Appendix B to Part 30 - Interpretative Statement With Respect to the Secured Amount Requirement Set Forth in § 30.7
17:1.0.1.1.23.0.7.14.23 : Appendix B
Appendix B to Part 30 - Interpretative Statement With Respect to
the Secured Amount Requirement Set Forth in § 30.7
1. Rule 30.7 requires FCMs who accept money, securities or
property from foreign futures and foreign options customers to
maintain in a separate account or accounts such money, securities
and property in an amount at least sufficient to cover or satisfy
all of its current obligations to those customers. 1 This amount is
denominated as the “foreign futures or foreign options secured
amount” and that term is defined in § 1.3. The separate accounts
must be maintained under an account name that clearly identifies
the funds as belonging to foreign futures and foreign options
customers at a depository that meets the requirements of Rule
30.7(c). Further, each FCM must obtain and retain in its files for
the period provided in Rule 1.31 an acknowledgment from the
depository that the depository was informed that such money,
securities or property are held for or on behalf of foreign futures
and foreign options customers and are being held in accordance with
the provisions of these regulations.
1 “Foreign futures or foreign options customer” means “any
person located in the United States, its territories or possessions
who trades in foreign futures or foreign options: Provided, That an
owner or holder of a proprietary account as defined in § 1.3 shall
not be deemed to be a foreign futures or foreign options customer
within the meaning of [Rules 30.6 and 30.7].” Rule 30.1(c).
“Foreign futures” means “any contract for the purchase or sale of
any commodity for future delivery made, or to be made, on or
subject to the rules of any foreign board of trade.” Rule 30.1(a).
“Foreign option” means “any transaction or agreement which is or is
held out to be of the character of, or is commonly known to the
trade as, an ‘option,’ ‘privilege,’ ‘indemnity,’ ‘bid,’ ‘offer,’
‘put,’ ‘call,’ ‘advance guaranty,’ or ‘decline guaranty,’ made or
to be made on or subject to the rules of any foreign board of
trade.” Rule 30.1(b).
2. In a series of orders issued pursuant to Rule 30.10, the
Commission required that certain foreign firms exempt from
registration as FCMs essentially comply with the standards of Rule
30.7. 2 Specifically, the Commission stated that “[the secured
amount] requirement is intended to ensure that funds provided by
U.S. customers for foreign futures and options transactions,
whether held at a U.S. FCM under Rule 30.7(c) or a firm exempted
from registration as an FCM under CFTC Rule 30.10, will receive
equivalent protection at all intermediaries and exchange
clearing organizations.” 3 The Commission further interpreted Rule
30.7 to require each FCM and Rule 30.10 firm to take appropriate
action (i.e., set aside funds in a “mirror” account) in the
event that it becomes aware of facts leading it to conclude that
foreign futures and foreign options customer funds are not being
handled consistent with the requirements of Commission rules or
relevant order for relief by any subsequent intermediary or
exchange clearing organization.
2 Under Rule 30.10, the Commission may exempt a foreign firm
acting in the capacity of an FCM from registration under the
Commodity Exchange Act (“Act”) and compliance with certain
Commission rules based upon the firm's compliance with comparable
regulatory requirements imposed by the firm's home-country
regulator or self-regulatory organization (“SRO”). Once the
Commission determines that the foreign jurisdiction's regulatory
structure offers comparable regulatory oversight, the Commission
may issue an Order granting general relief subject to certain
conditions. Firms seeking confirmation of relief (referred to
herein as “Rule 30.10 firms”) must make certain representations set
forth in the Rule 30.10 order issued to the regulator or SRO from
the firm's home country. For a list of those foreign regulators and
SROs that have been issued a Rule 30.10 order, see appendix C to
part 30. In certain cases, where a foreign regulator or SRO has
requested that firms subject to its jurisdiction be granted broader
relief to engage in transactions on exchanges other than in its
home jurisdiction (referred to herein as “expanded relief”), the
relief has been granted where the relevant authority has
represented that it will monitor its firms for compliance with the
terms of the order in connection with such offshore transactions.
Although Rule 30.10 orders generally exempt foreign intermediaries
from compliance with the secured amount requirement under Rule
30.7, firms seeking confirmation of the expanded relief must
represent that, with respect to transactions entered into on behalf
of U.S. customers on any non-U.S. exchange located outside their
home country, they will treat U.S. customer funds in a manner
consistent with the provisions of Rule 30.7. For the most recent
order granting expanded relief, see 64 FR 50248 (September 16,
1999) (Singapore Exchange Derivatives Trading Limited).
3 64 FR 50248, 50251, n.19 (emphasis added).
3. Upon further analysis and reconsideration of this matter, the
Commission has determined to revise its prior interpretation of the
Rule 30.7 secured amount requirement. The Commission notes that the
initial depository's ability to identify customer funds affords
foreign futures and foreign options customers a measure of
protection in the event that the intermediating FMC or foreign firm
becomes insolvent. Moreover, Rule 30.6(a) requires that foreign
futures and foreign options customers receive a Rule 1.55 written
disclosure explaining that the treatment of customer funds outside
the U.S. may not afford the same level of protection offered in the
U.S. These protections exist whetehr the intermediating firm is a
U.S. FCM or a firm exempt from such registration under Rule 30.10.
4
4 Although orders for expanded relief exempt foreign firms from
compliance with Rule 1.55, sales practice standards and the
treatment of customer funds constitute two of the specific elements
examined in evaluating whether the particular foreign regulatory
program provides a basis for permitting substituted compliance for
purposes of exemptive relief pursuant to Rule 30.10. appendix A to
part 30.
4. The Commission further notes, however, that, in February
1998, Rule 30.6 was amended to permit an FCM to open a commodity
account for a foreign futures or foreign options customer without
providing the Rule 1.55 risk disclosure statement or obtaining an
acknowledgment of receipt of such statement, provided that the
customer is, at the time at which the account is opened, one of
several types of sophisticated customers enumerated in Rule 1.55(f)
(“Rule 1.55(f) customers”). 5 While the amendment to Rule 30.6(a)
extinguished the obligation to provide a standardized risk
disclosure statement to Rule 1.55(f) customers at the time of the
account opening, the Commission stated that FCMs have obligations
to these customers independent of such a duty that would be
material in the circumstances of a given transactions. 6
5 63 FR 8566 (February 20, 1998). The list of sophisticated
customers referenced in Rule 1.55(f) closely tracks, with one
exception, the list of “eligible swap participants” in Rule
35.1.
6 Id. at 8569.
5. After careful consideration of the issue, the Commission has
determined that intermediaries should advise all customers
(regardless of their level of sophistication) to consider making
appropriate inquiries relating to the treatment of customer funds
by depositories located outside the jurisdiction of the
intermediating firm. Accordingly, the Commission has determined
that an FCM, at a minimum, must provide each foreign futures or
foreign option customer with a written disclosure tracking the
language in either: (1) Rule 1.55(b)(7), 7 or (2) Paragraphs 6 and
8 of appendix A to Rule 1.55(c). 8 Rule 30.10 firms must provide
each foreign futures or foreign options customer with a written
disclosure tracking the language in either Rule 1.55(b)(7) or
paragraphs 6 and 8 of appendix A to Rule 1.55(c), or a comparable
disclosure statement prescribed by the firm's home country
regulator. The Commission further encourages all firms, whether
domestic or foreign, to provide a Rule 1.55 written risk disclosure
to all customers, regardless of each customer's respective level of
experience. The Commission notes that, in any instance where a firm
provides a Rule 1.55(f) customer with a written disclosure, it is
not necessary for the firm to obtain an acknowledgment of receipt.
In addition, those FCMs that already have provided customers with a
disclosure tracking either Rule 1.55(b)(7) or paragraphs 6 and 8 of
appendix A to Rule 1.55(c) (or in the case of Rule 30.10 firm, a
comparable disclosure statement prescribed by its home country
regulatory) need not provide those same customers with an
additional written disclosure.
7 Rule 1.55(b)(7) reads as follows: Foreign futures transactions
involve executing and clearing trades on a foreign exchange. This
is the case even if the foreign exchange is formally “linked” to a
domestic exchange whereby a trade executed on one exchange
liquidates or establishes a position on the other exchange. No
domestic organization regulates the activities of a foreign
exchange, including the execution, delivery and clearing of
transactions on such exchange, and no domestic regulator has the
power to compel enforcement of the rules of the foreign exchange or
the laws of the foreign country. Moreover, such laws or regulations
will vary depending on the foreign country in which the transaction
occurs. For these reasons, customers who trade on foreign exchanges
may not be afforded certain of the protections which apply to
domestic transactions, including the right to use alternative
dispute resolution. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transactions on
domestic exchanges. Before you trade, you should familiarize
yourself with the foreign rules which will apply to your particular
transaction.
8 Appendix A to Rule 1.55(c) is the Generic Risk Disclosure
Statement, which FCMs may use as an alternative to the Risk
Disclosure Statement prescribed in Rule 1.55(b). The Commission
understands that most FCMs, in particular those that are most
active in international markets, use the Generic Risk Disclosure
Statement.
Paragraphs 6 and 8 of appendix A to Rule 1.55(c) read as
follows:
6. Deposited cash and property.
You should familiarize yourself with the protections accorded
money or property you deposit for domestic and foreign
transactions, particularly in the event of a firm insolvency or
bankruptcy. The extent to which you may recover your money or
property may be governed by specified legislation or local rules.
In some jurisdictions, property which has been specifically
identifiable as your own will be pro-rated in the same manner as
cash for purposes of distribution in the event of a shortfall.
8. Transactions in other jurisdictions.
Transactions on markets in other jurisdictions, including
markets formally linked to a domestic market, may expose you to
additional risk. Such markets may be subject to regulation which
may offer different or diminished investor protection. Before you
trade you should enquire about any rules relevant to your
particular transactions. Your local regulatory authority will be
unable to compel the enforcement of the rules of the regulatory
authorities or markets in other jurisdictions where your
transactions have been effected. You should ask the firm with which
you deal for details about the types of redress available in both
your home jurisdiction and other relevant jurisdictions before you
start to trade.
6. For the reasons set forth above, the Commission is revising
its interpretation of the secured amount requirement set forth in
Rule 30.7. The Commission believes that the Rule 30.7
acknowledgment required of FCMs, or other appropriate
acknowledgment required by Rule 30.10 firms, only applies to the
maintenance of the account or accounts containing foreign futures
and foreign options customer funds by the initial depository, and
not to the manner in which any subsequent depository holds or
subsequently transmits those funds. If an FCM receives from the
initial depository the acknowledgment described in Rule 30,7,
furnishes to each foreign futures or foreign options customer a
written disclosure statement tracking the language set forth in
Rule 1.55(b)(7) or paragraphs 6 and 8 of appendix A of Rule 1.55(c)
and otherwise complies with the provisions of Rule 30.7, then it
may include all funds maintained in the separate account or
accounts in calculating its secured amount requirement. A Rule
30.10 firm must satisfy the same requirements, except that it may
provide each foreign futures or foreign options customer with a
comparable disclosure statement prescribed by is home
regulator.
7. IF an FCM or Rule 30.10 firm fails to receive the required
acknowledgment from the initial depository or provide the above
written disclosure statement (and in certain circumstances, receive
from customers and acknowledgment of receipt), then it must set
aside funds with an acceptable depository and receive from such
depository the required acknowledgment.
8. The Commission's interpretation of the Rule 30.7 secured
amount requirement will apply to all regulated activities with all
new and existing foreign futures and foreign options customers as
of October 11, 2000. The Commission's interpretation does not alter
any other requirement set forth in Rule 30.7 or any other section
of part 30.
[65 FR 60558, Oct. 11, 2000, as amended at 83 FR 7996, Feb. 23,
2018]