be inapplicable to non-bank branches, there may be other reasons why

exemption from registration under Part 30 would be appropriate.

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Finally, the proposed rule defines ``foreign futures and options

customer omnibus account'' in Rule 30.1(d), and ``foreign futures and

options broker'' in Rule 30.1(e).

II. Related Matters

A. Regulatory Flexibility Act

es, there may be other reasons why

exemption from registration under Part 30 would be appropriate.

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Finally, the proposed rule defines ``foreign futures and options

customer omnibus account'' in Rule 30.1(d), and ``foreign futures and

options broker'' in Rule 30.1(e).

II. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,

requires that agencies, in proposing rules, consider the impact of

those rules on small businesses. The Commission has previously

established certain definitions of ``small entities'' to be used by the

Commission in evaluating the impact of its rules on such entities in

accordance with the RFA.\23\ The proposed rules discussed herein would

affect foreign members of foreign boards of trade who perform the

functions of an FCM, some of which may be foreign affiliates of U.S.

FCMS. The Commission previously has determined that, based upon the

fiduciary nature of the FCM/customer relationships, as well as the

requirement that FCMs meet minimum financial requirements, FCMs should

be excluded from the definition of small entities. Therefore, the

Chairman, on behalf of the Commission, hereby certifies, pursuant to 5

U.S.C. 605(b), that these proposed regulations will not have a

significant economic impact on a substantial number of small entities.

Nonetheless, the Commission specifically requests comment on the impact

these proposed rules may have on small entities.

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\23\ 47 FR 18618-18621 (April 30, 1982).

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B. Paperwork Reduction Act

omic impact on a substantial number of small entities.

Nonetheless, the Commission specifically requests comment on the impact

these proposed rules may have on small entities.

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\23\ 47 FR 18618-18621 (April 30, 1982).

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B. Paperwork Reduction Act

When publishing proposed rules, the Paperwork Reduction Act of 1995

\24\ imposes certain requirements on federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the Paperwork Reduction Act. In

compliance with the Act, the Commission, through this rule proposal,

solicits comments to: (1) evaluate whether the proposed collection of

information is necessary for the proper performance of the functions of

the agency, including the validity of the methodology and assumptions

used; (2) evaluate the accuracy of the agency's estimate of the burden

of the proposed collection of information including the validity of the

methodology and assumptions used; (3) enhance the quality, utility, and

clarity of the information to be collected; and (4) minimize the burden

of the collection of the information on those who are to respond,

including through the use of appropriate automated, electronic,

mechanical, or other technological collection techniques or other forms

of information technology, e.g., permitting electronic submission of

responses.

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\24\ Pub. L. 104-13 (May 13, 1995).

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g through the use of appropriate automated, electronic,

mechanical, or other technological collection techniques or other forms

of information technology, e.g., permitting electronic submission of

responses.

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\24\ Pub. L. 104-13 (May 13, 1995).

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The Commission has submitted this proposed rule and its associated

information collection requirements to the Office of Management and

Budget. The burden associated with this entire collection 3038-0023,

including this proposed rule, is as follows:

Average burden hours per response: .1645.

Number of Respondents: 73,610.

Frequency of response: On occasion; annually, semi-annually;

quarterly.

The burden associated with this specific proposed rule, is as

follows:

Average burden hours per response: .05.

Number of Respondents: 110.

Frequency of response: On occasion.

Persons wishing to comment on the estimated paperwork burden

associated with this proposed rule should contact the Desk Officer,

CFTC, Office of Management and Budget, Room 10202, NEOB, Washington,

D.C. 20503, (202) 395-7340. Copies of the information collection

submission to OMB are available from the CFTC Clearance Officer, 1155

21st Street NW, Washington, D.C. 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 30

Definitions, Foreign futures, Foreign options, Registratiaon

requirements, Reporting and recordkeeping requirements. Registration

requirements,

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, sections

2(a)(1), 4(b), 4c and 8 thereof, 7 U.S.C. 2, 6(b) 6c and 12a (1982),

and pursuant to the authority contained in 5 U.S.C. 552 and 552b

gn futures, Foreign options, Registratiaon

requirements, Reporting and recordkeeping requirements. Registration

requirements,

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, sections

2(a)(1), 4(b), 4c and 8 thereof, 7 U.S.C. 2, 6(b) 6c and 12a (1982),

and pursuant to the authority contained in 5 U.S.C. 552 and 552b

(1982), the Commission hereby proposes to amend Chapter I of Title 17

of the Code of Federal Regulations as follows:

PART 30--FOREIGN OPTIONS AND FOREIGN FUTURES TRANSACTIONS

1. The authority citation for Part 30 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise

noted.

2. Section 30.1 is proposed to be amended by adding paragraph (d)

and (e) to read as follows:

Sec. 30.1 Definitions.

* * * * *

(d) Foreign futures and options customer omnibus account is defined

as an account in which the transactions of one or more foreign futures

and options customers are combined and carried in the name of the

originating futures commission merchant rather than in the name of each

individual foreign futures and options customer.

(e) Foreign futures and options broker (FFOB) is defined as a non-

U.S. person that is a member of a foreign board of trade, as defined in

Sec. 1.3(ss), licensed, authorized or otherwise subject to regulation

in the jurisdiction where the foreign board of trade is located; or a

foreign affitiate of a U.S. futures commission merchant, licensed,

authorized or otherwise subject to regulation in the jurisdiction where

the affiliate is located.

3. Section 30.4 is proposed to be amended by revising paragraph (a)

to read as follows:

Sec. 30.4 Registration required.

* * * * *

wise subject to regulation

in the jurisdiction where the foreign board of trade is located; or a

foreign affitiate of a U.S. futures commission merchant, licensed,

authorized or otherwise subject to regulation in the jurisdiction where

the affiliate is located.

3. Section 30.4 is proposed to be amended by revising paragraph (a)

to read as follows:

Sec. 30.4 Registration required.

* * * * *

(a)(1) To solicit or accept orders for or involving any foreign

futures contract or foreign options transaction and, in connection

therewith, to accept any money securities or property (or extend credit

in lieu thereof), to margin, guarantee or secure any trades or

contracts that result or may result therefrom, unless such person shall

have registered, under the Act, with the Commission as a futures

commission merchant and such registration shall not have expired nor

been suspended nor revoked; provided that, a foreign futures and

options broker (as defined in Sec. 30.1(e)) is not required to register

as an FCM:

(i) In order to accept orders from or to carry a U.S. futures

commission merchant foreign futures and options customer omnibus

account, as that term is defined in Sec. 30.1(d);

(ii) In order to accept orders from or to carry a U.S. FCM

proprietary account, as that term is defined in paragraph (y) of

Sec. 1.3 of this chapter; or

(iii) In order to accept orders from or to carry a U.S. affiliate

account which is proprietary to the foreign broker, as ``proprietary

account'' is defined in paragraph (y) of Sec. 1.3 of this chapter.

s that term is defined in Sec. 30.1(d);

(ii) In order to accept orders from or to carry a U.S. FCM

proprietary account, as that term is defined in paragraph (y) of

Sec. 1.3 of this chapter; or

(iii) In order to accept orders from or to carry a U.S. affiliate

account which is proprietary to the foreign broker, as ``proprietary

account'' is defined in paragraph (y) of Sec. 1.3 of this chapter.

(2) Such foreign futures and options broker remains subject to all

other applicable provisions of the Act and of the rules, regulations

and orders thereunder. Foreign futures and options brokers that have

U.S. bank branches, offices or divisions engaging in the above-listed

activity are not required to register as an FCM if they file with the

National Futures Association, Vice-President, Registration and

Membership, 200 West Madison Avenue, Suite 1600, Chicago, Illinois

60606, the representations in Sec. 30.10(b)(1)-(6).

* * * * *

4. Section 30.10 is revised to read as follows:

Sec. 30.10 Petitions for exemption.

(a) Any person adversely affected by any requirement of this part

may file a petition with the Secretary of the Commission, which

petition must set forth with particularity the reasons why that person

believes that he should be exempt from such requirement. The Commission

may, in its discretion, grant such an exemption if that person

demonstrates to the Commission's satisfaction that the exemption is not

otherwise contrary to the public interest or to the purposes of the

provision from which exemption is sought. The petition will be granted

or denied on the basis of the papers filed. The petition may be granted

subject to such terms and conditions as the Commission may find

appropriate.

t such an exemption if that person

demonstrates to the Commission's satisfaction that the exemption is not

otherwise contrary to the public interest or to the purposes of the

provision from which exemption is sought. The petition will be granted

or denied on the basis of the papers filed. The petition may be granted

subject to such terms and conditions as the Commission may find

appropriate.

(b) Any foreign person that files a petition for an exemption under

this section shall be eligible for such an exemption notwithstanding

its presence in the United States through U.S. bank

branches, offices or divisions if, in conjunction with a petition for

confirmation of Sec. 30.10 comparability relief under an existing

Sec. 30.10 Commission order, it files the following representations

with the National Futures Association, Vice-President, Registration &

Membership:

(1) No U.S. bank branch, office or division will engage in the

trading of futures or options on futures within or from the United

States, except for its own proprietary account;

(2) No U.S. bank branch, office or division will refer any foreign

futures or options customer to the foreign broker or otherwise be

involved in the foreign broker's business in foreign futures and option

transactions;

(3) No U.S. bank branch, office or division will solicit any

foreign futures or options business or purchase or sell foreign futures

and option contracts on behalf of any foreign futures or option

customers or otherwise engage in any activity subject to regulation

under this part or engage in any clerical duties related thereto. If

any U.S. division, office or branch desires to engage in such

activities, it will only do so through an appropriate CFTC registrant;

(4) The foreign person will maintain outside the United States all

contract documents, books and records regarding foreign futures and

option transactions;

n any activity subject to regulation

under this part or engage in any clerical duties related thereto. If

any U.S. division, office or branch desires to engage in such

activities, it will only do so through an appropriate CFTC registrant;

(4) The foreign person will maintain outside the United States all

contract documents, books and records regarding foreign futures and

option transactions;

(5) The foreign person and each of its U.S. bank branches, offices

or divisions agree to provide upon request of the Commission, the

National Futures Association or the U.S. Department of Justice, access

to their books and records for the purpose of ensuring compliance with

the foreign undertakings and consents to make such records available

for inspection at a location in the United States within 72 hours after

service of the request; and

(6) Although it will continue to engage in normal commercial

activities, no U.S. bank branch, office or division of the foreign

person will establish relationships in the United States with the

applicant's foreign futures and options customers for the purpose of

facilitating or effecting transactions in foreign futures and option

contracts in the United States.

Dated: August 19, 1999.

By the Commission.

Catherine D. Dixon,

Assistant Secretary of the Commission.

[FR Doc. 99-22019 Filed 8-25-99; 8:45 am]

BILLING CODE 6351-01-M