On November 2, 2020, the Commodity Futures Trading Commission (“CFTC”) published an exemptive order under Rule 30.10 to a foreign firm.1 The relief permits the foreign firm to solicit and accept orders directly from US customers for foreign futures and options transactions, and, when the firm is acting in the capacity of a futures commission merchant (“FCM”), accept customer money or other property, without registering as an FCM with the CFTC.
This development is notable because it is the first time that the CFTC has granted relief under Rule 30.10 to a recipient that is not a foreign self-regulatory organization (“SRO”) or regulator. We expect other firms to follow suit in the near future.
This Legal Update discusses the background and implications of the CFTC’s action.
Part 30 of the CFTC’s rules governs the offer and sale of futures and option contracts traded on or subject to the rules of a foreign board of trade (foreign futures and options) to customers located in the US. In particular, Part 30 establishes requirements for foreign firms acting in the capacity of a FCM, introducing broker, commodity pool operator and commodity trading advisor with respect to the offer and sale of foreign futures and options to US customers.
However, under Rule 30.10, persons located outside the US and subject to a comparable regulatory structure in the jurisdiction in which they are located may seek an exemption from certain of the requirements under Part 30 based upon compliance with the regulatory requirements of the firm’s home jurisdiction.
Since the first exemptive order under Rule 30.10 was issued more than 30 years ago, all exemptions have been issued to a foreign SRO or regulator.2 Specifically, the typical approach was for the foreign SRO or regulator to submit an application for an exemptive order under Rule 30.10. That application would demonstrate how foreign firms that were members of the foreign SRO or subject to regulation by the foreign regulator were subject to a regulatory regime that was comparable to the CFTC’s Part 30.
Once the CFTC issued an exemptive order, a foreign firm (or an SRO or regulator on behalf of a foreign firm), could submit a notice to the National Futures Association (“NFA”) that designated an agent for service of process, agreed to provide access to books and records, and otherwise adhered to any required conditions in the exemptive order. Thereafter, the foreign firm could solicit or accept orders directly from US customers for foreign futures or options transactions traded on the SRO or regulated by the regulator without being required to comply with Part 30. Further, the foreign firm could accept customer money or other property without registering as an FCM.
Direct Exemptive Relief
One of the CFTCs’ exemptive orders of November 2, 2020, was issued directly to a foreign firm (a Swiss bank).3 In the preamble to the order, the CFTC noted that while the typical approach is for a foreign SRO or regulator to make an application, nothing in the text of Rule 30.10 prevents a foreign firm from submitting an application on its own behalf.
Therefore, the CFTC considered the application from the foreign firm and granted exemptions under Rule 30.10 to the requirements that would have required:
1. The foreign firm and its representatives to register with the CFTC;
2. The foreign firm to provide customers located in the US with certain risk disclosure statements;
3. The foreign firm to comply with the separate account requirement; and
4. The foreign firm to comply with the sections of Part 1 of the CFTC’s Rules (including those related to books and records) that apply to foreign futures and options sold in the US under Part 30.
The CFTC based its action on the foreign firm’s substituted compliance Swiss legal requirements (i.e., the Swiss Financial Market Supervisory Authority’s (“FINMA”) regulation of financial futures and options intermediaries) and did not grant an exemption to other aspects of Part 30, such as the antifraud provision of Rule 30.9.
Importantly, the CFTC noted that the exemption was granted with respect to “brokerage activities undertaken on behalf of customers located in the U.S. with respect to otherwise permitted transactions on or subject to the rules of any other non-U.S. market where [the foreign firm] is authorized by Swiss law to conduct brokerage activities.” Therefore, the foreign firm may rely on the exemptive order solicit or accept orders directly from US customers for foreign futures or options transactions that are conducted on non-Swiss SROs or outside of Switzerland (and the US), as long as it is authorized to do so by FINMA.4
The CFTC’s decision to grant exemptive orders under Rule 30.10 directly to foreign firms is a positive development for the derivatives markets. The historical approach under Rule 30.10 was focused on each market/jurisdiction and did not take into account the fact that many foreign firms are globally active financial institutions that are subject to comprehensive supervision in their home jurisdiction. The new approach embodied in the exemptive order to the Swiss bank should allow foreign firms to efficiently and expeditiously offer US customers access to foreign futures and options in new markets under the careful supervision of a home country regulator and is consistent with the CFTC’s recent emphasis on international cooperation and reciprocal deference.5
1 Press Release, CFTC Expands its Part 30 Exemptive Program to Improve Global Market Access for US Customers (Nov. 2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8300-20.
3 Foreign Futures and Options: UBS AG (Oct. 30, 2020), https://www.cftc.gov/media/5231/votingdraft110220f/download.
5 E.g., Press Release, Statement of CFTC Chairman Heath P. Tarbert on the European Commission’s Draft Delegated Acts (June 11, 2020); Press Release, Joint Statement of the CFTC and the European Commission Following Meeting on Cross-Border Derivatives Regulatory Issues (Sept. 13, 2019).