The CFTC Proposes Significant Relief For Non-U.S. Market Participants

The U.S. Commodity Futures Trading Commission ("CFTC"), which regulates commodity interest transactions such as swaps and futures contracts, has requested comments from industry market participants on its proposed amendments to CFTC Rule 3.10. CFTC Rule 3.10 sets forth the exemptions that may apply to non-U.S. market participants, and the rule impacts brokers, advisers and fund operators. The CFTC’s stated goal, subject to receiving comments, is to expand the exemptions from registration for non-U.S. firms engaged in commodity interest transactions in the U.S. on behalf of customers located outside of the U.S. The proposal also seeks to simplify the exemptions’ requirements. For non-U.S. firms, this could be a major development if ultimately promulgated by the CFTC, in that the amendments would significantly broaden the exemptions under CFTC Rule 3.10. In this Client Alert, we examine the proposed amendments to CFTC Rule 3.10 and the exemptions. In light of the proposal, a non-U.S. firm should determine whether it can meet the proposed requirements, and how reliance on the exemptions will allow it to participate in U.S. markets on behalf of its customers. In addition, a non-U.S. firm should consider whether any changes, or other suggestions, should be provided to the CFTC during the 30-day comment period. Comments in support of the proposal are also encouraged. The proposed exemptions would apply to non-U.S. persons acting solely as a "foreign broker," or otherwise acting as an intermediary only with respect to persons located outside of the U.S., and exempt such non-U.S. persons from registration as futures commission merchants ("FCMs"), introducing broker ("IBs"), commodity trading advisors ("CTAs") or commodity pool operators ("CPOs"). Currently, CFTC Rule 3.10 (c)(3)(i) exempts non-U.S. persons from registration as an IB, CTA or CPO for certain non-U.S. activities involving commodity interest transactions executed bilaterally, or made on or subject to the rules of an exchange or a swap execution facility ("SEF") in the U.S. if the following conditions are met: (1) the person is located outside of the U.S.; (2) the person acts only on behalf of persons located outside of the U.S.; and (3) the commodity interest transaction is submitted for clearing through a registered FCM. CFTC Rule 3.10 (c)(2)(i) provides similar exemptive relief for any non-U.S. person acting as an FCM. The proposal would remove the clearing requirement set forth in item (3) above, and simply require that the firm be located outside of the U.S. and act only on behalf of customers or clients located outside of the U.S. In discussing the proposal, the CFTC states that it believes that "the focus on the exemption should be the activity of the [Non-U.S. Person], not its customer." Additionally, the CFTC notes that the proposal is consistent with its policy to focus domestically on customer protection activities, and that where a non-U.S. person’s customers are located outside the U.S., the jurisdiction where the customer is located has the "preeminent interest" in protecting such customers. While the CFTC’s proposal is a welcomed step, there are questions regarding the scope of the relief. For example, who is considered to be a "person located outside of the U.S."? Would this include U.S. citizens temporarily residing outside of the U.S.? Questions such as these will need to be addressed during the comment period.