American Bar Association

Transcription

1 1 American Bar Association Regulation of Futures and Derivative Instruments Committee Opening New Markets, Expanding Existing Opportunities Panel Chair: Robert Pickel Chief Executive Officer, International Swaps and Derivatives Association, Inc. February 2, 2008 Panelists: Kathleen M. Cronin Managing Director and General Counsel, CME Group, Inc. Jacqueline Mesa Director, Office of International Affairs, Commodity Futures Trading Commission Tim Plews Partner, Clifford Chance Elizabeth Jacobs Deputy Director, Office of International Affairs, Securities and Exchange Commission

2 2 Opening New Markets Emerging Market Developments China CME/CFETS initiative Local documentation Netting initiatives India Credit derivatives OTC settlement Other products Islamic Finance Shariah-compliant derivative master Product development

3 3 Expanding Existing Opportunities Regulatory Update on Developed Markets CFTC Global Initiatives SEC Mutual Recognition Markets in Financial Instruments Directive Japanese Financial Instruments and Exchange Law Equity Derivative Disclosures

4 April 27, 2006 FAQs ANSWERS TO FREQUENTLY ASKED QUESTIONS ABOUT DOING TRANS- ATLANTIC BUSINESS This information provides guidance on derivatives products, markets and financial intermediaries for the EU 1 and the USA. You may access the information electronically, which is maintained on each participating jurisdiction s website or through the CESR and the US CFTC web-sites. CESR also indicates areas in which European law is harmonized. The information provided here is intended to summarize material requirements under a variety of scenarios, primarily related to the cross-border, Trans-Atlantic conduct of business. Derivatives products, for purposes of the information included, do not at this time include counterparty transactions in over-the-counter instruments except OTC products that are admitted to clearing. The category of foreign exchange transactions (forex), however, does include dealer transactions in foreign currency. Markets include exchanges/regulated/organized markets and multi-lateral trading facilities (MTFs) or automated trading systems (ATS). It is understood that different markets may be regulated differently and by different authorities within the same jurisdiction. PLEASE OBSERVE that the information contained herein is not intended to be legal advice, nor is it a substitute for legal advice. The following is a resource for identifying sources and information relative to doing business in various jurisdictions. The information should be used to alert oneself of proposed conduct which may require authorization and to prompt further inquiry. No guarantees are being made as to its completeness or accuracy. Any person contemplating to enter into business in another jurisdiction is recommended to seek professional legal advice intended for their specific needs. The following questions are divided into the categories of Exchanges, Investment Services and End-Users. 1 The 25 countries of the European Union and Norway and Iceland as being members of the European Economic Area. All these are members of CESR. 1

5 JURISDICTION: United States Commodity Futures Trading Commission 2, which has exclusive jurisdiction over commodity futures and options contracts and shared jurisdiction over security futures products (see below). Questions concerning equity securities,debt instruments and securities exchanges should be directed to the US Securities and Exchange Commission. EXCHANGES: 3 Briefly: 1. What are the requirements and/or approvals needed, if any, for establishing an exchange in your jurisdiction? The criteria for designation as a contract market are set forth in Section 5(b) of the CEA and Part 38 of the CFTC s regulations. The criteria relate to the following standards: (1) General Demonstration of Adherence to Designation Criteria; (2) Prevention of Market Manipulation; (3) Fair and Equitable Trading; (4) Enforcement of Rules on the Trade Execution Facility: (5) Financial Integrity of Transactions; (6) Disciplinary Procedures; (7) Public Access to Information on the Contract Market; and (8) Ability of the Contract Market to Obtain Information. A complete description of the requirements for designation as a contract market is found in Part 38 of the CFTC s Rules. Appendix A to Part 38 provides guidance to applicants on how the specific conditions for initial designation may be met by an applicant. Appendix B to Part 38 provides guidance to applicants on how designated contract markets can comply with the core principles both initially and on an ongoing basis. 2 Where more than one authority is applicable, identify which authority is responsible for which issue. 3 Exchanges include markets for the purposes of this paper. 2

6 Information regarding the various categories of exchanges (i.e., designated contract markets, derivatives transaction facilities, and several types of exempt exchanges), is found at Ezxchnages and Products on the CFTC s web-site. Exchanges are designated by Order of the CFTC. 2. What are the requirements and/or approvals needed, if any, for an exchange established in another jurisdiction to set up a branch in your jurisdiction? The CFTC s Rules do not contain special provisions for an exchange branch. If an exchange is deemed to be located within the United States (i.e., the staff no-action process for the placement of trading screens described in #5 below is not applicable), the exchange would be required to seek designation as a designated contract market or other type of market and to comply with the requirements set forth immediately below. 3. What are the requirements and/or approvals needed, if any, for an exchange to have a representative office, or a technical service center in your jurisdiction? There are no formal CFTC Rules. However, it is advisable for an exchange to discuss its plans with the CFTC in order to ensure that its proposed activities do not inadvertently trigger a registration duty. 4. What are the requirements and/or approvals needed, if any, for an intermediary authorized in your jurisdiction to offer a foreign exchange s products to a client located in your jurisdiction? (a) Authorization Firms that offer or sell foreign futures or foreign option contracts to a foreign futures or foreign options customer (i.e., any person located in the United States, its territories or possessions) must register in the appropriate capacity set forth in CFTC Rule For example, 3

7 a US firm that sells foreign futures and accepts funds must register as a futures commission merchant (FCM). Rule 30.4 does not establish a separate registration scheme. Rather, Part 30 requires registration in the appropriate capacity under existing CFTC Part 3 Rules. For example, if a person engages in conduct described under Rule 30.4, the person would follow the application procedures set forth in CFTC Rule 3.10 (registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators). Procedurally, all applications are processed by the National Futures Association (NFA), which the CFTC has authorized to perform registration activities under the Commodity Exchange Act in a series of orders beginning in NFA has developed an Online Registration System (ORS) that allows firms and individuals to register with the CFTC and apply for NFA membership electronically. See NFA s registration web-page. (b) Compliance Authorized firms intermediating foreign futures and foreign options must, in addition to the CFTC compliance Rules generally applicable to their registration category, comply with specific Rules contained in Part 30 (e.g., treatment of customer secured amount funds, quarterly reporting). (c) Product Restrictions In general, properly registered or exempt persons may offer or sell most foreign exchange-traded futures and commodity option products in the United States without additional approvals. Special procedures do apply, however, to the offer and sale of equity and corporate debt, stock indexes and foreign government debt products, subject to regulation under the Commodity Exchange Act. For more information, see CFTC Backgrounder: Foreign Instrument Approvals and Exemptions. The SEC regulates direct options on equity, and corporate and sovereign debt instruments. Several important product restrictions should be considered. See End Users, question #2. 4

8 5. What are the requirements and/or approvals needed, if any, for an exchange established in another jurisdiction to locate its terminals in, or to provide direct access to its electronic trading system from, your jurisdiction? Please indicate if there are different requirements for access by intermediaries authorized in your jurisdiction and for individual (professional/retail) traders or for proprietary and customer business. (a) Staff no-action procedures In June, 1999, the CFTC issued an order withdrawing proposed Rules addressing foreign electronic systems and instructed the staff to begin immediately processing no-action requests from foreign boards of trade seeking to place terminals in the US 64 Fed. Reg (June 18, 1999)). The term no-action position refers to Division staff action that constitutes a determination that the staff will not recommend that the Commission take enforcement action if the subject conduct takes place. To receive this relief the exchange must be a bona fide foreign exchange. No-action applications are processed by the CFTC s Division of Market Oversight (DMO). Essentially, the foreign exchange submits information concerning the exchange, the desired conduct, the relevant Rules governing the system and an overview of the regulatory system. The Division s analysis follows the template of the IOSCO 1990 Principles for the Oversight of Screen-Based Trading Systems ( revised in 2000). You may reach DMO through the CFTC s Web Site at: Examples of No-Action letters for the recognition of foreign electronic trading systems at Foreign Entities Receiving Staff No-Action Letters to make Futures Trading Systems Available in the US.: NOTE: The grant of the no-action does not negate the general requirement that a firm operating pursuant to the no-action relief must be appropriately registered (or exempt from registration) in order to engage in the offer or sale of a foreign futures contract for or on behalf of US customers. The no-action letters also do not negate the obligations of firms under CFTC Rule Orders. For example, Rule firms continue to be prohibited from maintaining a physical presence in the US Thus, Rule firms cannot provide direct access to the foreign exchange (although they would be permitted to accept orders overseas from customers located in the United States transmitted via AORS). (b) Proprietary trading Proprietary traders (see CFTC Rule 1.3(y)) need not be separately licensed in the US but must have clearing arrangements with appropriately licensed firms. 5

9 6. What are the requirements and/or approvals needed, if any, for persons located in your jurisdiction to operate as remote members of an exchange located outside your jurisdiction? There are no CFTC Rules that condition or apply to the membership status of a US person at a foreign exchange. That person s conduct with respect to US customers, if any, however could trigger a registration requirement (e.g., the solicitation or acceptance of orders). For example, see Question 5 above. Many foreign markets only permit entities that are licensed by them or by the remote regulator to be members. 7. What are the requirements and/or approvals needed, if any, for determining who can properly clear derivatives products traded in your jurisdiction? (a) Derivatives clearing organizations Registered derivatives clearing organizations, or DCOs, are clearing organizations registered with the Commission to perform the functions described in Section 1a(9) of the CEA with respect to futures contracts or options on futures contracts, or with respect to those contracts as specified in the Commission s order granting registration as a DCO. Part 39 of the CFTC s Rules sets forth the procedures and requirements for a clearing organization to be registered as a DCO. The criteria for registration as a DCO are set forth in Section 5b of the CEA and Part 39 of the CFTC s regulations. A registered DCO must comply initially and on a continuing basis with the following 14 core principles: A. In general H. Rule Enforcement B. Financial Resources I. System Safeguards C. Participant and Product Eligibility J. Reporting D. Risk Management K. Recordkeeping E. Settlement Procedures L. Public Information F. Treatment of Funds M. Information Sharing G. Default Rules and Procedures N. Antitrust Appendix A to CFTC Rules Part 39 provides more specific information on these requirements as well as guidance to applicants seeking to become registered DCOs. Additional information on application procedures is found at Derivatives Clearing Organization Backgrounder. 6

10 (b) Multilateral Clearing Organization for OTC Derivative Instruments Section 409 of the Federal Deposit Insurance Corporation Improvement Act, which was added by the Commodity Futures Modernization Act of Section 409 provides that a multilateral clearing organization for over-the-counter derivative instruments (MCO) may operate in the US if, among other alternatives, the MCO is supervised by a foreign financial regulator that the Commission, or one of several other US financial regulators, has determined satisfies appropriate standards. For example, in 2002 the CFTC determined that the multilateral clearing activities of NOS Clearing ASA (NOS) are subject to appropriate foreign supervision. NOS is a Norwegian clearinghouse which clears and settles OTC trades on the International Maritime Exchange (IMAREX), an electronic trading facility for cash-settled futures contracts for the transportation of maritime freight. The Commission s Order permits NOS to now clear and settle trades by US persons on IMAREX. The CFTC reviewed the applicant s oversight in view of both internationally-accepted standards developed by the International Organization of Securities Commissions and the fourteen core principles set forth in the CEA, as amended by the CFMA, for firms registered with the Commission as derivatives clearing organizations. The applicant also represented that it will share with the Commission information on NOS s clearing activities. See CFTC Press Release What are the requirements and/or approvals needed, if any, for an exchange established/authorized outside your jurisdiction to conduct promotional, road shows (where no orders are being received) in your jurisdiction? There are no formal CFTC Rules. However, it is advisable for the exchange to discuss its plans with the CFTC in order to ensure that its activities do not inadvertently trigger a registration duty. EXCHANGE ISSUES CONTACT INFORMATION CONTACT FOR EXCHANGE ISSUES Name of Department: Division of Market Oversight Telephone: DMO@cftc.gov Fax:

11 CONTACT FOR CLEARING ISSUES Name of Department: Division of Clearing and Intermediary Oversight Telephone: Fax: CONTACT FOR ENFORCEMENT ISSUES Name of Department: Division of Enforcement Telephone: On-line complaint form: CONTACT FOR GENERAL INQUIRIES Name of Department: Office of International Affairs Telephone: Fax:

12 INVESTMENT SERVICES I. Authorization/Licensing Requirements in your jurisdiction: Briefly, 1. What types of activities performed or services rendered trigger a duty to be authorized as an investment firm/intermediary and what are the application procedures? General Rule: If you solicit or accept orders from a US customer for commodity futures or options, you will have to register in an appropriate capacity. (a) Trades executed on a US market In general, any person, whether domestic or foreign, who conducts business on a US designated contract market (DCM) or derivatives transaction execution facility (DTEF) for a customer located in the United States is subject to compliance with the full panoply of the CFTC s regulatory regime. Registration categories include the following: Futures commission merchants (FCMs): A FCM is any person that is engaged in soliciting or accepting orders for the purchase or sale of any commodity for future delivery on or subject to the Rules of a contract market or derivatives transaction execution facility and who, in connection with such solicitation or acceptance of orders, accepts any money or other property (or extends credit) to margin, guarantee, or secure any trades or contracts that result or may result therefrom. Introducing brokers (IBs): The term IB means any person (except an individual who elects to be and is registered as an associated person of a FCM) engaged in soliciting or accepting orders for the purchase or sale of any commodity for future delivery on or subject to the Rules of a contract market or derivatives transaction execution facility who does not accept any money, securities, or property (or extend credit) to margin, guarantee, or secure the contracts resulting therefrom. Commodity pool operators (CPOs): 4 The term CPO means any person engaged in a business that is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or indirectly or through capital contributions, 4 Under the CEA, the operators of a pool rather than the pool itself registers through NFA. Virtually all commodity pools operated by registered CPOs were sold as private placements (i.e., private, non-public offering of securities that is exempt from registration under the Securities Act of 1933). See CFTC Backgrounder 1-05 The CPO and Commodity Pool Industry (March 24, 2005). 9

13 the sale of stock or other forms of securities, or otherwise, for the purpose of trading in a commodity for future delivery on or subject to the Rules of a contract market or derivatives transaction execution facility. Commodity trading advisors (CTAs): The term CTA means any person who for compensation or profit engages in the business of advising others, either directly or indirectly or through publications, writings, or electronic media, as to the value of or the advisability of trading in a commodity for future delivery on or subject to the Rules of a contract market or derivatives transaction execution facility, any commodity option authorized under Section 4c of the CEA, or any leverage transaction authorized under Section 19 of the CEA. [Note: CTAs have been included in this document in connection with their exercise of discretionary trading authority over accounts and for completeness in describing the regulatory scheme.] Associated persons (APs) (i.e., sales personnel): Any person associated with an FCM, IB, CPO, and CTA who solicits or accepts customer orders (other than in a clerical capacity) or who supervises persons who do so must register as an AP. (b) Exception for transactions intermediated by a foreign person solely on behalf of non-us customers. When an intermediary conducts business on a US market for a foreign customer, the determination as to whether that intermediary is subject to CFTC regulation may be affected by where that intermediary is deemed to be located. If the intermediary is located in the United States, that intermediary will be required to register. If the person is acting in the capacity of an introducing broker, commodity pool operator or commodity trading advisor and is located outside of the United States, and all of its solicitation efforts are directed at persons located outside of the United States, that intermediary is not required to register with the CFTC even if it is transacting on behalf of foreign customers trading on US markets. If the person is acting in the capacity of a FCM, but is (a) located outside the US, (b) directing all of its activities at persons located outside the US, and (c) clearing trades on US markets through a FCM registered under the Commodity Exchange CEA on an omnibus basis, the CFTC would not require registration under the Act as a FCM, but would impose certain requirements on the person as a foreign broker in terms of reporting positions for market surveillance purposes and acting as an agent for service of process on foreign traders. However, if this person sought to be a direct clearing member of a US exchange, that is, it did not wish to clear trades on an omnibus basis through a registered FCM, the CFTC has required registration of the foreign-located person as an FCM under the CEA. (c) Foreign broker carrying US FCM s omnibus account is generally not required to register as a FCM under Part 30 Rules. When a FCM transfers its customer omnibus account to an offshore firm which is either a member of a foreign exchange or is an offshore affiliate of a US 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 (i.e., US customers) is limited 10

14 to carrying the customer omnibus account of the US FCM for execution on the foreign exchange, such activity should not bring it within the scope of the Part 30 Rules. See CFTC Rule 30.4(a), as amended in 69 Federal Register (August 12, 2004), which superseded Staff Letter 87-7, Division of Trading and Markets, November 17, 1987, reprinted in Comm. Fut. L. Rep., 23,972 (Nov. 17, 1987). 2. What are the general requirements for establishing an investment firm/intermediary in your jurisdiction? Registration generally requires the applicant, among other things, to provide complete disclosure of its management structure, the filing of information by certain categories of principals and sales employees ( associated persons ) to enable an inquiry into the fitness of those persons, including a determination that the applicant is not subject to a statutory disqualification under either Section 8a(2) or 8a(3) of the Commodity Exchange Act, and the demonstration of capacity to conduct business and adequacy of capital. All applications are processed by the National Futures Association (NFA), which conducts registration activities for the CFTC under authority delegated to it by the CFTC. NFA has developed an Online Registration System (ORS) that allows firms and individuals to register with the CFTC and apply for NFA membership electronically. NFA registration contains detailed requirements for each registration category. For example an applicant for registration as a FCM is required to file the following: A completed Form 7-R. A completed Form 8-R, fingerprint card and fee of $85 for each individual principal. 5 Fingerprint card and fee are not required if such person is currently registered with the CFTC in any capacity or is listed as a principal of a current CFTC registrant. 5 A principal is: (1) an individual who is: a sole proprietor of a sole proprietorship; a general partner of a partnership; a director, president, chief executive officer, chief operating officer or chief financial officer of a corporation, limited liability company or limited partnership; in charge of a business unit, division or function of a corporation, limited liability company or limited partnership if the unit, division or function is subject to regulation by the CFTC; or a manager, managing member or a member vested with the management authority for a limited liability company or limited liability partnership; or (2) an individual who 10% or more of any class of a registrant's voting securities; has contributed 10% or more of a registrant's capital; is entitled to receive 10% or more of a registrant's net profits; or has the power to exercise a controlling influence over a registrant's activities that are subject to regulation by the directly or indirectly, through agreement, holding companies, nominees, trusts or otherwise: is the owner of 10% or more of the outstanding shares of any class of a registrant's stock; is entitled to vote 10% or more of any class of a registrant's voting securities; has the power to sell or direct the sale of Commission; or (3) an entity that is a general partner of a registrant; or is the direct owner of 10% or more of any class of a registrant's securities; or has directly contributed 10% or more of a registrant's capital unless such capital contribution consists of subordinated debt contributed by: an unaffiliated bank insured by the Federal Deposit Insurance Corporation; a United States branch or agency of an unaffiliated foreign bank that is licensed under the 11

15 Individual principals and branch office managers who are applying for registration as an associated person 6 must satisfy all applicable filing and proficiency requirements, including having a sponsoring FCM. Also, for each branch office manager proof of passage of the futures branch office manager examination (Series 30) or sponsorship by a broker-dealer and proof of having met the branch office manager requirements of either the New York Stock Exchange or the National Association of Securities Dealers, Inc. A completed Form 1-FR-FCM or FOCUS Report (certified audit). A statement describing the source of the current assets of the FCM applicant combined with a representation that the applicant s capital has been contributed for the purpose of operating the business of an FCM and will continue to be used for that purpose. A non-refundable registration fee of $500. Net capital requirements. FCMs and independent IBs are subject to a net capital requirement. See Proficiency requirements. Individuals who are applying for NFA membership as a sole proprietor FCM, IB, CPO, CTA or for registration as an AP of any of these categories must satisfy proficiency requirements. Unless they are eligible for the alternatives listed below, they must have passed the National Commodity Futures Examination (NCFE or Series 3) within the two years preceding their application. NFA publishes a study outline to help prepare for the futures industry examinations. Exams are administered by the NASD contractors at locations around the word. NFA membership. All registered FCMs, IBs, CPOs and those registered CTAs who manage or exercise discretion over customer accounts must be members of NFA in order to conduct futures business with the public. Persons acting as APs of NFA members must become NFA Associates. laws of the United States and regulated, supervised and examined by United States government authorities having regulatory responsibility for such financial institutions; or an insurance company subject to regulation by any State. An individual's status as a principal is determined by the individual's 1) ability to control a registrant's business activities; 2) formal title or position with the registrant; and 3) financial or ownership interest in the registrant. Individuals who, through their conduct or activity, directly or indirectly control a registrant are principals of the registrant, irrespective of their formal title or financial interest in the registrant. Similarly, individuals who hold specific positions or titles with registrants (see definition of principal above) are also principals of the registrant, irrespective of their ability to control the registrant's business. 6 An AP is an individual who solicits orders, customers or customer funds (or who supervises persons so engaged) on behalf of a FCM, IB, CTA, or CPO. An AP is, in effect, anyone who is a salesperson or who supervises salespersons for any of these categories of individuals or firms. The registration requirements apply to any person in the supervisory chain-of-command and not only to persons who directly supervise the solicitations of orders, customers or funds. 12

16 Mandatory membership is the cornerstone of NFA s regulatory structure, and effective industry wide self-regulation is not possible without it. NFA Bylaw 1101 very clearly prohibits the conduct of customer business with non-nfa members. NFA Members must be especially diligent not to violate NFA Bylaw They must examine the relationships they have with other registrants, with customers, with third-party account controllers, with branch offices and so on, to determine that they are in compliance. Application forms for NFA membership and Associate membership are incorporated in Forms 7-R and 8-R. AP applicants automatically apply for Associate membership when the Form 8-R is filed if their sponsor is or becomes an NFA Member. See NFA s Frequently Asked Questions on registration at: 3. What are the requirements for an investment firm/intermediary established in another jurisdiction to locate a branch in your jurisdiction? The location of a branch in the United States and the performance of conduct described in Question 1 above would trigger a registration requirement. The specific registration category depends on the type of conduct engaged in by the intermediary. See the general registration requirement Question #2 above. Registration requirements are the same, although NFA requires certain undertakings concerning access to books and records. Specifically, before NFA registers a foreign applicant whether under Part 3 or Part 30 it requires (1) an affidavit identifying the location of the firm s books and records and affirming that the books and records will be made available on 72 hours notice at a stated location and (2) an opinion of counsel that any secrecy or blocking laws of the country in which the applicant is located will not interfere with full inspection of the applicant s books and records by the CFTC or NFA. 4. What are the requirements for an investment firm/intermediary authorized in another jurisdiction to operate as a remote member of an exchange located in your jurisdiction, for proprietary business? Is there a difference for customer business? The CFTC does not impose any conditions related to the membership qualifications of persons or firms seeking to become members of US contract markets. Exchange Rules determine the conditions for exchange membership. 13

17 5. Such a remote member may be required to register in the appropriate capacity with the CFTC (through NFA) should it engage in regulated activity discussed above, particularly if it wishes to act as a direct clearing member of a US contract market. What generally are the ownership requirements, the so called fit and proper requirements, for a person/firm located in another jurisdiction wishing to establish an intermediary in your jurisdiction? The requirements are the same as described in Question# 2 above. In general, the owners would likely fall within the definition of principal and be required to provide information, including fitness information, as described in Question # 2 above. The fitness review would include fingerprinting and communication with the home country regulator and Interpol. 6. What are the requirements for a person/firm that is not an authorized investment firm/intermediary to operate as a proprietary trader on an exchange in your jurisdiction? Assuming that it does not engage in any solicitation of customers or the acceptance of orders, a bona fide proprietary trader doing business on a US exchange need not register. Proprietary account is defined in CFTC Rule 1.3(y). Link to CFTC Rules at: II. Services from an Intermediary Located Outside Your Jurisdiction: In general: 1. What are the circumstances, if any, under which an intermediary that is located outside your jurisdiction can solicit and accept business from clients (prospective clients), located in your jurisdiction? General Rule: The solicitation or acceptance of orders for futures and options products (whether foreign or domestic) from a customer located in the United States or its possessions and territories, will trigger a registration requirement. For example, if you solicit or accept orders from US persons for US or foreign futures and commodity options products and accept customer 14

18 funds, you must register as an FCM. See registration categories in Section I. Question 1 (a) above, Authorization/Licensing Requirements,. Foreign firms that solicit and accept orders for non-us products and that are subject to a comparable regulatory scheme may be granted exemption relief from FCM registration under the procedures of Rule See Question 3(c) below. More specifically: 2. Do any different requirements apply regarding products that are traded on an exchange that is located in your jurisdiction? No. The offer or sale of US products to US customers will require registration in the appropriate category as described in Section I, Authorization/Licensing Requirements, Question #1 (a) above. 3. Do any different requirements apply regarding products that are traded on an exchange that is located outside your jurisdiction? Generally not for a firm located in the United States. The firm would in the first instance be required to register with the CFTC in the appropriate capacity. See Question #3 (a) below. However, foreign firms that solicit and accept orders for non-us products and that are subject to a comparable regulatory scheme may be granted exemption relief from FCM registration under the procedures of Rule See Question 3(b) of this question below. Note: A US firm may carry foreign products that are not otherwise approved for sale to United States customers for their foreign customers. See CFTC Order in 57 Federal Register (Aug. 13, 1992)) and SEC No-Action letter dated August 8, 2002 issued by the SEC s Division of Market Regulation to Jonathan Barton, Chairman of the FIA/SIA Steering Committee, the Securities Industry Association and Futures Industry Association. (a) Intermediation of foreign futures to US customers requires domestic registration Firms, foreign or domestic, that offer or sell foreign futures or foreign option contracts to a foreign futures or options customer (i.e., any person located in the United States, its territories 15

19 or possessions) must register in the appropriate capacity set forth in CFTC Rule CFTC law and regulation links at: Rule 30.4 does not establish a separate registration scheme. Rather, Part 30 requires registration in the appropriate capacity under existing CFTC Part 3 Rules. For example, if a person engages in conduct described under Rule 30.4, the person would follow the application procedures set forth in CFTC Rule 3.10 (registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators). Registration processing is conducted by NFA. See Section I. Authorization/Licensing Requirements, Question #2 above. (b) Alternative procedures for non-domestic persons. CFTC Rule 30.5 permits intermediaries located outside the United States, which otherwise are required to register as an IB, CPO or CTA, to apply for an exemption from such registration requirement provided that the intermediaries conduct business through a FCM located in the United States and enter into a written agency agreement either with that FCM, the NFA or other agent for service of process pursuant to which that agent is authorized to serve as agent for the purpose of accepting delivery and service of communication from the CFTC, US Department of Justice, any self-regulatory organization or any US customer. See Rule 30.5 under CFTC Rules in law and regulation link at: (c) Exemption from FCM registration for foreign firms soliciting US persons for non-us products See Under CFTC Rule 30.10, persons located outside the United States who solicit or accept orders and related funds from US customers for foreign futures or options transactions and who are subject to a comparable regulatory scheme in their home country, may apply for an exemption from FCM registration and the application of certain of the Part 30 Rules. The exemption implements a concept of substituted compliance, such that compliance with generally comparable foreign regulations will be considered sufficient to warrant exemption from what otherwise may be duplicative regulation. To receive such relief under Rule 30.10, the firm s home-country regulator must demonstrate that it provides a comparable system of regulation (as outlined in Appendix A to CFTC Rules Part 30) and must enter into an information-sharing agreement with the CFTC. For a more detailed discussion of the Rule application process, and the representations and conditions required therein, see 62 Federal Register (Sept. 11, 1997) and Appendix A to Part 30 of the CFTC Rules. and select CFTC Rules. The CFTC office in charge of Rule arrangements is the Division of Clearing and Intermediary Oversight (DCIO). You can reach DCIO via the CFTC s Web Site at: 16

20 Once the CFTC has issued a Rule order to a foreign regulator, a firm subject to regulation by that regulator may seek confirmation that the Rule relief applies to the firm. The CFTC has delegated to the National Futures Association (NFA) the authority to verify the fitness of and representations made by firms seeking to operate under a Rule Order. (d) Rule procedures of interest to EU firms operating as branches The CFTC authorized the NFA to confirm Rule relief to a firm that is organized in one country (home country), but operating in one or more countries (host country) through a branch or branches (hereinafter referred to as cross-border futures brokers (CBFB)) and therefore subject to combined regulation by authorities located in two different jurisdictions under the following specific circumstances: HOME HOST AVAILABILITY OF RELIEF Rule Order issued to the Rule Order issued to the NFA is authorized to confirm Home Country regulator or Host Country regulator or the availability of relief, SRO SRO subject to certain conditions. Home Country regulator or SRO does not have Rule relief Rule Order issued to the Home Country regulator or SRO Rule Order issued to the Host Country regulator or SRO Host Country regulator or SRO does not have Rule relief See scenario (i) below. NFA is authorized to confirm the availability of relief, subject to certain conditions. See scenario (ii) below. CFTC reserves authority to determine appropriateness of relief on case-by-case basis. (i) Host and Home country regulator each have been issued a Rule Order The CFTC has authorized NFA to confirm Rule relief to any CBFB that solicits or accepts orders (and accepts money, securities or property to margin the trades that result or may result therefrom) from US foreign futures and options customers and that is fully regulated, in the aggregate, by a host and home country regulator, each of which has received a Rule Order from the CFTC (modified relief). For a CBFB to receive confirmation of such modified relief, the CBFB: 1. Must apply for confirmation of relief in accordance with the provisions set forth in the host country regulator or SRO s Rule Order; 2. Represent that it will comply with the relevant provisions of each Rule Order; and 3. Agree to provide to each regulator or SRO any information regarding transactions arising from such relief. In addition, each regulator or SRO must confirm that it will monitor the CBFB for compliance with the local laws, Rules and regulations governing those aspects of the broker s business 17

21 subject to regulation in its respective jurisdiction, and state that it will share information with the CFTC in accordance with the terms and conditions of the applicable Rule Order. (ii) For CBFBs organized and operating pursuant to the European Passport and only the Host Country regulator has been issued a Rule Order. The CFTC also authorized NFA to confirm modified Rule relief to a CBFB that is organized and operating pursuant to the European Passport from a branch location in a jurisdiction whose regulator or SRO has received Rule relief, notwithstanding that the CFTC has not issued a Rule Order to the home country regulator. The CFTC determined that, in the aggregate, the regulatory program governing cross-border activity of any firm operating pursuant to the European Passport from a branch located within a jurisdiction whose regulator or SRO has received Rule relief provides a basis for permitting substituted compliance for purposes of exemptive relief pursuant to Rule Therefore, the CFTC determined that it is no longer appropriate to require a CBFB operating pursuant to the European passport to petition the CFTC for confirmation of relief when NFA already has been authorized to confirm other standardized requests for relief. The CBFB seeking the alternative modified Rule relief under this scenario must: 1. Apply for confirmation of relief in accordance with the provisions set forth in the Host Country regulator or SRO s Rule Order; 2. Represent that it will be operating from a branch located in the Host country pursuant to the European Passport, and will comply with the applicable provisions of the Host country s Rule Order and the applicable laws and regulations of its country of origin, as well as all current and future Directives and other legislation underlying the European Passport; and 3. Agree to provide to the Host and Home Country regulator or SRO any information regarding transactions made in accordance with such relief. In addition, both the Host and Home Country regulator, respectively, must confirm that they will monitor the CBFB for compliance with local laws, Rules and regulations governing those aspects of the broker s business subject to regulation in its respective jurisdiction, and state that they will share information with the Commission, wither in accordance with the terms and conditions of the applicable Rule order (Host Country regulator) or pursuant to a separate written undertaking (Home Country regulator). Prior to confirming modified Rule relief under this alternative method, NFA is required to consult with CFTC staff to ensure that the information-sharing arrangement between the CFTC and the Home country regulator is sufficient. 18

22 (iii) For CBFBs organized in a country whose Home Country regulator is the recipient of a Rule Order and seeks to conduct brokerage activities pursuant to the European Passport through a branch from a location where the Host Country regulator is not the recipient of a Rule Order. The CFTC determined that, under the above circumstances, it would retain the authority to determine on a case-by-case basis whether Rule relief would be appropriate. See 70 Federal Register 2621, 2623 (Jan.14, 2005). 4. Does your jurisdiction have a division in between retail and wholesale client, or a similar division? If so, how do you differentiate between the two? As noted below, certain CFTC regulations make distinctions for essentially well qualified customers, based generally on measures of assets or institutional status. 4(a). If so, which requirements apply regarding wholesale or professional clients? (a) Distinctions based on status of the customer: Numerous distinctions are made, including: Exclusions from certain part 4 Rules for CPOs and CTAs with respect to offerings to qualified eligible persons. CFTC Rule 4.7 provides relief from certain otherwise applicable disclosure, periodic reporting, and annual reports requirements to CPOs and CTAs who solicit qualified eligible persons as defined by Rule 4.7(a)(2). 7 Staff registration relief to a foreign firm operating under a Rule exemption that introduced orders to US FCMs for well-qualified customers. A February 1993 CFTC staff letter granted registration relief to a U.K. firm exempted under Rule 30.10, which proposed to introduce to a US FCM orders of certain U.K. branch offices of US corporations (among other entities) for transactions on US contract markets. Under existing standards, firm accepting orders from such US customers ordinarily would be required to register with the CFTC. However, relief was granted based in part on the status of the customer (i.e., highly qualified institution, operating as independent profit center outside the United States), 7 CFTC Rule 4.7 defines qualified eligible persons in terms of both sophistication and business experience as well as personal wealth. The term includes, for example, FCMs, broker dealers registered under the Securities Act, accredited investors under the Securities Acts and any non-united States person. See Rule 4.7 for details. 19

23 the Rule status of the firm, and the fact that the accounts of each customer would be carried by a US FCM on a fully disclosed basis. Foreign currency transactions with retail customers. It is unlawful to offer foreign currency futures and option contracts to retail customers 8 unless the offeror is a regulated financial entity as enumerated in the CEA, including FCMs and certain of their affiliates. Off-exchange trading of foreign currency futures or options with retail customers by counterparties that are not within one of the enumerated categories is a violation of Section 4(a) of the CEA. The enumerated counterparties who may lawfully conduct off-exchange foreign currency futures and options trading with retail customers are regulated financial entities. These include, among others, FCMs and certain affiliates of FCMs. Other enumerated counterparties are: (1) financial institutions; (2) registered broker-dealers; (3) associated persons of registered broker-dealers; (4) insurance companies or affiliates thereof; (5) financial holding companies; and (6) investment bank holding companies. See Section 2(c)(2)(B)(ii) of the CEA. Certain customers of a FCM may contact the foreign broker carrying the US FCM s omnibus account. See Question # 7(b) below. Exempt Boards of Trade and Exempt Commercial Markets Transactions by eligible contract participants as defined in section 1a(12) of the CEA in selected commodities may be conducted on an exempt board of trade under the CEA. The requirements and provisions related to exempt boards of trade (XBOTs) are set forth in Section 5d of the CEA and Part 36.2 of the CFTC s regulations. Under Section 5d, a board of trade electing to operate as an exempt board of trade must so notify the CFTC. Exempt boards of trade are subject only to the CEA's anti-fraud and anti-manipulation provisions. An exempt board of trade is prohibited from claiming that the facility is registered with, or recognized, designated, licensed or approved by the CFTC. Also, if it is performing a price discovery function, the market must provide certain pricing information to the public. Definition of Eligible contract participant. For information concerning these markets, see and 8 Generally, retail customers for these purposes are: (1) individuals with less than $10 million in total assets, or less than $5 million in total assets if entering into the transaction to manage risk, and who are not registered as futures or securities professionals; (2) companies, other than financial institutions and investment companies, with less than $10 million in total assets, or a net worth less than $1 million if entering into the transaction in connection with the conduct of their businesses; and (3) commodity pools that have less than $5 million in total assets. CEA Section 1a(12) 20

24 Electronic trading facilities providing for the execution of principal-to-principal transactions between eligible commercial entities, as defined in section 1a(11) of the CEA, in exempt commodities, as defined in section 1a(14) of the CEA, may operate as exempt commercial markets (ECMs) under the CEA. The requirements and provisions related to exempt commercial markets are set forth in Sections 2(h)(3)-(5) of the CEA and in Part 36.3 of the CFTC s regulations. Under Section 2(h)(5), an electronic trading facility electing to operate as an exempt commercial market must so notify the CFTC. Under Section 2(h)(4), a ECM is subject to anti-fraud and anti-manipulation provisions and a requirement that, if performing a significant price-discovery function, the market must provide pricing information to the public. An ECM is prohibited from claiming that the facility is registered with, or recognized, designated, licensed or approved by, the CFTC. See definition of Eligible commercial entity. 4b). If so, which requirements apply to the offer or sale of products to retail clients? All sales practice requirements (disclosure, etc.) See Question #8 below. 5. Do any different requirements apply regarding products that are of a particular type? Yes. In general, each category of transaction described above is subject to specific requirements. Exclusions from certain part 4 Rules for CPOs and CTAs with respect to offerings to qualified eligible persons. See CFTC Rule 4.7(a). Staff registration relief to a foreign firm operating under a Rule exemption that introduced orders to US FCMs for well-qualified customers. Foreign currency transactions with retail customers. See section 2(c)(2)(B)(ii) of the CEA. Exempt Boards of Trade. See Exempt Commercial Markets. See 21

25 6. What requirements are there for an intermediary to do business through an omnibus account with intermediaries located in your jurisdiction? Omnibus accounts are permitted. Pursuant to CFTC Rule 1.58, each futures commission merchant (FCM) which carries a commodity futures or commodity options position for another FCM or for a foreign broker on an omnibus basis must collect, and each FCM and foreign broker for which an omnibus account is being carried must deposit, initial and maintenance margin on each position reported in accordance with CFTC Rule at a level no less than that established for customer accounts by the Rules of the applicable contract market. CFTC Rule Under the CFTC s large-trader reporting system, clearing members, FCMs, and foreign brokers (collectively called reporting firms ) electronically file daily reports with the CFTC. Part 17 Rules at: These reports contain the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations. (A list of current Commission reporting levels can be found at the Commission s website: If, at the daily market close, a reporting firm has a trader with a position at or above the Commission s reporting level in any single futures month or option expiration, it reports that trader s entire position in all futures and options expiration months in that commodity, regardless of size. Under CFTC Rule 17.00(e) a FCM, clearing member or foreign broker must report gross long and short positions in each future of a commodity and each strike price of a put or call option for each expiration month of all special accounts, including (4) omnibus accounts. See 7. What requirements are there to permit the customer of a foreign intermediary to use an intermediary in your jurisdiction to execute transactions for the foreign intermediaries omnibus customer account? (a) Contact of US FCM carrying the foreign broker s omnibus account. The CFTC does not have any Rules that restrict or condition the customer of a foreign intermediary from using an intermediary in the US to execute transactions for the foreign intermediary s omnibus customer account. Any such US intermediary would be required to be registered as a FCM. The exchanges have requirements that would address give up 22

26 arrangements. In this regard, the US Futures Industry Association (FIA) has a model give-up agreement. (b) Reverse scenario: US customer of FCM contacting the foreign broker carrying the US FCM s omnibus account. CFTC Rule permits certain well-qualified customers of US FCMs, eligible swap participants, 9 that maintain omnibus accounts with foreign brokers to effect orders for their own account by dealing directly with the foreign broker. CFTC Rule (c) exempts any person located outside the United States who accepts such orders from registration as a FCM or IB under the Part 30 Rules as long as the order is effected consistent with the order transmittal procedures, which basically are intended to ensure that such customer is properly authorized, that the transaction is properly supervised and that the responsibilities are clear. The foreign broker otherwise could be characterized as accepting orders and be required to register under the Part 30 Rules. (c) Due Diligence Measures for Certain Types of Accounts Involving Foreign Persons The Patriot Act amended the Bank Secrecy Act (BSA) to require that financial institutions establish Anti-money laundering (AML) Programs. FCMs, CPOs, and CTAs are now included in the definition of financial institution in the BSA. The Patriot Act requires that financial institutions must establish appropriate, and where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through foreign private banking and correspondent accounts. Interim final Rules (issued by the US Treasury) require FCMs, IBs, and broker-dealers to immediately take steps to comply with the due diligence statutory requirements with respect to foreign private banking accounts pending issuance of final implementing Rules. FCMs, IBs, and broker-dealers must have due diligence programs designed to ensure that the financial institution takes reasonable steps to ascertain the identity of the nominal and beneficial owners and sources of funds deposited into foreign private banking accounts to guard against money laundering and to conduct enhanced scrutiny of private banking accounts maintained by senior foreign political figures (or their immediate family members or close associates) and transactions that may involve the proceeds of foreign corruption. See for link to interim Rules. See for Patriot Act and requirements 9 CFTC Rule 35.1(b)(2) defines eligible swap participant to include, among others, banks, insurance companies, investment companies subject to the Investment Company Act, corporations or individuals having net assets in excess of $10 million. 23

27 See NFA s Anti-Mopney Laundering Reminder to FCMs and IBs What are the applicable ongoing conduct of business Rules in each of these circumstances listed in questions 1 to 7 above? Conduct of business Rules for registrants apply, including among other things, Rules addressing,, recordkeeping and oversight apply. See, generally Sales practice procedures, including disclosure (see CFTC Rule 1.55 and NFA s Sales Practice Rules. Trade practice ( Financial surveillance, ( Segregation of customer funds (see CFTC Rule 4.2) Dispute resolution procedures (se CFTC Rule 180) NFA Regulatory Guide to Retail Forex Transactions. 24

28 INVESTMENT SERVICES CONTACT INFORMATION CONTACT FOR INTERMEDIARY ISSUES Name of Department: Division of Clearing and Intermediary Oversight Telephone: Fax: CONTACT FOR EXEMPT MARKET ISSUES Name of Department: Division of Market Oversight Telephone: Fax: CONTACT FOR ANTI-MONEY LAUNDERING ISSUES AML Staff Working Group Three Lafayette Centre st Street, N.W. Washington, D.C CONTACT FOR ENFORCEMENT ISSUES Name of Department: Division of Enforcement (enforcement issues) Telephone: On-line complaint form: CONTACT FOR GENERAL INFORMATION Name of Department: Office of International Affairs Telephone: Fax:

29 Passporting within the EU and EEA The legislation in the EU and EEA countries concerning investment firms is based upon the Investment Services Directive (93/22/EEC), generally known as the ISD. That directive will be replaced by the new Markets on Financial Instruments Directive (2004/39/EC) known as MiFID, which shall be transposed into the legislation of the member states of the EU and EEA. Under both of these directives exists the possibility of using the authorization acquired in one EU/EEA member state in order to conduct business in another member state according to the system of mutual recognition, often referred to as passporting. Hence, a firm must first obtain an authorization in one member state, its home member state, where it has its legal seat. One can access another EU/EEA market by setting up a branch in that EU/EEA country, the host member state, or by providing services into the host member state without setting up a permanent place of business there. Establishment of Branches An investment firm that wishes to set up a branch office in another member state shall notify the competent authority in its home member state (home authority), and provide certain documentation. Unless the home authority has reason to doubt the adequacy of the information it will communicate that information to the competent authority in the host member state (host authority) within three months. The investment firm can start its business in a branch office, two months after the host competent authority has received notification from the home competent authority. The supervision of an investment firm including its branches located in another member state remains the main responsibility of the home authority. The branch may also have reporting obligations to the host authority. It must also follow the market conduct Rules of the host authority. There are Rules on assistance in supervision between home and host authorities. Provision of Services When providing services under the freedom to provide services, without setting up a branch office, the home authority shall also be notified by the investment firm and it shall within one month communicate the information provided by the investment firm to the host authority. The investment firm may then start to provide the investment services in question in the host Member State. For additional information see FAQs at CESR web-site at: 26

30 END USERS 1. Which derivative products can be traded in your jurisdiction under the laws of your jurisdiction? (a) US Products: The CFTC web-site provides information on US derivatives products. The exchanges subject to CFTC regulation trade futures and options on futures based on physical commodities and a broad spectrum of financial instruments and indexes, including security futures (futures on stock indexes and single shares): Contracts Listed Pursuant to Exchange Certification: Contracts Recently Approved by the CFTC: Contracts Pending CFTC Approval: Security Futures Product (SFP) Filings Futures on Single Stocks (including ADRs): Futures on Narrow-Based Indexes Futures on Other Eligible Securities: ETFs, TIRs, Closed-End Funds (b) Note on security futures products : The Commodity Futures Modernization Act of 2000 (CFMA), which became law on December 21, 2000, establishes a framework for joint regulation by the CFTC and the Securities and Exchange Commission (SEC) of the trading of futures on single securities and on narrowbased security indexes (collectively, security futures products or SFPs). Previously, these products were prohibited from being offered in the United States. Instead, futures contracts were allowed only on diversified indexes that contained many securities and could not be used as a surrogate for trading in a single security. With the passage of the CFMA, broad-based security indexes, which are not considered security futures products, continue to trade under the sole jurisdiction of the CFTC, while security futures products are subject to the joint jurisdiction of the CFTC and the SEC. For additional information, including methods for determining when an index is broad or narrowbased, see link at: 27

31 2. Which possible prohibitions exist on products offered from your jurisdiction? (a) Product restrictions: In addition to firm registration requirements, special considerations apply to the offer and sale to US persons of futures (or options on such futures) based on foreign securities or foreign government debt. See CFTC Backgrounder: Foreign Instrument Approvals and Exemptions. (b) Foreign securities: Futures and options on futures based on broad-based security indexes are under the exclusive jurisdiction of the CFTC. This is in contrast to security futures products, including futures on narrow-based security indexes, which are subject to the joint jurisdiction of the CFTC and the Securities and Exchange Commission. Specifically, Section 2(a)(1)(C)(iv) of the CEA generally prohibits any person from offering or selling a futures contract based on a security index in the US, except as otherwise permitted under the Act, including Section 2(a)(1)(C)(ii). By its terms, Section 2(a)(1)(C)(iv) of the CEA applies to futures contracts on security indices traded on both domestic and foreign boards of trade. Section 2(a)(1)(C)(ii) of the CEA sets forth three criteria to govern the trading of futures contracts on a group or index of securities on contract markets and derivatives transaction execution facilities: (1) The contract must provide for cash settlement; (2) The contract must not be readily susceptible to manipulation or to being used to manipulate any underlying security; and (3) The group or index of securities must not constitute a narrow-based security index. (c) The CEA does not explicitly address the standards to be applied to a foreign security index futures contract traded on a foreign board of trade. The CFTC s Office of General Counsel has applied the same three criteria noted above in evaluating requests by foreign boards of trade to allow the offer and sale within the US of their foreign security index futures contracts when those foreign boards of trade do not seek designation as a contract market or registration as a derivatives transaction execution facility to trade those products. The information a foreign board of trade should submit when seeking no-action to offer and sell in the United States futures contracts on broad-based securities indexes is set forth in Appendix D to Part 30 of the CFTC Rules. Appendix D as well as other relevant information may be found at: 28

32 (d) Note on Narrow Based Indexes Although Section 2(a)(1)(E)(i) of the CEA authorizes the SEC and CFTC to jointly issue Rules to allow the offer and sale to a US person of security futures products traded on foreign boards of trade, that provision did not have a statutory deadline attached to it and the agencies have not issued such Rules. To date, there is no procedure that allows narrow based foreign indexes to be offered to US customers. (e) Foreign government debt Debt obligations of a foreign government must be designated as an exempted security by the US Securities and Exchange Commission (SEC) under SEC Rule 3a12-8 before a futures contract or option thereon can be offered or sold in the United States. 3. How does an end user from another jurisdiction know how to identify the market operators, investment firms/intermediaries/brokers/asset managers in your jurisdiction with which they can do business? (a) Intermediaries NFA s BASIC website provides information on the registration status of intermediaries. NFA also maintains a listing of firms that have been disciplined for sales practice violations. (b) Markets The CFTC s web-site provides lists of approved markets. See link at: 4. What client money protections exist in your jurisdiction both in case of individual accounts and managed accounts, both individually and collectively? CEA Section 4d and CFTC Rule 1.20 require FCMs (including any depositories) to treat and deal with customer funds as belonging to the customer, separately account for such funds, and 29

33 not commingle those funds with the funds of any other person. CFTC Rule 4.30 prohibits a CTA from receiving client funds in the trading advisor s name. 5. In principle: In the event of insolvency, bankruptcy or liquidation of an investment firm/intermediary: Is client money or other assets protected from claims from creditors of the investment firm? Would the client in such a situation be able to close or manage its positions? The US Bankruptcy Code, Title 11 USC. Ch. 7, Subchapter IV and CFTC Rules Part 190 govern the failure of a market intermediary subject to CFTC jurisdiction. Under the CFTC s bankruptcy regulations, the accounts held by a commodity broker are divided into the following types or classes: futures accounts, foreign futures accounts, leverage accounts, commodity option accounts and delivery accounts. In general, the CFTC s bankruptcy regulations require that customer property which is segregated on behalf of a specific account class, or readily traceable to customers of such account class, must be allocated on a pro-rata basis to the customer estate of the account class for which it is segregated or traceable. All other property is allocated among all account classes using a formula intended to equalize the percentage of each claim for each account class. CFTC Rule (c). Classes of customer accounts are identified to permit the implementation of the principle of pro rata distribution so that differing segregation requirements with respect to differing classes of accounts benefit customer claimants on the class of account for which they were imposed. Among other things: Customer funds are acknowledged as separate from the broker and receive a priority. 11 USC. 766(h) Margin cannot be set aside except for fraud 11 USC. 546(i)(f) Liquidation or finality of variation margin payments can not be impaired by any court 11 USC. 556 Transfer of accounts is explicitly permitted. 11 USC. 764 See also CFTC Rule [List of contacts follows on next page.] 30

34 END USER CONTACT INFORMATION CONTACT FOR JURISDICTION, BANKRUPTCY and PRODUCT RESTRICTIONS Name of Department: Office of the General Counsel Telephone: Fax: CONTACT FOR EXCHANGES, PRODUCTS AND PRODUCT RESTRICTIONS Name of Department: Division of Market Oversight Telephone: Fax: CONTACT FOR INTERMEDIARY AND CLEARING ISSUES Name of Department: Division of Clearing and Intermediary Oversight Telephone: Fax: CONTACT FOR ENFORCEMENT ISSUES Name of Department: Division of Enforcement Telephone: On-line complaint form: CONTACT FOR GENERAL INFORMATION Name of Department: Office of International Affairs Telephone: Fax:

35 48262 Federal Register / Vol. 72, No. 163 / Thursday, August 23, 2007 / Notices SCHEDULE OF ANCILLARY MEETINGS Continued Washington State Delegation Enforcement Consultants Groundfish Advisory Subpanel Groundfish Management Team Scientific and Statistical Committee Olympic Coast National Marine Sanctuary Marine Habitat Research Report Thursday, September 13, 2007 Council Secretariat California State Delegation Oregon State Delegation Washington State Delegation Groundfish Advisory Subpanel Groundfish Management Team Enforcement Consultants Friday, September 14, 2007 Council Secretariat California State Delegation Oregon State Delegation Washington State Delegation Enforcement Consultants 7 a.m. 8 a.m. 8 a.m. 8 a.m. 8 a.m. 7 p.m. 7 a.m. 7 a.m. 7 a.m. 7 a.m. 8 a.m. 8 a.m. As needed. 7 a.m. 7 a.m. 7 a.m. 7 a.m. As needed. ebenthall on PRODPC61 with NOTICES Although non-emergency issues not contained in this agenda may come before this Council for discussion, those issues may not be the subject of formal Council action during this meeting. Council action will be restricted to those issues specifically listed in this notice and any issues arising after publication of this notice that require emergency action under Section 305(c) of the Magnuson-Stevens Fishery Conservation and Management Act, provided the public has been notified of the Council s intent to take final action to address the emergency. Special Accommodations These meetings are physically accessible to people with disabilities. Requests for sign language interpretation or other auxiliary aids should be directed to Ms. Carolyn Porter at (503) at least 5 days prior to the meeting date. Dated: August 17, Tracey L. Thompson, Acting Director, Office of Sustainable Fisheries, National Marine Fisheries Service. [FR Doc. E Filed ; 8:45 am] BILLING CODE S COMMODITY FUTURES TRADING COMMISSION Petition of the Chicago Mercantile Exchange Inc. for Exemptive Relief, Pursuant to Section 4(c) of the Commodity Exchange Act, From the Requirement That the China Foreign Exchange Trade System and National Interbank Funding Center or Its Members Register as Futures Commission Merchants AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed order and request for comment. SUMMARY: The Chicago Mercantile Exchange Inc. (CME) has petitioned the Commodity Futures Trading Commission (Commission) for exemptive relief, pursuant to section 4(c) of the Commodity Exchange Act (Act or CEA), from the requirement that the China Foreign Exchange Trade System and National Interbank Funding Center (CFETS) or its members register as futures commission merchants (FCMs). The Commission seeks comment on CME s petition. Copies of the petition are available for inspection at the Office of the Secretariat by mail at the address listed below, by telephoning (202) , or on the Commission s Web site ( DATES: Comments must be received on or before September 24, ADDRESSES: Comments should be sent to David A. Stawick, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, st Street, NW., Washington, DC Comments may be sent by VerDate Aug<31> :04 Aug 22, 2007 Jkt PO Frm Fmt 4703 Sfmt 4703 E:\FR\FM\23AUN1.SGM 23AUN1 facsimile transmission to (202) , or by to secretary@cftc.gov. Reference should be made to CME Petition for Exemption from FCM Registration on Behalf of CFETS. Comments may also be submitted by connecting to the Federal erulemaking Portal at and following the comment submission instructions. Comments will be published on the Commission s Web site. FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate Director, (202) , rwasserman@cftc.gov, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, st Street, NW., Washington, DC SUPPLEMENTARY INFORMATION: I. Background By petition dated July 27, 2007 (Petition), CME applied for an exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 6(c), from the requirement (pursuant to section 4d of the Act, 7 U.S.C. 6d) that CFETS or its members register as FCMs. According to the Petition, CFETS is a non-profit affiliate of the People s Bank of China (PBC). CFETS operates an electronic trading system with respect to trading in the interbank foreign exchange market, Renminbi (RMB) lending, and trading on the bond market in China. The foreign currencies traded against the RMB through CFETS include the U.S. dollar, Japanese yen, Euro, and Hong Kong dollar, and CFETS provides trading services for foreign exchange spot, forwards, and swaps. CFETS also operates China s interbank RMB money

36 Federal Register / Vol. 72, No. 163 / Thursday, August 23, 2007 / Notices ebenthall on PRODPC61 with NOTICES market and facilitates the trading of government securities and repo transactions. CFETS has over 270 members engaged in foreign exchange trading, including all of the major Chinese banks. CFETS members also include insurance and securities companies, fund management companies, and foreign financial institutions. CME and CFETS have entered into an agreement pursuant to which CFETS will become a super-clearing member of CME authorized to clear foreign currency and interest rate futures transactions on behalf of CFETS members and their customers domiciled in China. Although CFETS members include non-chinese financial institutions, only those of its members (and their customers) that are domiciled in China would be permitted to clear CME contracts through CFETS under the agreement. Pursuant to the agreement, CME will, among other things, provide consulting services and technical assistance to CFETS. In addition, CME and CFETS will cooperate to complete both a comprehensive training program and a marketing program. Under the arrangement, CFETS compliance with CME operational procedures will not be enforced via regulatory processes applicable to other clearing members, but instead under the terms of the agreement. As a clearing member of CME, CFETS would fall within the FCM definition of section 1a(20) of the Act, 7 U.S.C. 1a(20), in that it would accept[] orders for the purchase or sale of [a] commodity for future delivery on or subject to the rules of [a] contract market * * * and * * * in or in connection with such * * * acceptance of orders, [would] accept[] * * * money, securities, or property * * * to margin, guarantee, or secure * * * trades or contracts that * * * result therefrom. While the Commission and its predecessor agencies have not applied the FCM registration requirement to foreign brokers 1 that 1 In this context, foreign broker means any person located outside the U.S., its territories, or possessions who is engaged in soliciting or in accepting orders only from persons located outside the U.S., its territories, or possessions for the purchase or sale of any commodity interest transaction on or subject to the rules of any designated contract market or derivatives execution facility and that, in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom. See Exemption From Registration for Certain Foreign Persons, 72 FR 15,637 (Apr. 2, 2007) (proposing to revise and redesignate a definition for the term foreign broker ). clear through U.S. FCMs, Commission staff have stated that the FCM registration requirement of Section 4d(a)(1) of the Act, 7 U.S.C. 6d(a)(1), applies to foreign brokers that clear directly through a U.S.-based clearinghouse, 2 as CFETS will under the proposed arrangement with CME. CME states that, given CFETS status as an entity that is not separately capitalized, CFETS itself will not be in a position to provide net capital information to CME. Therefore, CFETS cannot meet the requirements that would apply if it were required to register as an FCM. 3 CME further states that, in light of CFETS existing business environment, CFETS is currently unable to establish a capitalized subsidiary in the U.S. that could otherwise meet the requirements applicable to registered FCMs. Consequently, CME is seeking an exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 6(c), on behalf of CFETS, from the FCM registration requirement. CME is also seeking relief from any FCM registration requirement that might apply to CFETS members. Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), empowers the Commission to promote responsible economic or financial innovation and fair competition by exempting any transaction or class of transactions, including any person offering or entering into such transaction, from any of the provisions of the CEA (subject to exceptions not relevant here) where the Commission determines that the exemption would be consistent with the public interest. 4 2 The Commission has recently proposed to codify its longstanding view that a foreign broker is not required to register if the foreign broker: (1) Limits its customers to foreign customers; (2) submits the trades of such foreign customers that are entered into on U.S. markets for clearing on an omnibus basis through a registered FCM; and (3) does not solicit or accept orders from U.S. customers for trading on U.S. markets. See supra note 1; see also CFTC Staff Letter 89 07, [ Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,479 at 36, (June 22, 1989) ( The Commission has not required a person located outside the United States which engages in the conduct described in section 2(a)(1)(A) of [the Act] for or on behalf of foreign customers through a U.S. FCM to register as an FCM ). In the proposal, the Commission specifically noted that, by limiting exemptive relief in the past to activities conducted though a U.S. FCM staff did not extend the exemptive relief available to a foreign broker to include the submission of trades executed for its customer and non-customer accounts directly to a clearing organization for a U.S. market. See 72 FR at 15, Petition, at 3. 4 Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides that: In order to promote responsible economic or financial innovation and fair competition, the Commission by * * * order, after notice and VerDate Aug<31> :04 Aug 22, 2007 Jkt PO Frm Fmt 4703 Sfmt 4703 E:\FR\FM\23AUN1.SGM 23AUN1 The Petition includes, among other things, the following conditions that could be included in any order granting an exemption to CFETS pursuant to section 4(c), 6(c): CFETS shall be required to comply with financial requirements that substitute for those applicable to CME s clearing members. Specifically, CFETS shall be required to satisfy CME s security deposit requirement, which is currently a minimum of $500,000. CFETS shall be required to maintain surrogate capital 5 of 8% of aggregate required customer performance bond, but in any case, no less than $10 million. All such surrogate capital shall be required to be held in the form of U.S. dollars or Treasury securities (subject to any haircuts required by Regulation 1.17) in a CME-controlled account in the U.S. CME shall be required to provide the Commission a monthly report detailing surrogate capital amounts and calculation (which report, or portions thereof, would be published on the Commission s Web site). CME shall be required to provide next-day notice to the Commission if: (i) Surrogate capital falls below 110% of the requirement; or (ii) if a customer margin call exceeds excess surrogate capital on deposit. 6 opportunity for hearing, may ( * * * on application of any person, including any board of trade designated or registered as a contract market * * *) exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to subsection (a) of this section (including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction), either unconditionally or on stated terms or conditions or for stated periods * * * from any * * * provision of this chapter (except subparagraphs (C)(ii) and (D) of section 2(a)(1) of this title, except that the Commission and the Securities and Exchange Commission may by rule, regulation, or order jointly exclude any agreement, contract, or transaction from section 2(a)(1)(D) of this title), if the Commission determines that the exemption would be consistent with the public interest. While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), imposes additional requirements with respect to any exemption from the requirements of Section 4(a) of the Act, 7 U.S.C. 6(a), CME is not seeking such relief. 5 If the Commission were to grant CFETS request for relief, CFETS would not be required to meet the minimum capital requirements of Regulation See Regulation 1.17, 17 CFR 1.17 (minimum capital requirements applicable to persons registered as a futures commission merchant ). Surrogate capital refers to alternative minimum capital requirements that CME represents that CFETS would be required to meet that are intended to parallel, in effect, the minimum capital requirements of Regulation These requirements may be imposed on CFETS as conditions of a Commission order pursuant to Section 4(c)(1), 6(c)(1). 6 For example, if CFETS had a surrogate capital requirement of $10 million, it would be required to maintain surrogate capital of $11 million (110% of the requirement) in a CME-controlled account in Continued

37 48264 Federal Register / Vol. 72, No. 163 / Thursday, August 23, 2007 / Notices ebenthall on PRODPC61 with NOTICES CME shall be required to provide the Commission immediate notice of any deficiency in surrogate capital. CME and CFETS shall be required to provide all large-trader reporting information at the same time and in the same format that CFETS would be required to provide if CFETS were registered as an FCM. CME and CFETS shall be required to act as agent for service of process regarding trading on CME for both CFETS members and customers of CFETS members. CME shall not hold CFETS positions and associated funds in U.S. customer accounts segregated pursuant to section 4d of the Act, 7 U.S.C. 6d. CME and CFETS shall be required to maintain records, in English, in the U.S., sufficient to permit the Commission to confirm compliance with any provision of any order issued by the Commission. CME and CFETS shall be required to make such records available to the Commission in the U.S. within 72 hours of any request. CME and CFETS shall be required to comply with U.S. anti-money laundering requirements as determined by the U.S. Treasury. CME and CFETS shall be required to accept joint and several liability in any Commission enforcement action relating to compliance with any order issued by the Commission. CME and CFETS shall be required to file a report with the Commission providing statistics and analyzing issues (to be determined) within 18 months after issuance of any relief. II. Request for Comments The Commission requests public comment on any aspect of the Petition that commenters believe may raise issues under the CEA or Commission regulations. In particular, the Commission invites comment regarding: (1) Whether the proposed exemption is consistent with the requirements for relief set forth in section 4(c) of the Act, 7 U.S.C. 6(c), including whether granting the exemption would be consistent with the public interest and the purposes of the CEA; (2) whether CME s representations, as discussed above, if imposed as conditions of an order pursuant to section 4(c)(1), section 6(c)(1), would provide adequate safeguards with respect to the U.S. clearing system in light of CFETS exemption from the FCM registration requirement; (3) whether an order granting the request for relief should include requirements different from or in addition to those discussed above; (4) order to avoid providing the Commission with nextday notice of its surrogate capital on deposit. whether an order granting the request for relief should exclude any one or more of the requirements discussed above; (5) any material adverse effects that granting the petition would have upon other derivatives clearing organizations, exchanges, or other Commission registrants from a competitive 7 or other perspective 8 ; and (6) any other issues relevant to this petition. Issued in Washington, DC, on August 8, 2007 by the Commission. David A. Stawick, Secretary of the Commission. [FR Doc. E Filed ; 8:45 am] BILLING CODE P COMMODITY FUTURES TRADING COMMISSION Fees for Reviews of the Rule Enforcement Programs of Contract Markets and Registered Futures Associations AGENCY: Commodity Futures Trading Commission. ACTION: Establish the FY 2007 schedule of fees. SUMMARY: The Commission charges fees to designated contract markets and registered futures associations to recover the costs incurred by the Commission in the operation of its program of oversight of self-regulatory organization (SRO) rule enforcement programs (17 CFR part 1 Appendix B) (National Futures Association (NFA), a registered futures association, and the contract markets are referred to as SROs). The calculation of the fee amounts to be charged for FY 2007 is based upon an average of actual program costs incurred during FY 2004, 2005, and 2006, as explained below. The FY 2007 fee schedule is set forth in the SUPPLEMENTARY INFORMATION. Electronic payment of fees is required. 7 As noted above, the Commission may grant an exemption pursuant to Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), [i]n order to promote responsible economic or financial innovation and fair competition. Section 15(b) of the Act, 7 U.S.C. 19(b), provides that the Commission shall take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of this chapter, as well as the policies and purposes of this chapter, in issuing any order * * *. 8 The Commission notes that Section 15(a) of the Act, 7 U.S.C. 19(a), requires that the Commission, before issuing an order, consider the costs and benefits in light of considerations of protection of market participants and the public; considerations of the efficiency, competitiveness, and financial integrity of futures markets; considerations of price discovery; considerations of sound risk management practices; and other public interest considerations. VerDate Aug<31> :04 Aug 22, 2007 Jkt PO Frm Fmt 4703 Sfmt 4703 E:\FR\FM\23AUN1.SGM 23AUN1 DATES: Effective Dates: The FY 2007 fees for Commission oversight of each SRO rule enforcement program must be paid by each of the named SROs in the amount specified by no later than October 22, FOR FURTHER INFORMATION CONTACT: Stacy Dean Yochum, Counsel to the Executive Director, Commodity Futures Trading Commission, (202) , Three Lafayette Centre, st Street, NW., Washington, DC For information on electronic payment, contact Adrienne Young-Burgess, Three Lafayette Centre, st Street, NW., Washington, DC 20581, (202) SUPPLEMENTARY INFORMATION: I. General This notice relates to fees for the Commission s review of the rule enforcement programs at the registered futures associations 1 and designated contract markets (DCM), which are referred to as SROs, regulated by the Commission. II. Schedule of Fees Fees for the Commission s review of the rule enforcement programs at the registered futures associations and DCMs regulated by the Commission: Entity Fee amount Chicago Board of Trade... $72,547 Chicago Mercantile Exchange... 97,725 New York Mercantile Exchange 59,604 Kansas City Board of Trade... 10,799 New York Board of Trade... 57,273 Minneapolis Grain Exchange... 10,967 HedgeStreet... 2,736 One Chicago... 18,355 Chicago Climate Futures Exchange... 1,731 EUREX... 2,523 National Futures Association ,854 Total ,114 III. Background Information A. General The Commission recalculates the fees charged each year with the intention of recovering the costs of operating this Commission program. 2 All costs are accounted for by the Commission s Management Accounting Structure Codes (MASC) system, which records each employee s time for each pay period. The fees are set each year based 1 NFA is the only registered futures association. 2 See Section 237 of the Futures Trading Act of 1982, 7 U.S.C. 16a and 31 U.S.C For a broader discussion of the history of Commission Fees, see 52 FR (Dec. 4, 1987).

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42 New Legislative Framework for Investor Protection - "Financial Instruments and Exchange Law" - Financial Services Agency, Japan

43 In recent years, the environment surrounding Japan's financial and capital markets has been changing drastically. Users' viewpoint With the development of financial technologies, some financial products not covered in the current regulations for user protection have been appearing, and there have been also cases of users suffering damages. It is necessary to compile comprehensive and crosssectional rules for user protection and to develop an environment where users can invest with confidence. Market's viewpoint Japan's household financial assets are mainly held in the form of cash and deposits. Shifting them from savings to investments has continued to be an issue. On the other hand, various other issues and problems have emerged related to the way in which the market should function in order to take in these funds. It is essential to enhance fairness and transparency in the market and to restore confidence in the Japanese market. International viewpoint Amid the globalization of financial and capital markets, market legislative frameworks and market infrastructure have been reorganized in other countries and regions. It is necessary to expedite efforts to enhance the attractiveness of the Japanese market as an international market. Financial assets of households and the like Financial portfolios of Japanese households have a higher cash and deposit ratio compared to other countries. Japan (end Mar. 2006) [preliminary] U.S.A. (end Mar. 2006) [preliminary] Germany (end 2005) Others 5.3% Stocks, bonds, mutual funds, Others 3.3% Others 0.4% Stocks, bonds, mutual funds, trusts & contributions to trusts & contributions to capital capital 18.5% 33.4% Insurance & pension funds 25.3% Insurance & pension funds 30.7% Insurance & pension funds 30.4% Cash & deposits 50.9% (Total: JPY 1,556.5 trillion) Cash & deposits Stocks, bonds, mutual funds, 13.3% trusts & contributions to capital 53.0% (Total: USD 39.8 trillion) Cash & deposits 35.0% (Total: EUR 4.3 trillion) Notes: 1. Financial assets of private nonprofit institutions serving households are included in Japan's financial assets for households for sake of comparison with those of the United States. 2. Price volatility is included in stocks. Sources: Bank of Japan, "Japan's Flow of Funds Accounts / Financial Assets and Liabilities" FRB, "Flow of Funds Accounts of the United States" Deutsche Bundesbank, "Financial Accounts for Germany 1991 to 2005" 1

44 In order to respond to these issues, the bills to develop the legislative framework for financial instruments and exchange were approved in the ordinary Diet session in June The following amendments have been made. (1) Establishing a cross-sectional legislative framework for user protection covering a wide range of financial products with strong investment characteristics (the so-called legal framework for investment services) 1) From the "Securities and Exchange Law" to the "Financial Instruments and Exchange Law" 2) Broadening the scope of instruments covered under the FIEL 3) Cross-sectional regulation on financial instruments businesses covered under the FIEL 4) More flexible rules for entry into the financial instruments businesses according to the type of business 5) Reorganizing regulation on conduct of financial instruments businesses 6) More flexible regulation on conduct of businesses according to the attributes of customers 7) Cross-sectional coverage of regulations on deposits, insurance and the like with strong investment characteristics 8) Reorganizing other systems for user protection page 3 page 4 page 5 page 6 page 7 page 8 page 9 page 10 (2) Enhancing disclosure requirements 1) Enhancing disclosure by listed companies 2) Reviewing the Tender Offer System 3) Reviewing the reporting system for Large Shareholdings page 12 page 13 page 15 (3) Ensuring appropriate management of self-regulatory operations by exchanges page 16 (4) Strict countermeasures against unfair trading page 17 (Effective dates of legislation) page 18 2

45 The so-called legal framework for investment services 1 From the "Securities and Exchange Law" to the "Financial Instruments and Exchange Law" Title of legislation The name of the Securities and Exchange Law will be amended to the Financial Instruments and Exchange Law. The following four laws will be abolished to be consolidated into the Financial Instruments and Exchange Law. Laws to be amended or abolished Financial Futures Trading Law Law Concerning the Regulation of Investment Advisory Services Relating to Securities Law Concerning Foreign Securities Firms Law Concerning the Regulation of Mortgage Business Eighty-nine laws will be amended in total, some parts of which will be consolidated into the Financial Instruments and Exchange Law. In the Financial Instruments and Exchange Law, the legal name for a firm subject to the regulation will be changed to "financial instruments firm" and the legal name for an exchange will be changed to "financial instruments exchange." Financial instruments firms/ Financial instruments exchanges * However, continued use of names such as "securities firm" and "stock exchange" will be permitted. Securities firms Commodity fund sales firms Investment advisory firms Financial futures trading firms Trust beneficiary rights sales firms Investment trust management firms etc. Financial instruments firms Stock exchanges Financial futures exchanges Financial instruments exchanges 3

46 The so-called legal framework for investment services 2 Broadening the scope of instruments covered under the FIEL Securities The scope of "securities" will be expanded in the Financial Instruments and Exchange Law. For example, all interests in trusts will be deemed as securities, and interests in collective investment schemes will be comprehensively positioned as securities. * The Securities and Exchange Law lists government bonds, local government bonds, corporate bonds, stocks, investment trusts, and the like, as "securities." The scope of "derivative transactions" will be expanded in the Financial Instruments and Exchange Law. For instance, transactions on a wide range of assets and indexes will be covered in the FIEL. (For example, currency and interest rate swaps, weather derivative transactions, and credit derivative transactions will be also categorized as derivative transactions.) * In terms of derivative transactions, the Securities and Exchange Law covers only those concerning securities. Derivative transactions Coverage under the Securities and Exchange Law Government bonds Local government bonds Corporate bonds Stocks Investment trusts Securities derivatives, etc. Coverage under the Financial Instruments and Exchange Law Government bonds Local government bonds Corporate bonds Stocks Investment trusts Interests in trusts in general Interests in collective investment schemes (funds) (comprehensive definition) Various derivative transactions, etc. For reference: About collective investment scheme In the Financial Instruments and Exchange Law, rights concerning any scheme that (1) collects capital or contribution in monetary or other similar form from two or more persons, (2) conducts business/undertakes investments using the money, and (3) distributes profits or properties to investors from the business/investments (collective investment scheme) are deemed to be and treated comprehensively as securities, regardless of the legal feature of the scheme; such as contracts for partnerships based on the Civil Law, secret partnerships based on the Commercial Law, limited investment partnerships, limited liability partnerships, or any other form of contracts (but excluding cases where all investors are involved in the business, etc.). The scope of the law covers a variety of investment instruments, such as investment in commodities using capital or contributions in monetary or other similar form (so-called commodity funds), investments in trust beneficiary rights on real estate (so-called real estate funds), and those engaged in various businesses (so-called business funds). 4

47 The so-called legal framework for investment services 3 Cross-sectional regulation on financial instruments businesses covered under the FIEL The Financial Instruments and Exchange Law requires registration for "sales and solicitation" operations of securities and derivative transactions, as well as "investment advisory," "investment management" and "customer asset administration" services for cross-sectional regulation. For interests in collective investment schemes, "sales and solicitation" by the members of the scheme (so-called self-offering), will be also subject to regulation. In addition, it is clearly stated that the management of properties for investment purposes in collective investment schemes (socalled self-management) will be subject to the regulation. Securities and Exchange Law Securities business (registration required in principle) Financial Futures Trading Law Financial futures trading business (registration required) Sales and solicitation Commodity Fund Law Trust Banking Law Commodity fund sales business (permission required) Trust beneficiary rights sales business (registration required) Self-offering of interests in collective investment schemes Investment advisory Securities Investment Advisory Business Law Securities Investment Advisory Business Law Securities investment advisory business (registration required) Discretionary investment business (license required) Financial instruments business (registration required) Investment management Investment Trusts and Investment Corporations Law Investment trust management business Corporate Asset Management Business (license required) Self-management of properties in collective investment scheme Asset administration (Incidental and subordinate business activities of securities firms and the like) Custody of securities 5

48 The so-called legal framework for investment services 4 More flexible rules for entry into the financial instruments businesses according to the type of business The regulation on entry into the financial instruments business depend on the scope of the firm's business (type of business). More precisely, financial instruments businesses are categorized into the first financial instruments business, the investment management business, the second financial instruments business, and the investment advisory and agency business. The first financial instruments business Sales and solicitation of securities with high liquidity, customer asset administration, etc. Investment management business Financial instruments businesses (registration required) Investment management The second financial instruments business Sales and solicitation of securities with low liquidity, etc. * Regulation of entry according to the type of business Acceptability of entry of individuals Financial asset base Fit and proper criteria etc. Investment advisory and agency business Investment advisory, etc. * Firms engaged in financial instruments businesses shall display signs indicating the types of businesses they are engaged in as well as other relevant details. * Firms already engaged in a financial instruments business must follow the procedures for the changing registration before engaging in another type of business. 6

49 The so-called legal framework for investment services 5 Reorganizing regulation on conduct of financial instruments businesses In the Financial Instruments and Exchange Law, it is stipulated that financial instruments firms should comply with the following rules of conducts (rules for sales and solicitation) in conducting sales or solicitation of securities or derivative transactions. Obligation on presenting signs - All branch offices and business offices of financial instruments firms must present signs in places noticeable for the public. Regulation on advertisements - An advertisement must indicate a registration number and that the advertiser is a financial instruments firm. - Concerning profit prospects, an advertisement shall not portray things in a way that is significantly different from the truth or in a way this may mislead people. Obligation to deliver documents in a written format before making a contract - Documents must indicate a registration number and that the company is a financial instruments firm. - Documents must state the outlines of the contract and the fees. - If there is a "possibility of incurring loss" or "possibility that the loss may exceed the value of deposits received from customers," the documents must state as such. Obligation to deliver document in a written format at the time of a contract Various prohibited conducts - It is prohibited to engage in "the delivery of false information" or "solicitation by providing decisive judgments on uncertain matters." - Solicitation of customers who have not requested such solicitation by making visits or phone calls is prohibited (a ban on unwanted solicitation). * It is intended that, for the time being, this will apply to over-the-counter financial futures transactions (foreign exchange margin transactions, etc.). - Continued solicitation of customers who have once indicated that they do not wish to enter into a contract is prohibited (a ban on re-solicitation). * It is intended that, for the time being, this will apply to financial futures transactions in general (foreign exchange margin transactions, etc.). Prohibitation of loss compensation Principle of appropriateness - In light of customer knowledge, experience, and assets, as well as the purpose for concluding a contract, firms must not engage in inappropriate solicitation that may result in insufficient investor protection. In addition, various regulations on conduct of businesses are being reorganized regarding "investment advisory," "investment management" and "customer asset administration" activities and the like. 7

50 The so-called legal framework for investment services 6 More flexible regulation on conduct of businesses according to the attributes of customers - Differentiation between professional investors and general investors - In the Financial Instruments and Exchange Law, under the premise of user protection and with a perspective towards the smoother provision of risk capital, if a customer is a "professional investor," certain regulations regarding conduct of businesses, such as "obligation to deliver documents before making a contract," will not be applied. All customers for financial instruments firms are categorized into "professional investors" or "general investors," some of them may apply for a change of status from one to the other. (1) Always treated as professional investors Qualified institutional investors, etc. Professional investors (2) Possible to change status to that of a general investor Listed companies, etc. Possible to change status after completion of certain procedures General investors (3) Possible to change status to that of a professional investor Corporations other than (1) and (2) Individual customers meeting certain criteria (4) Always treated as general investors Individuals (except those who meet the criteria in (3)) For reference: Reporters of special business activities In the Financial Instruments and Exchange Law, a financial instrument business is required to register for self-offering of interests in collective investment schemes and self-management of properties of collective investment schemes (page 5). On the other hand, in order to promote financial innovation through the sound development of funds (collective investment schemes), a financial instruments firm is not required to register in relation to businesses related to funds dealing with professional investors. Instead notification is required to such firms as "reporters of special business activities" so that their status can be monitored. (In precise terms, this is applicable to funds dealing only with qualified institutional investors and a limited number of general investors.) 8

51 The so-called legal framework for investment services 7 Cross-sectional coverage of regulations on deposits, insurance and the like with strong investment characteristics Some financial instruments such as bank deposits and insurance remain being regulated under the Banking Law and the Insurance Business Law, etc., and are not subject to direct regulation under the Financial Instruments and Exchange Law. In this revision, concerning "sales and solicitation" activities for deposits and insurance with strong investment characteristics, the Banking Law, the Insurance Business Law, and the like, have been amended so that the same regulation for user protection (rules for sales and solicitation) as those under the Financial Instruments and Exchange Law will be applied to them. For instance, concerning the following financial instruments with strong investment characteristics, the rules for sales and solicitation will, in principle, be applied at the same level as that set under the Financial Instruments and Exchange Law. Deposits, etc. with strong investment characteristics (The Banking Law, etc.) Insurance, etc. with strong investment characteristics (The Insurance Business Law, etc.) Trusts with strong investment characteristics (The Trust Banking Law, etc.) Foreign currency deposits Derivative deposits Foreign-currency denominated insurance and pension funds Variable insurance and pension funds Designated money in trust (with returns based on performance) (Deposits that may incur loss of principal denominated in Japanese yen due to fluctuations in foreign exchange rates) (Deposits that may incur loss of principal due to exit penalties calculated based on trends in interest rates when called before maturity) (Insurance and pension funds that may incur loss of premiums, and the like, denominated in Japanese yen, due to fluctuations in foreign exchange rates) (Insurance and pension funds that may incur loss of premiums, and the like, due to performance results) (Trusts that may incur loss of principal due to performance results) Commodity futures transactions (The Commodity Exchange Law) (Transactions that may incur loss due to fluctuations in commodity prices) Real estate syndicate (The Real Estate Syndication Law) (Transactions that may incur loss due to circumstances surrounding real estate transactions) 9

52 The so-called legal framework for investment services 8 Reorganizing other systems for user protection Enhancing the Financial Products Sales Law * The Financial Products Sales Law serves to facilitate of filing claims for damages concerning sales of a wide range of financial instruments such as deposits and savings, insurance, and securities, etc. If a financial instruments firm fails to provide necessary explanation upon sales of a financial instrument, the firm will bear liability for damages, whether at fault or not, with any losses incurred on the principal being presumed as losses to be compensated. Principles regarding actions for damages under the Civil Law (Section 709 of the Civil Law) Customers suffering damage must provide evidence of all of items (1) to (4). Financial Products Sales Law This law prescribes special rules on liabilities for damages under the Civil Law concerning a wide range of financial instruments including deposits and savings, insurance, securities, etc. No need for customers suffering damage to provide evidence of (2), (3) and (4). (1) Malfeasance (3) Causation (2) Intention or negligence Duty of financial instruments firms to explain (current system) (Matters to be explained) Possibility of loss to principals (Points to be explained) Existence of risks Violation of duty [Proof of (1)] to explain (4) Damages No fault liability for financial instrument firms Loss taken to be the loss incurred on principal In this legislative reorganization, under the Financial Products Sales Law, the scope of duty to provide explanation will be enhanced for financial instruments firms ("possibility of incurring losses in excess of principal" will be added to the matters requiring explanation, and "significant parts of the structure of transactions" will be covered in points requiring explanation). In addition, the regulation has been revised to stipulate that financial instruments firms must give appropriate explanation based on the level of customers' knowledge, experience and financial status as well as the purpose of the transaction. Also, providing decisive judgments on uncertain matters will be prohibitted, and the violations will result in liability for damages, whether at fault or not, imposed on the financial instruments firm, with losses presumed to be the losses incurred on the principal. 10

53 Establishing Certified Investor Protection Organizations Under the Financial Instruments and Exchange Law, government authorities certify organizations that settle complaints and mediate disputes on financial instruments businesses from private organizations other than self-regulatory organizations. A framework to enhance the reliability of such businesses (Certified Investor Protection Organizations) is being put together. For reference: In the Financial Instruments and Exchange Law, the legal name for a self-regulatory organization made up of a membership of financial instruments firms has been amended to "Financial Instruments Firms Association." * However, continued use of names such as "Securities Dealers Association" will be permitted. Securities Dealers Association Securities Investment Advisers Association Financial Futures Association Investment Trust Association Financial Instruments Firms Association Each SRO engages in activities such as examination aimed at resolving complaints, the mediation of disputes, the development of self-regulatory rules, surveillance of members in relation to compliance with laws, regulations and rules, and the imposition of sanctions in case of violation. 11

54 Enhancing disclosure requirements 1 Enhancing disclosure by listed companies Introducing the statutory quarterly reporting system In order to ensure timely and prompt disclosure of financial and corporate information, "quarterly reporting" will become a mandatory requirement for listed companies, and it will be subject to audits by certified public accountants or auditing firms. (Submission of false quarterly report will be subject to criminal or civil money penalties.) Enhancing internal control over financial reporting In order to ensure appropriate disclosure of financial and corporate information, "internal control reports" which provide an evaluation of the validity of internal control of financial reporting (a system to ensure appropriate information on financial matters) for each fiscal year will become a mandatory requirement for listed companies and will be subject to audits by certified public accountants or auditing firms. In addition, listed companies will be obliged to submit "certification" by management stating that descriptions in financial statements are appropriate and in compliance with laws and regulations. 12

55 Enhancing disclosure requirements 2 Reviewing the Tender Offer System The number of corporate mergers and acquisitions has been accelerating rapidly in Japan along with increasing numbers of "tender offer (TOB)," one way to exercise M&A. The types of tender offers are also becoming more diversified. Given these circumstances, the tender offer (TOB) system under the Securities and Exchange Law has been reviewed in this legislative revision. For reference: The tender offer (TOB) system The "tender offer (TOB) system" is a system that ensures transparency and fairness in stock transactions that may affect the management rights of a company. By imposing duties to disclose information including offer periods, volume and prices to companies intending to conduct large volume off-exchange purchases of stock *1, a fair opportunity for shareholders of the target company to sell such stock is ensured. *1 In principle, this refers to cases when shareholdings exceed 5% following the purchase. However, if shares are purchased from a significantly small number of shareholders (10 or fewer shareholders within 60 days) and the deals are executed outside of the stock exchanges, the buyer must make a "tender offer" when shareholdings exceed one third of the total following the purchase. 13

56 For instance, the following revisions will be made. In an effort to deal with transactions that seek to evade relevant laws and regulations, it will be made clear that aggressive buying involving transactions executed on and/or off the market that will result in shareholdings of one third or more will be subject to regulations on tender offers. In order to ensure sufficient provision of information to shareholders and investors as well as to secure an enough period that allows shareholders and investors to fully consider the acceptance of tender offers, the period for a tender offer will be counted by business days basis rather than calendar dates (between 20 and 60 business days). * Under current regulation, the period for tender offers is set by the offering company and ranges between 20 and 60 days (on a calendar date basis). Companies targeted by tender offers will have a duty to express their opinions. Other measures will also be taken to give opportunities for target companies to raise questions with offering companies, and to allow target companies to request extensions of tender offer periods. If target companies take countermeasures against the takeover, offering companies may withdraw tender offers and reduce offering prices. * Under current regulation, withdrawal of tender offers is allowed in limited cases such as bankruptcy or merger of target companies. In order to ensure fairness amongst shareholders and investors, if a purchase will result in shareholdings of two thirds or more, offering companies are obliged to buy all of the tendered shares. In order to ensure fairness amongst bidders, if a party with shareholdings of more than one third of the target company's shares begins a rapid buy-up while a tender offer of another party is in place, the former is obliged to make a tender offer also. 14

57 Enhancing disclosure requirements 3 Reviewing the reporting system for Large Shareholdings Given the increasing incidence of high volume share acquisitions, this legislative revision will also amend "the reporting system for large shareholdings" under the Securities and Exchange Law. For reference: The "reporting system for large shareholdings" "The reporting system for large shareholdings" is a system to promptly disclose the status of large shareholdings to investors. If total shareholdings in a listed company reach above 5%, the shareholder must submit a "report on large shareholdings" within 5 business days from the date of the purchase. (If the holdings increase or decrease by 1% or more at a later date, a "report on changes" must also be submitted within 5 business days.) However, in consideration of the administrative workload for institutional investors engaged in a large volume of trading as part of their daily business activities, a lower frequency of reporting will be required (special reporting system). For instance, the followings will be reviewed. Concerning the "special reporting system" for institutional investors, the deadline will be shortened and the frequency for reporting will be increased to "roughly every 2 weeks, within 5 business days." * Under the current "special reporting system," for example, if shareholdings in a listed company reach above 5%, a report must be provided "once every 3 months by the 15th of the following month." To facilitate rapid publication through EDINET (an electronic disclosure system), "reports on large shareholdings" must be submitted electronically. 15

58 Ensuring appropriate management of self-regulatory operations by exchanges Under current regulation, stock exchanges are allowed to be demutualized. Regarding incorporated stock exchanges, some concerns regarding possible conflicts of interest between the following two have been raised: "Profitability" as a stock corporation, and "Self-regulatory operation" aimed at ensuring fairness and transparency of transactions on the exchange. Under the Financial Instruments and Exchange Law, in order to ensure appropriate management of self-regulatory operations by financial exchanges, systems are being organized to allow: (1) The entrustment of self-regulatory operations to a "self-regulatory corporation"; (2) The establishment of a "self-regulatory committee" to make decisions on matters concerning self-regulatory operations (for incorporated stock exchanges). * "Self-regulatory operations" of a stock exchange refer to, for example, operations concerning listing or delisting, and examination on the compliance of market participants. For reference: Organizational structure that financial instruments exchanges may take (1) A corporation independent from the exchange ("self-regulatory corporation") performs self-regulatory operations (2) An independent self-regulatory committee within the same organization Financial instruments exchange Holding company Financial instruments exchange Board of directors Self-regulatory committee Self-regulatory corporation Financial instruments exchange Self-regulatory corporation 16

59 Strict countermeasures against unfair trading Increase in maximum criminal penalty In order to ensure user protection, secure fairness and transparency in transactions, and establish public confidence in the markets, the current level of penalties under the Securities and Exchange Law will be increased concerning violation of disclosure requirements and unfair tradings. For example, penalties against the following malfeasance are increased: General unfair trading, spreading of rumors, resorting to deceptive devices, market manipulation Submission of false registration statement regarding material information Insider trading Non-submission of registration statement Maximum imprisonment of 5 years Individuals: Maximum fine of JPY 5 million Corporations: Maximum fine of JPY 500 million Imprisonment maximum 3 years Individuals: Maximum fine of JPY 3 million Corporations: Maximum fine of JPY 300 million Maximum imprisonment of 10 years Individuals: Maximum fine of JPY 10 million Corporations: Maximum fine of JPY 700 million Imprisonment maximum 5 years Individuals: maximum fine of JPY 5 million Ccorporations: Maximum fine of JPY 500 million Countermeasures against "misegyoku" "Misegyoku" is a means of market manipulation whereby dummy orders are placed to create an impression of active trading that will later be cancelled immediately before the transactions are completed. In this legislative revision, the scope for civil money penalties and criminal penalties will be enlarged to be applied to "misegyoku." This amendment deals with those matters surrounded by line. Criminal penalty Civil money penalty "Misegyoku" by customers (through securities firms) (currently applicable) (applicable after the revision) "Misegyoku" by securities firms as part of self-dealing activities (applicable after the revision) (applicable after the revision) 17

60 (Effective dates of legislation) The date on which amendments to legislation will come into effect are as follows: Increased penalties and countermeasures against "misegyoku" (page 17) The date falling 20 days following the promulgation of the legislations (July 4, 2006) Reviewing the tender offer rules and the reporting system for large shareholdings (pages 13-15) The date to be designated by cabinet order not exceeding 6 months after the promulgation (by December 13, 2006) * Of the reviews of the reporting system for large shareholdings (page 15), the review of the "special reporting system" and the obligation to report electronically will be effective on the date to be designated by cabinet order not exceeding one year after the promulgation (by June 13, 2007). Development of the socalled legal framework for investment services (pages 3-11) Enhancing disclosure by listed companies (page 12) Ensuring appropriate management of selfregulatory operations by exchanges (page 16) The date to be designated by cabinet order not exceeding 18 months after the promulgation (by December 13, 2007) * Reviews concerning the introduction of the statutory quarterly reporting system and the enhancement of internal control over financial reporting (page 12) will become applicable from the fiscal year starting on and after April 1,

61 For inquiry regarding this brochure, please contact: Financial Markets Division, Planning and Coordination Bureau Corporate Accounting and Disclosure Division, Planning and Coordination Bureau Tel: Website New Legislative Framework for Investor Protection - "Financial Instruments and Exchange Law" - September 2006 Financial Services Agency

62 Shariah Compliant OTC Derivatives Master Agreement Tim Plews ABA Regulation of Future and Derivative Instruments February 2, 2008

63 Background Market demand MOU between ISDA and IIFM (International Islamic Financial Market) Collaboration to develop a master agreement for OTC Shariah compliant derivatives transactions Based on the ISDA Master Adapted to take account of Shariah requirements No interest provisions To be considered by IIFM s board of Shariah scholars 1

64 Some Shariah related context Religious principles not legal principles Different interpretations different schools different views among scholars considerable areas of consensus Not susceptible to legal opinion type verification IIFM s board of Shariah scholars widely drawn and widely respected 2

65 Some Specific Aspects Compliance with Shariah principles a matter for each party to determine for itself representation of non-reliance Agreement governed by English law/ny law not expressed to be governed by Shariah principles Individual country laws may apply certain Shariah principles (effectively as public policy) jurisdiction issue not general contract issue use of ISDA Master generally already subject to individual jurisdiction legal requirements need to do your jurisdictional due diligence 3

66 Some Specific Aspects (2) Arbitration provision included Good master agreement cannot save bad individual transaction Consider Shariah compliance of individual transactions as well as the master agreement itself Similar to verifying that particular transactions fall within e.g. a jurisdiction s netting legislation Need to do your jurisdictional due diligence 4

67 Some Specific Aspects (3) Positive preliminary discussion with some of the scholars on master agreement framework single agreement provision events of default and termination events close-out mechanism After finalisation of Master Agreement, attention to turn to specific transactions 5

68 Shariah Compliant OTC Derivatives Master Agreement Clifford Chance, 10 Upper Bank Street, London, E14 5JJ, UK Clifford Chance LLP 2008 Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications UK/ /01