Thursday, July 28, 2016

CFTC proposes to expand registration exemption for certain foreign intermediaries

By Lene Powell, J.D.

The CFTC proposed to expand an exemption from registration for certain foreign intermediaries. Under the proposed amendments, an intermediary located outside the U.S. (Foreign Intermediary) would be eligible for an exemption from CFTC registration if the intermediary, in connection with a commodity interest transaction, acts only on behalf of persons located outside the U.S. or certain International Financial Institutions (IFIs). The exemption would be available whether or not the transaction is submitted for clearing through a registered futures commission merchant (FCM).

The comment period will be open for 30 days after publication in the Federal Register.

Current exemption. Existing Regulation 3.10(c)(3)(i) provides an exemption from registration as a commodity pool operator (CPO), commodity trading advisor (CTA), or introducing broker (IB) if a person and the transaction meet the following conditions:
  1. The person is located outside the U.S.;
  2. The person acts only on behalf of persons located outside the U.S.; and
  3. The commodity interest transaction is submitted for clearing through a registered futures commission merchant (FCM).
Regulation 3.10(c)(2)(i) provides a similar exemption from registration for any Foreign Intermediary acting as an FCM.

Over the past two years, the Division of Swap Dealer and Intermediary Oversight has provided staff no-action relief allowing Foreign Intermediaries to rely on the exemption in 3.10(c)(3)(i) if their activities involve swaps that are not subject to a Commission clearing requirement. Because not all swaps are required to be cleared and some swaps are not yet accepted for clearing by any clearinghouse, the Division did not believe the Commission intended that Foreign Intermediaries acting only for persons located outside the U.S. should be required to register merely because the intermediaries acted for such persons in connection with transactions not required to be cleared.

In addition, the Division provided relief from registration as an IB or CTA for intermediaries acting for International Financial Institutions IFIs (as defined, including the International Monetary Fund and certain other multilateral entities), due to the unique attributes and multinational status of these institutions.

Proposed amendment. The Commission proposed to amend the exemptions by (1) removing the clearing requirement and references to DCMs and SEFs; (2) adding language regarding IFIs. According to the Commission, the CFTC’s longstanding customer protection focus is on domestic firms and upon firms soliciting or accepting orders from domestic participants. Where a Foreign Intermediary’s customers are located outside the U.S., the jurisdiction where the customer is located has the preeminent interest in protecting such customers.

Specifically, the proposed amendments would make a Foreign Intermediary eligible for an exemption from CFTC registration if the Foreign Intermediary, in connection with a commodity interest transaction, only acts on behalf of (1) persons located outside the U.S., or (2) IFIs, without regard to whether such persons or institutions clear such commodity interest transaction.

Comments. The Commission requested comments on all aspects of the proposed rulemaking.

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