CFTC Staff Letter 07-08: No-Action Relief for Foreign Affiliate Introducing Institutional US Customers

U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5430
Facsimile: (202) 418-5547 aradhakrishnan@cftc.gov Division of Clearing and Intermediary Oversight Ananda Radhakrishnan Director CFTC letter No. 07-08 May 30, 2007 No-Action Division of Clearing and Intermediary Oversight

Re: Section 4d -- Request for No-action Relief from Introducing Broker Registration Dear :
This is in response to your letter dated May 4, 2007, to the Division of Clearing and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission”), by which you request that the Division not recommend enforcement action be taken against “A” and “B” if “B” were to introduce certain institutional customers located in the U.S. on a fully-disclosed basis to any registered futures commission merchant (“FCM”) without being registered with the Commission as an introducing broker (“IB”). Based upon your representations, the facts are understood to be as follows. “B” is licensed to conduct investment business by the Australian Securities & Investments Commission. In addition, “B”’s banking activities are regulated by the Australian Prudential Regulation Authority. “B” operates in a range of investment banking, commercial banking and selected retail financial services in Australia and overseas, and is a member of the Sydney Futures Exchange (“SFE”). “A”, an affiliate of “B”, is located in New York and is registered with the Commission as an FCM. “B” also maintains branch offices worldwide, including a branch office in London that is licensed by the Financial Service Authority (“FSA”) to conduct investment business. Pursuant to Commission Regulation 30.10,1 “B” has been granted an exemption from registration with the Commission as an FCM for purposes of offering foreign futures and options to persons located in the U.S.2 The relief granted to “B” pursuant to Regulation 30.10 does not

1
Commission regulations referred to herein may be found at 17 C.F.R. CH I (2006). 2 See 71 Fed. Reg. 40395 (July 17, 2006) (SFE). The relief issued pursuant to Regulation 30.10 extends to “B”’s London branch office. See 68 Fed. Reg. 58583 (Oct. 10, 2003) (FSA); 70 Fed. Reg. 2621 (Jan. 14, 2005) (authorizing the National Futures Association to confirm exemptive relief from FCM registration to certain firms organized in one foreign jurisdiction and engaging in cross-border activities from a branch location in another jurisdiction).

2 extend to any activities related to trading, directly or indirectly, on U.S. exchanges on behalf of any U.S. persons. In such a case, “B” would be required to comply with all applicable U.S. laws and regulations, including the requirement to register with the Commission in the appropriate capacity. As “B” is not permitted to solicit or accept trades for U.S. persons on U.S. exchanges, you represented that customers of each firm that desire to place an order for foreign futures and options and U.S. exchange-traded futures and options must use two or more entry systems or place two or more phone calls to execute such trades. In particular, you noted that this is an issue for certain institutional customers (“US Customers”) who, as part of their trading strategies, are increasingly conducting business on numerous worldwide exchanges. You further stated that requiring the use of multiple systems in fast-moving markets is highly inefficient and may increase both systemic and liquidity risks. Accordingly, you have proposed that “B” be permitted to introduce US Customers to “A” for purposes of trading U.S. exchange-traded futures and options consistent with prior staff letters.3 You have represented that all U.S. customers that “B” will introduce to “A” will be institutional customers as defined in Regulation 1.3(g).4 You also represented that “B” will not solicit US Customers for trading on U.S. markets, nor will “B” handle any US Customer funds for trading on any U.S. market. In addition, you represented that all US Customers that “B” introduces to “A” or to another registered FCM will be introduced on a fully-disclosed basis in accordance with Regulation 1.57. You further represented that the control functions at “C”5 relevant to futures brokerage are organized across legal entities and along global reporting lines. Legal, compliance, audit, and credit personnel at “A” and “B”, therefore, have identical reporting lines to a central global head, while maintaining local day-to-day reporting lines to the local senior manager. As such, “A” is willing to accept liability for trades given up by “B” to another FCM because “B” will be subject to the same procedures and oversight designed to monitor and control risks associated with the trading of futures and options by US Customers. Based upon the representations in your letter, the Division believes that granting the requested relief would not be contrary to the public interest. Accordingly, the Division will not recommend that the Commission commence any enforcement action against “A” or “B” based solely upon the failure of “B” to register as an IB for purposes of introducing US Customers, as

3 See, e.g., CFTC Staff Letter 07-05, [Current Transfer Binder] Comm. Fut. L. Rep. ¶_____ (Apr. 26, 2007). 4 Commission Regulation 1.3(g) defines an institutional customer as an eligible contract participant, as defined in Section 1a(12) of the Commodity Exchange Act. 5 “C” comprises “B” and its subsidiaries and affiliates worldwide.

3 defined herein, to “A” or any other FCM to trade US exchange-traded futures and options. This relief is conditioned upon “A”’s acknowledgment that it will be jointly and severally liable for any violations of the Act or the Commission’s regulations committed by “B” in connection with the latter’s handling of orders for US Customers for trading of futures and options on US exchanges, including those orders executed by “B” and given up to another FCM. “A” must submit such an acknowledgment in writing manually signed by a representative duly authorized to bind “A” within two weeks of the date of this letter. This letter does not excuse “A”, “B”, or any other FCM acting pursuant to this relief from compliance with any other applicable requirements contained in the Act or in the Commission’s regulations issued thereunder. For example, each remains subject to all applicable antifraud provisions of the Act. Moreover, the position taken in this letter is applicable to “A” or “B” solely in connection with the introduction of US Customers on a fully-disclosed basis to “A” by “B” for purposes of executing trades on US exchanges. The position taken in this letter is based upon the representations that have been made to the Division. Any different, changed, or omitted facts or conditions might render this position void. You must notify the Division immediately in the event the operations or activities of “A”, “B”, or any other participating FCM change in any material way from those represented to us. Further, this letter represents the position of this Division only and does not necessarily represent the views of the Commission or any other division or office of the Commission. If you have any questions concerning this correspondence, please contact Deputy Director Lawrence B. Patent or Special Counsel Andrew V. Chapin at (202) 418-5450. Very truly yours, Ananda Radhakrishnan Director