Comment Text:
10-007
COMMENT
CL-00001
Paul lW A~chitzel
VIA E-MAIL
ALSTON BIRD LLP
The Atlantic Building
950 F Street, NW
Washington, DC 20004-1404
202-756-3300
Fax:202-756-3333
www. alston.com
Direct Dial: 202-756-3492
E-mail: pauLarchi~zel@alston~com
April 21, 2008
David Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581
Petition Pursuant to Section 4(c) of the Commodity Exchange
Exemption from Section 2(a)(1)(C)(iv) of the Commodity
and Appendix D to Part 30 of the Rules of the Commodity
Trading Commission.
Dear Mr. Stawick:
On behalf of our client Hard Eight Futures, LLC, a registered
advisor with its principal place of business in the United
Number 0379919), we respectfully petition the Commodity Futures
("Commission") for exemptive relief pursuant to Section 4(c)
Exchange Act, 7 U.S.C. §1 et seq. ("Act") with respect to the
below.
This Petition seeks an exemption which is necessary to
economic innovation and fair competition. Granting this Petition
appropriate persons as defined in Section 4(c)(3) of the Act
1
to trade futures contracts on
stock indexes on certain non-U.S, exchanges in the absence of such
trade obtaining from OGC a No-action letter relating to the
contracts to U.S. persons. U.S. eligible contract participants
2
currently are able to trade
contracts, agreements or transactions that replicate futures contracts
indexes in the over-the-counter ("OTC") markets. They may not,
7 U.S.C. §6(c)(3).
The term "eligible contract participant" (hereafter "ECP") is defined in section 1
Atlanta ¯ Charlotte ¯ Dallas ¯ New York ¯ Research Triangle ¯ Washington, D.C.10-007
COMMENT
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David Stawick
April 21, 2008
Page 2
futures contracts on the same index traded on a foreign board of trade
board of trade has applied for, and has been granted, a No-action letter
3
Granting this exemptive relief will enable appropriate persons,
requests the Commission to define as including all ECPs, to trade
board of trade which are the equivalent to those contracts which ECPs
trade in the OTC markets. As discussed in greater detail below, the
OGC No-action process is in furtherance of Congress' expressed intent
"to protect the
interests of U.S. residents against fraudulent or other harmful practices
''4
ECPs, due to
their size and sophistication, are not dependent upon the OGC No-
protection from fraud. In light of the fact that contracts on foreign
already broadly traded in the OTC markets by U.S. persons that are ECPs,
it is very much in the public interest to provide U.S. ECPs the choice
stock indexes in a more regulated, transparent exchange environment.
is served in preventing them from doing so.
I. Relief Sought
This Petition seeks an exemption upon claim of notice to the
appropriate persons may trade on a foreign board of trade futures contracts
foreign securities that are not security futures products under the same
which they may trade any other futures contract on a foreign board of
no prior qualifying action by the Commission or its staff is required
persons to enter into futures contracts traded on a foreign board of
customers are permitted to access the products offered by a foreign
through a U.S. registered F.C.M. or IB or through a foreign firm
exemption from registration as a U.S. FCM under 17 C.F.R. §30.10. The
exemption would require that persons wishing to trade a particular
index traded on a foreign board of trade that is not subject to an
notify the Commission of the person's intent to do so. The notice
claimant to demonstrate his or her qualification for the exemption and
not a narrow-based security index. The exemption would be effective
that person and index unless the Commission notifies the person within
that the claimant does not meet the requirements of the exclusion or
qualify under the Act as a non-narrow based index and provides the
3 The OGC No-action procedure, which is discussed in greater detail below, is a substitute
foreign boards of trade to comply with Section 2(a)(1)(C)(iv)'s prohibition on the
stock index contracts except as permitted under Section 2(a)(1)(C)(ii) of the Act. Section
the Act in turn provides that the Commission may only designate a board of trade as a
contracts on a security index that meet the requirements contained in that provision.
See e.g.
CFTC Letter
No. 99-25 (July 14, 1999) at
.h..t.t.~.;L/.~v..~.:x~.:.~.c.f..t..c.~`g~...v.~t.~.m../.~.e..t.t..e..r.~~L~m~R~2~h~m.
These provisions of
the Act were formerly found at Sections 2(a)(1)(B)(v) and 2(a)(1)(B)(ii) respectively.
action process relieves foreign boards of trade from the requirement that they become
markets in order to offer stock indexes traded thereon to U.S. persons.
4 H.R. Report No. 97-565, Part I, at p. 85.10-007
COMMENT
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David Stawick
April 21, 2008
Page 3
explanation of why it considers the person to not be qualified or the
based, respectively.
This Petition requests relief from the requirement that U.S. ECPs
into contracts on a foreign stock index traded on a foreign board of
board of trade has first received a No-action letter of the Office of
This exemption would be available only with respect to contracts
boards of trade the regulator of which has entered into a Memorandum of
with respect to information sharing and cooperation with the Commission
does not seek an exemption from the requirement that a foreign board of
an OGC No-action letter before the general public is permitted to enter
stock index contracts. Nor does it seek an exemption from the
contracts may be traded on a foreign board of trade's U.S. terminals
approval under a staff foreign terminals no-action letter.
5
In order to promote responsible innovation and fair competition,
respectfully request that the Commission modify the current OGC No
process by granting an exemption from Section 2(a)(1)(C)(iv) of the
Part 30 Appendix D in the following form:
(X) Exemption for Eligible Contract Participants Trading Non-
Based Stock Indexes on a Foreign Board of Trade.
The Commodity Futures
Trading Commission, pursuant to its authority under Section
Commodity Exchange Act, hereby determines that notwithstanding
of Section 2(a)(1)(C)((iv) of the Act and Appendix D to Part
nothing in the Act is intended to prohibit any "eligible
defined in section l(a)(12) of the Act, located in the U.S
carrying futures contacts on a securities index that is not a
as defined in Section 1(a)(25) of the Act, traded on or subject
foreign board of trade to the same extent such person may
purchase or carry a futures contract on any other commodity
underlying securities comprising such index are principally
through any exchange or market located outside the United
regulator of such foreign board of trade has entered into
Understanding with respect to information sharing and
Commission.
(a)Notification.
Persons wishing to avail themselves of this
exemption shall so notify the Commission. This notification
the Secretary of the Commission at its Washington, D.C.
electronic form, shall be labeled as "Notification of Trading
Based Index Traded on a Foreign Board of Trade," and shall include:
5 See 71 Fed. Reg. 19877 (April 18, 2006).10-007
COMMENT
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David Stawick
April 21, 2008
Page 4
(1)
The name and address of the person and a representation
person qualifies as an Eligible Contract Participant and the basis
person so qualifies;
(2)
The name of the non-narrow based index and of the
of trade on which the index is traded;
(3)
A demonstration that the index is not a "narrow
under the definition of Section la(25) of the Act;
(4)
A representation that the regulator of the foreign
entered into an information-sharing agreement with the Commission
the Commission is also a signatory.
(b)Effective date; The exemption shall be effective ten business days
after filing of the notice with the Commission unless the Commission
period notifies the person claiming the exemption that the exemption
made effective with respect to that person and/or that index and
finding.
II.
Standards for Exemptive Relief
The Futures Trading Practice Act of 1992 (the "1992 Act") added
4(c)(1) to the Act, which provides the Commission with broad exemptive
Section 4(c)(1) of the Act provides that the Commission may exempt
agreement or transaction from any of the provisions of the Act (except
of subparagraphs 2(a)(1)(C)(ii) and (D)) 6 if the exemption is consistent
interest.
The Conference Report to the 1992 Act stated that the public
include the national public interests of the Act, the prevention of fraud
financial integrity of the markets, in addition to promotion of
financial innovation and fair competition.
7
The Commission must also assess "the impact
of a proposed exemption on the maintenance of the integrity and soundness
and market participants.
8
In considering fair competition,
"implement this provision in a fair and even-handed manner
sponsored by exchanges and non-exchanges alike." The
determine that the contract, agreement or transaction for which
have a material adverse affect on the ability of the Commission
discharge its regulatory or self-regulatory duties under this Act.
in making this determination, the Commission should consider
the Commission must
to products and systems
Commission must also
relief is granted "will not
or any contract market to
The Conferees noted that
the impact of the exempt
6 This Petition seeks an exemption from the requirement of Section 2(a)(1)(C)(iv) of the
7 House Conference Report No. 102-978 to H.R. 707, p.78.
8Id.10-007
COMMENT
CL-00001
David Stawick
April 21, 2008
Page 5
product on such regulatory concerns as "market surveillance,
participants, protection of customers and trade practice enforcement
''9
The Commission
was also instructed to apply section 15 to its consideration of exemptive
III.
Foreign stock indexes and the OGC No-action process
The Futures Trading Act of 1982, Pub. Law 97-444, 96 Stat.2294
established the treatment of foreign stock index contracts under the
addition of two separate provisions of the Act--the Shad-Johnson
found in Section 2(a)(B) of the Act and a new section 4(b) of the Act.
The Shad-Johnson accord continued the Commission's exclusive
futures contracts on broad-based security indexes. Section 2(a)(B)(v)
Act provided that "no person shall enter into or confirm the execution of'' a stock index
contract except as provided by Section 2(a)(B)(ii). The House Committee
explained that new Section 2(a)(B)(ii) of the Act provided that no
designated as a contract market with respect to such broad-based security
it demonstrates to the Commission that 1) the contract is cash settled;
contract would not be readily susceptible to manipulation; and 3) such
published measure of the market for all publicly traded equity or
substantial segment thereof.
11
Section 2(a)(B) therefore did not distinguish between the
offer and sale of stock index contracts to U.S. persons traded on U.S.
traded on foreign markets.
The 82 Act also clarified the Act's applicability with respect to
trade in new Section 4(b). As the House Committee on Agriculture
4(b) expressly empowers the Commission to protect the interests of
residents against fraudulent or other harmful practices by a vendor of
9Id.
10 In order to afford the Commission and its staff the flexibility to determine the most
procedure for considering the requested relief, this letter also requests in the alternative
sought be provided under Commission rule 140.99. If the Commission were to conclude for
to exercise its Section 4(c) authority in order to grant the requested relief, it would
OGC to consider granting the requested relief through the amendment of the current OGC
with respect to the offer and sale of foreign stock indexes. The current OGC No-action
many years prior to the Commission's grant of exemptive authority under Section 4(c) of
Accordingly, the OGC No-action procedures could be modified as requested by this Petition
140.99 and such a modification would not be dependent upon an Order of the Commission
4(c) of the Act to be made effective. In any event, the standards for issuing a Section
instructive with respect to, and support equally, granting the requested relief under
140.99.
11 H.R. Rep. No. 97-565, Part I, at 81. The last criterion was amended by the Commodity
Modernization Act of 2000, which substituted the requirement that the index not constitute
security index.10-007
COMMENT
CL-00001
David Stawick
April 21, 2008
Page 6
is located in the United States .... -12 Section 4(b) also provides,
Commission may not adopt a rule that requires approval of a foreign
in any way a rule of a foreign board of trade. As the Committee explained,
does not authorize the commission to regulate the internal affairs
board of trade, exchange, market, or clearing house for such
terms and conditions of foreign futures created by a foreign
Commission approval of any action of any such market or its clearinghouse
However, nothing in the provisions prevents a foreign board
applying to the Commission for certification that its futures
with requirements of this Act where, by its terms, the Act
requirements for a specifically identified contract. For example,
of trade may seek certification from the Commission that
offered by it that is based upon a group or index of American
minimum requirements specified in subparagraphs (a) through
2(a)(1)(B)(ii) of the Act, without seeking or obtaining
Commission as a contract market. Any such certification is to be
the procedures, and subject to the rights of other persons, set
of the Act establishing such minimum requirements. A futures
upon a group or index of foreign securities only, could
Commission under such criteria as the Commission may deem
certification by the Commission, the minimum requirements for
be deemed to have been met, and the offering and sale of
United States, its territories or possessions will be lawful
complies with the regulations of the Commission adopted under
the Act.
House Report No. 97-565 (1982) at p. 85. Thus, Congress
Commission's interest in the offer and sale in the U.S. of contracts
securities from indexes on foreign securities.
The Commission has not adopted the certification procedure
Committee as a means of confirming which foreign security indexes can
sold to U.S. persons consistent with Section 4(b)'s regulatory interest
persons from fraudulent or other harmful practices. Rather, OGC
process wherein it issues a No-action letter with respect to
exchanges to confirm that a foreign security index may be offered
United States.
13
Under that process, OGC, exercising its discretion, has determined
12 Id.
at85.
13 See ht..tp://www.cftc.g~v/intenati~na~/f~reignmarketsandpr~ducts/fi~ing1...e..qs.htm~ and 17 C.F.
Appendix D.10-007
COMMENT
CL-00001
David Stawick
April 21, 2008
Page 7
apply the same criteria to foreign stock indexes as the Act applies
domestic securities.
Subsequent to the Act's inclusion of the Shad-Johnson accord and
and the establishment of the OGC No-action process with respect to
indexes, the Congress on December 21, 2000, enacted into law the
Modernization Act of 2000, 114 Stat. 2763 ("CFMA"). The CFMA introduced
of tiered regulation of the regulated futures markets. It also excluded
certain contracts, agreements or transactions in "excluded commodities,"
security indexes.
14
Section 2(d) of the Act excludes from the Act contracts, agreements
and transactions in security indexes (an excluded commodity) that are
ECPs and not executed on a trading facility. Under the terms of this
ECPs are free to trade foreign stock indexes in the OTC markets,
principal-to-principal basis on an electronic trading facility,
Commission approval or procedure.
Although the CFMA did not make major changes with respect to the
of regulation that applies to broad-based security indexes, it
regulatory framework which applies to security futures products, that
on single stocks and narrow-based indexes. In adopting the framework
futures products, Congress extended the CFMA concept of tiered regulatory
security futures products traded on foreign boards of trade.
refrained from imposing additional U.S. regulatory requirements for
products on foreign securities traded on a foreign exchange with respect
by ECPs. Specifically, new Section 2(a)(1)(F)(ii) provides:
Nothing in the Act is intended to prohibit any eligible contract
in the United States from purchasing or carrying securities futures
on or subject to the rules of a foreign board of trade, exchange
same extent such person may be authorized to purchase or carry
traded on a foreign board of trade, exchange or market so long as
security for such security futures products is traded principally
any exchange or market located outside the United States.
IV.
and assuming price risks, discovering prices, or disseminating
The Petition satisfies the Standards for Relief under Section 4(c)
A.
The Proposed Relief is Consistent with the Public Interest
Purposes of the Act
One of the fundamental purposes of the Act is "to provide a means
information
14 Section la(13) of the Act.10-007
COMMENT
CL-00001
David Stawick
April 21, 2008
Page 8
through trading in liquid, fair and financially secure trading
''15
The proposed
relief from OGC's No-action procedure will enable U.S. ECPs to trade
foreign stock indexes that are currently available in the OTC markets
and secure exchange environment on the same basis as they are able
commodity futures contract on a foreign exchange. This is consistent
fundamental purpose of the Act, but it is consistent with the changes
the CFMA.
Neither the Commission nor OGC reexamined OGC's No-action
which apply to broad-based foreign stock indexes following enactment
16
Such a reexamination is highly appropriate in light of the profound
regulatory framework by the CFMA. In this regard, the CFMA's nuanced
regulatory treatment of security futures contracts traded on a foreign
foreign market should also be applied to the security indexes
Commission's exclusive jurisdiction. Specifically, Section 2(a)(1)(F)(ii)
ECP may purchase or carry a security futures product on a foreign
foreign board of trade under the same conditions that pertain to
any other foreign security.
17
It is noteworthy that in crafting Section 2(a)(1)(F)(ii)
Congress relied upon two factors--the provision extends only to U
differentiates between contracts traded on a foreign board of trade
security is principally traded on a foreign exchange from contracts
security is traded principally on a U.S. exchange. The relief this
upon these same two factors. It would be consistent with this provision
Commission to permit ECPs to access a broad-based security index,
commodity under the Commission's exclusive jurisdiction, under the
and procedures which apply to any other commodity.
The Petition also includes as a condition of the exemptive relief
securities index may not be a "narrow-based index" within the
1(a)(25) of the Act and that a Memorandum of Understanding for
and cooperation be in place between the Commission and the regulator
foreign board of trade. These conditions have been applied by OGC in
stock indexes under its No-action procedures and their inclusion within
exemptive relief assures the Commission that the foreign indexes that
15 Section 3 of the Act.
16 OGC's No-action guidance was first added as 17 C.F.R. Part 5, Appendix E in 1999. 64
29217 (June 1, 1999). Following enactment of the CFMA, this guidance was merely re-
C.F.R. Part 40 Appendix C. 66
Fed. Reg.
42255 (August 10, 2001). In 2002 the Commission made
technical changes to the OGC No-action guidance to reflect the CFMA's revision of the
determining what indexes would be considered to be ~'non-narrow-based" indexes. 67
Fed. Reg.
62873
(October 9, 2002). In 2003, the Commission added an introductory section providing an
how the information submitted is used and by deleting some information that was no longerFed.
Reg.
33623 (June 5, 2003). All of these amendments were technical in nature and none re-
action process in light of the fundamental structural changes to futures regulation made
17 2a(1)(F)(ii) of the Act.10-007
COMMENT
CL-00001
David Stawick
April 21, 2008
Page 9
exemption are similar in nature to those which have been approved by
under its No-action procedure.
Moreover, the Petition provides that the exemption shall be subject
a notice by the person claiming the exemption. This notice provides
opportunity within ten days to notify the requesting person of its
person or the index does not meet the eligibility requirements of the
way the Commission can be assured that only eligible persons claim the
the index for which the exemption is claimed meets the statutory
narrow index."
B.
The Proposed Relief is Consistent with the Prevention of Fraud
The proposed relief is consistent with the prevention of fraud
and foremost, by its terms, the relief only applies to ECPs. ECPs
largest and most sophisticated market participants. It is highly
knowledge and economic resources to protect themselves from fraud.
fact, Congress has excluded or exempted ECPs from many of the
Accordingly, the requested relief, because it applies only to ECPs
prevention of fraud.
Equally important, however, under the
would continue to access broad-based security indexes on foreign
foreign boards of trade under the conditions which apply to all
noted above, foreign futures can be accessed by U.S. persons through
FCMs or lBs or through foreign firms that have been exempt from
upon the comparability of the regulatory framework to which
Accordingly, even though ECPs are sophisticated traders with
protect themselves from fraud, under the proposed relief they
from the protections of the regulatory framework through the requirement
on foreign boards of trade through U.S. registrants and comparably
firms.
The Proposed Relief will Preserve the Financial Integrity of
and Participants
The proposed relief will provide ECPs the choice to trade contracts
based security indexes on foreign securities in an exchange environment,
the financial protections of clearing. Such contracts are available
OTC markets. In this regard, although clearing of OTC energy
established, OTC synthetic stock index contracts generally are not
granting the proposed relief will, for the first time, provide U.S. ECPs
the financial integrity protections of exchange traded contracts for
contracts that are today available to them on the OTC markets. The
further the financial integrity of the markets by providing ECPs with
on exchange. This will no doubt enhance the competitiveness of foreign10-007
COMMENT
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David Stawick
April 21, 2008
Page 10
and potentially increase liquidity on these markets, thus reinforcing
integrity and promoting competition.
D.The Proposed Relief Will Not have a Material Adverse Impact
Commission or on Contract Market Regulatory or Self-
Responsibilities
Granting the relief requested will not have a material adverse
Commission's regulatory program or on the self-regulatory program
market or foreign board of trade. To the contrary, by providing U.S.
to trade such contracts on a foreign board of trade, potentially
concerning their activities will be available to self-regulators and,
sharing agreements, to the Commission. In the absence of this relief,
continue to have no choice in certain markets but to continue trading
OTC markets. Moreover, the Petition would require that in order to claim
persons file a notice with the Commission. This will provide the
opportunity to ensure that the claim is properly claimed both with
the claimant's status as an ECP and with respect to the contract not
contract. Thus, granting this relief is certain to assist the relevant
the Commission, in carrying out their regulatory and self-regulatory
The Proposed Relief Will Promote Responsible Economic or
Innovation and Fair Competition
The Proposed relief will further responsible innovation and fair
removing a regulatory obstacle to U.S. ECPs being able to trade on
Moreover, the proposed relief would permit futures contracts on broad-
foreign securities traded on a foreign board of trade to be traded in
to the manner in which security futures products on foreign securities
market are treated under the Act. The Act specifically provides that
to trade or carry foreign security futures products to the same extent
foreign securities. The Proposed relief would permit broad-based foreign
to compete on a similar basis, permitting ECPs to enter into such
extent that they are authorized to trade other futures contracts.
For the foregoing reasons, granting the requested relief is also
Section 15 of the Act, which instructs the Commission to take the
means of achieving the purposes of the Act. As noted above, the
procedure is unnecessary to protect ECPs from fraudulent sales activities
requested relief will serve to increase competition in the markets
indexes.10-007
COMMENT
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David Stawick
April 21, 2008
Page 11
The current OCG No-action procedure was established in response
Amendments to the Act and has operated without modification since that
the CFMA made a number of profound changes to the structure of the
CFMA's changes, ECPs are authorized to trade foreign stock index contracts
markets. Nevertheless, they are prevented from trading such contracts
unless the foreign board of trade first obtains a No-action letter
the CFMA, in enacting the regulatory scheme for security futures products,
ECPs would be able to enter and carry foreign security futures products
they are permitted to enter into or carry foreign securities.
In light of these changes introduced by the CFMA, the Commission
reconsider the OGC No-action procedure with respect to futures contracts
indexes that are not security futures products. Modifying the OGC No-
to provide an exemption therefrom for ECPs so that they can enter
positions in foreign security indexes on the same basis as other foreign
is consistent with the conditions for exemption under Section 4(c) of the
changes to the Act made by the CFMA and is in the public interest.
proposed relief will have the perverse effect of depriving ECPs from being
to trade such contracts in the safer, more regulated exchange environment
For the foregoing reasons, we respectfully request that the Commission
proposed relief.
Respectfully submitted,
Paul M. Architzel
Hard Eight Futures, LLC
Brendon Weiss
Chairman Lukken
Commissioner Dunn
Commissioner Chilton
Commissioner Sommers
Terry Arbit, General Counsel10-007
COMMENT
CL-00001
Certification Pursuant to Commission Rule 140.99(c)(3)(i)
The undersigned hereby certifies that the material facts set forth in
dated April 21, 2008, are true and complete to the best of my knowledge.
Pursuant to Commission Rule 140.99(c)(3)(ii), Hard Eight Futures,
undertakes that, if at any time prior to the issuance of such no-
material representation made in this letter ceases to be true and complete,
inform the Commission staff in writing of any material change
circumstances.
Hard Eight Futures, LLC
By:
Title:
Dated: April 21, 2008
LEGAL02/30535793v310-007
CONMENT
CL-00001
Certification Pursuant to Comraission Rule 140.99(e)(3)(i)
The undersigned hereby certifies that the material facts set :forth in
dated Ap~l 21, 2008, are true and complete to the best of my knowledge.
Pursuant to Commission Rule 140.99(c)(3)(ii), Hard Eight Futures,
undertakes that, if at any time prior to the issuance of such no
material representation made in this letter ceases to be true and
intbrm the Commission staff in writing of any material change in facts and
circumstances.
Hard Eight Futures~LLC
By:
LEGAL02/30535793v3
Dated: April 2!, 2008
