CFTC

Generally, there are no established criteria for the recognition of a foreign clearing house, market and/or foreign product. However, the Part 30 rules include a provision which, in effect, lifts the ban on foreign options on a market-by-market basis. Further, certain additional conditions are applicable before foreign stock index futures contracts and foreign government debt futures contracts may be offered or sold to or for a U.S. customer. In a Federal Register release on Guideline No. 1, the Commission provided notice to the public regarding the information which should be included in seeking a no-action opinion on whether a futures contract on an equity index traded on that exchange may be offered in the U.S. 57 Fed. Reg. 3518 (January 30, 1992).

SEC

There are no restrictions on U.S. nationals trading on a foreign securities market. If a foreign market or product falls within the definition of an exchange or security under Sections 3(a)(1) and 3(a)(10) of the 34 Act, respectively, and uses the jurisdictional means described in Section 3(a)(17), it must be recognized to the same extent as a domestic market or product in the U.S. See domestic markets and products discussion above at I.A.1.(c).

SIB

For these purposes, the term "foreign" is applied to those exchanges and clearing houses which have their head office overseas. (The concept of "head office" is based on the general principles of law of the European Community in relation to the legal notion of "siege"). These exchanges and clearing houses are not subject to primary and direct UK regulatory oversight.

The FSA provides for the recognition of overseas exchanges deemed to be carrying on investment business in the UK and which are subject to supervision by foreign regulators. These exchanges are required to provide arrangements for investor protection at least equivalent to that afforded under the FSA (FSA, s.40) (see item I.A.2(c)). Conditions of recognition of these overseas exchanges include notification obligations which result in the provision of information to UK regulators regarding developments on the relevant exchange.

A different category of overseas exchange, in respect of which the FSA is silent, is the Designated Investment Exchange (DIE); this is a concept introduced in SIB Conduct of Business Rules (CBRs) to identify those exchanges which do not carry on investment business in the UK but which are deemed to provide adequate investor protection arrangements.

A foreign exchange must be either a Recognised Overseas Investment Exchange (ROIE) or a DIE to qualify as an exchange upon which margined transactions may be effected by an authorised firm on behalf of an inexperienced private customer (CBRs, 11.04).

Authorised firms are not restricted or prohibited from effecting trades in margined transactions on exchanges which are neither ROIEs nor DIEs on behalf of business, experienced or professional investors (CBRs, 11.04) and where an authorised firm is acting as a discretionary portfolio manager for an inexperienced private customer whose customer agreement contemplates such trades, but they must be for hedging purposes only (CBRs, 11.04(e)(ii)).

Customers who are UK nationals will not be treated differently from customers who are nationals of other countries. For regulatory purposes, customers are treated equally, regardless of nationality.

Section 40 of the FSA provides for the recognition of overseas clearing houses, deemed to be carrying on investment business in the UK, which have their head office overseas and which are subject to supervision by foreign regulators.

(Important note in relation to references to the CBRs in this document:) The CBRs referred to in this document are those currently in force under SIB rules and they apply to persons directly authorised by SIB to carry on investment business. Self-regulating organisations (SROs) have their own rulebooks which apply to the members that they authorise to carry on investment business. SROs may make rules which provide for adequate investor protection (bearing in mind different types of investment business, types of investors, and the effectiveness of SROs' arrangements for enforcing compliance).

The Companies Act of 1989 empowered SIB to make "statements of principle" on the conduct and financial standing of those involved in investment business. These Principles, of which there are 10, are the top tier of a three-tier approach to regulation of investment business in the UK. The Principles, which came into force on 30 April 1990, are intended to form a universal statement of conduct expected of all authorised persons, including members of SROs, where monitoring and enforcement is primarily the responsibility of the relevant SRO. The second tier is comprised of rules 'designated' by SIB which apply to the members of SROs, although SIB may provide that the rules will not apply to a particular SRO. One set of designated rules is the Core Rules on Conduct of Investment Business.

The Core Rules on Conduct of Investment Business were made by SIB in January 1991, however, they only come into effect for members of SROs when each SRO has implemented changes in its rules to supplement the Core Rules. The supplemental rules made by SROs form the third tier of the new structure. Each SRO is working to a different timetable, and therefore the Core Rules commenced at different times for each SRO. The Core Rules will be commenced for members of the Securities and Futures Authority (SFA) on 1 April 1992. After the designated Core Rules have been commenced for all SROs, it is anticipated that SIB will introduce its third tier, i.e., SIB will implement changes for firms directly regulated by SIB.

SIB's Principles are as follows:

1. Integrity

A firm should observe high standards of integrity and fair dealing.

2. Skill, Care and Diligence

A firm should act with due skill, care and diligence.

3. Market Practice

A firm should observe high standards of market conduct. It should also, to the extent endorsed for the purpose of this principle, comply with any code or standard as in force from time to time and as it applies to the firm either according to its terms or by rulings made under it.

4. Information about Customers

A firm should seek from customers it advises or for whom it exercises discretion any information about their circumstances and investment objectives which might reasonably be expected to be relevant in enabling it to fulfill its responsibilities to them.

5. Information for Customers

A firm should take reasonable steps to give a customer it advises, in a comprehensible and timely way, any information needed to enable him to make a balanced and informed decision. A firm should similarly be ready to provide a customer with a full and fair account of the fulfillment of its responsibilities to him.

6. Conflicts of Interest

A firm should either avoid any conflict of interest arising or, where conflicts arise, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act, or otherwise. A firm should not unfairly place its interests above those of its customers and, where a properly informed customer would reasonably expect that the firm would place his interests above its own, the firm should live up to that expectation.

7. Customer assets

Where a firm has control of or is otherwise responsible for assets belonging to a customer which it is required to safeguard, it should arrange proper protection for them, by way of segregation and identification of those assets or otherwise, in accordance with the responsibility it has accepted.

8. Financial Resources

A firm should ensure that it maintains adequate financial resources to meet its investment business commitments and to withstand the risks to which its business is subject.

9. Internal Organisation

A firm should organise and control its internal affairs in a responsible manner, keeping proper records, and where the firm employs staff or is responsible for the conduct of investment business by others, should have adequate arrangements to ensure that they are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.

10. Relations with Regulators

A firm should deal with its regulator in an open and cooperative manner and keep the regulator promptly informed of anything concerning the firm which might reasonably be expected to be disclosed to it.

SIB has also been enabled to issue codes of practice. SIB does not, for the present, propose to issue codes but self-regulating organisations may use codes, made under their own powers, to fill out the detail of principles and rules applying to those they regulate, subject, of course, to the overall results being adequate.

COB

The Law modifying the law of March 28, 1885 provides that the public can be solicited to operate on foreign futures and option markets only when these markets have been recognised, complying with conditions fixed by decree and under reciprocity condition. The decree promulgated, on October 25, 1990, has settled that foreign market dealing in securities, futures contracts or any financial instruments may be recognized only when the rules relating to protection of investors, safety, supervision and monitoring of the said market are equivalent to those existing on the market placed under the authority of the Conseil des Bourses de Valeurs and of the Conseil du Marche a Terme.

To date, 15 US futures markets have been recognized by Ministerial order dated September 20, 1991.

Persons who are domiciled or have their Registered Office outside the French territory are authorized to contact the public in France with a view to operations on a recognized foreign market dealing in securities, futures contracts or any financial instruments, when they have been approved by the competent supervisory authority in their country of origin and after the competent French authorities have determined that the rules of competence, honorable character and solvency to which the said persons are subject are equivalent to those applicable in France.

In order to offer or sell futures and options contracts traded on recognized exchanges to French investors, US Futures Commission Merchants have to be recognized by the COB pursuant to the Mutual Recognition Memorandum of Understanding (MRMOU) signed between the COB and the CFTC.

In addition, in order to permit cross exchange trading through GLOBEX and enable MATIF members to trade CME contracts, the CMT has supplemented its general regulation.

The amended general regulation concerning cross exchange trading provides that members which trade contracts listed on a foreign exchange are required to comply with the trading rules implemented by this exchange. CME trading rules have been recognized by the CMT. CFTC rule 575 provides for similar provision. To the extent permitted by the law, Market Authorities have agreed to exchange information necessary to ensure the surveillance of the trades.

French investors who are contacted in order to trade on recognized foreign markets must receive a prospectus, written in french, giving information related to the market, the firm and the contract specifications (rule 90.10 of the COB).

MOF

Securities companies and financial institutions are required to obtain necessary licenses to trade foreign products.

ASC

A clearing house, futures exchange and foreign market must be recognized to be traded by Australians on that market. A foreign product, if it is being traded on a recognised foreign exchange, may be traded by an Australian or if the product is traded on an exempt market (declared as such by the Minister and usually specialist markets confined to investors with expert knowledge of the markets' characteristics) it may be traded by Australians who participate in that market. Foreign products which are offered on Australian exchanges must be approved for trading by the ASC.

OSC

Foreign exchanges must be recognized and the form of foreign contracts must be accepted by the OSC. Blanket OSC Orders, however, relieve all foreign exchanges from the need to be formally recognized and from the need to have the form of their contracts accepted by the OSC. (This blanket relief means that most of the answers below apply equally to foreign dealers/products and Ontario dealers/products.)

CVMQ

SFC

No, foreign clearing houses, markets and/or products do not need to be recognized.

SVS

These are not considered part of the domestic securities market, but anyone may participate in non-domestic clearinghouses, products and markets through the purchase of foreign currency on the formal or informal exchange market.

FSA

Foreign firms may be authorized and licensed as exchanges, market places or clearing houses. As mentioned above, clearing must only be done by firms licensed as clearing house according to the new exchange and clearing act.

NZSC

There are no restrictions on New Zealand nationals dealing on their own account in foreign markets. However, no person may deal on behalf of any other person unless the dealer is a member of an authorised futures exchange or is approved individually by the Securities Commission, subject to any conditions the Commission may impose.

(b) If so, describe the factual bases for requiring recognition of such clearing house, market and/or product and identify the clearing houses, markets, and/or products so recognized

CFTC

Pursuant to rule 30.3(a), it is unlawful for any person to engage in the offer or sale of any foreign option until the CFTC, by order, authorizes the foreign option to be offered in the U.S. Foreign option is defined in the regulations by rule 30.1(b).

In determining whether to grant the petition of a foreign market with respect to the offer and sale of particular option products in the U.S., the CFTC will examine:

- the existence of mechanisms for information sharing and the ability to confirm transactions and prices;

- the arrangements in place for assuring that sales practice abuses in such options do not occur; and

- the regulatory environment in which such foreign options are traded.

Pursuant to rule 30.3(a), the CFTC has approved the following option contracts:

- ME: IOCC Options on Foreign Currencies, Canadian Dollar, Gold and Platinum, and options on the Government of Canada Bond futures contract.

- Singapore International Monetary Exchange (SIMEX): Options on Eurodollar, Japanese Yen, Deutschemark and 3-Month Euroyen Interest Rate and Nikkei Stock Average futures contracts.

- Sydney Futures Exchange (SFE): 3-Year and 10-Year Australian T-Bond futures, Australian Dollar futures and 90-Day Bank Accepted Bill futures, and on the All Ordinaries Share Price Index futures contract.

- London International Financial Futures Exchange (LIFFE): Options on Long Gilt, US Treasury Bond, German Government Bond, Italian Government Bond, 3-Month Sterling Interest Rate, 3-Month Euro-Deutsche mark Interest Rate, 3-Month Eurodollar Interest Rate and 3-month EuroSwiss Franc Interest Rate futures contracts; and options on Sterling and Dollar-Mark currencies.

- International Petroleum Exchange of London: Options on Brent Crude Oil futures and Gas Oil futures.

- London Futures and Options Exchange: Options on Robusta Coffee futures contract, No. 5 White Sugar futures contract, No. 6 Raw Sugar futures contract, No. 7 Cocoa futures contract, MGMI futures contract, and European Washed Arabica Coffee futures contract.

- London Metal Exchange: Options on High-Grade Primary Aluminum, Copper Grade-A, Special High-Grade Zinc, Standard Lead, and Primary Nickel and Tin futures contracts.

- Marche a Terme International de France (MATIF): Options on Notional Bond, 3-month Paris Interbank Offered Rate (PIBOR), 3-month Euro-deutsche mark and Long-Term ECU Bond futures contracts.

- Tokyo Grain Exchange: Options on U.S. soybean futures contracts.

CEA §2(a)(1)(B)(v) authorizes futures contracts based on, among other things, "exempted securities." Thus, a foreign government debt instrument must first be designated as an "exempted security" by the SEC under Section 3(a)(12) of the 34 Act before such futures contract based on a foreign government debt instrument can be offered or sold to or by a person in the U.S. To date, the SEC has designated the debt instruments of the governments of the United Kingdom, Canada, Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the Netherlands, Switzerland, Germany, Italy and Ireland as "exempted securities" for purposes of futures trading.

Under CEA §2(a), the CFTC staff has issued no-action letters providing for the offer and sale of foreign stock index futures based on an index of foreign securities in the U.S. In issuing these letters, the staff generally has followed the guidelines set forth in CEA §2(a)(1)(B)(ii). To date, no-action letters have been issued with respect to the following futures contracts:

- LIFFE: Financial Times Stock Exchange 100 Index futures contract

- Toronto Futures Exchange: Toronto Stock Exchange (TSE) 300 Composite Index, TSE 300 Spot Index, TSE 35 Index and TSE 35 Spot Index futures contracts

- SIMEX: Nikkei Stock Average futures contract

- International Futures Exchange (Bermuda) Ltd.: Financial News Composite Index futures contract

- MATIF: CAC 40 Index futures contract

- Osaka Stock Exchange (OSE): Nikkei Stock Average Index futures contract

- SFE: All Ordinaries Share Price futures contract

- Tokyo Stock Exchange: Tokyo Stock Price Index futures contract

On August 10, 1992, the CFTC issued an order permitting FCMs, IBs, and CTAs to offer and sell, or provide advice with respect to, the following foreign exchange-traded products to non-U.S. customers, consistent with applicable local law and certain limitations: foreign exchange-traded option contracts which have not been approved for trading in the United States under CFTC rule 30.3(a); foreign exchange-traded stock index futures contracts which have not been the subject of a CFTC staff no-action letter; and foreign exchange-traded futures based on a foreign government debt which has not been designated as an "exempted security" under Securities and Exchange Commission rule 3a12-8. 57 Fed. Reg. 36369 (August 13, 1992).

SEC

See SEC response at I.A.2.a. above.

SIB

With respect to ROIEs and Recognized Overseas Clearing Houses (ROCHs), the FSA provides for recognition by HMT of exchanges and clearing houses which have their head offices overseas and which undertake activities which are characterised as carrying on investment business in the UK by virtue of the provision of facilities for the purposes of arranging deals in investments (FSA. s.40).

As in the case of ROIEs (and ROCHs), DIEs are not subject to direct and primary oversight by UK regulators. The purpose of the DIE concept is to provide an additional element of investor protection by the identification of those overseas exchanges which are considered to provide adequate investor protection.

Upon the acquisition, by an exchange, of ROIE or DIE status, all of the products traded on that exchange are covered by the recognition or designation.

COB

MOF

ASC

If a foreign futures exchange meets the Australian recognition criteria and is approved by the Minister, it is designated a "recognised futures exchange."

OSC

The Winnipeg Commodity Exchange has been recognized pursuant to section 34 of the CFA. All other foreign commodity futures exchanges have been exempted from the need for recognition provided that trades are made through futures commission merchants registered in Ontario. The factors to be considered in recognizing a foreign exchange (rendered redundant by the Blanket Orders) are essentially the same as those described at I.A.1.(c)).

CVMQ

SFC

Inapplicable.

SVS

FSA

A foreign firm must be authorized as an exchange with a Swedish branch independently managed only if

- this firm in its home country does this sort of business and is supervised by an authority or another competent commission, and
- the business planned in Sweden may be assumed to fulfill requirements of fairness and - in an applicable extension - the provisions of the new act.

NZSC

Not applicable.

(c) Recognition criteria

CFTC

See CFTC response at I.A.2.a. above.

SEC

See SEC response at I.A.2.a. above.

SIB

In order to achieve ROIE status, an exchange must satisfy HMT:

i) that it is subject to supervision in the country where its head office is located which, together with its rules and practices, is such that investors in the UK are afforded protection at least equivalent to that provided under the FSA in relation to domestic RIEs or RCHs;

ii) of its ability to cooperate in the sharing of information; and

iii) of the existence of adequate arrangements for cooperation by those responsible for the supervision of the exchange in the foreign country (FSA, s.40).

HMT is required to be satisfied that the rules and guidance of the exchange or clearing house do not significantly prevent or distort competition (FSA, s.119) and before making a decision regarding recognition, it must have regard to the report of the Director General of Fair Trading (FSA, s.122) (see item I.A.1(c), above).

COB

MOF

Licenses to trade foreign products are given by category of products.

ASC

No legislation exists for the recognition of foreign markets. However, the ASC consults with the relevant exchange or market participants to ensure that investor protection is adequate and that the interests of the public will be served. In particular, the ASC must be satisfied that:

- the standards of training and experience, and other qualifications, of the operators of the market are appropriate;

- the manner in which the members would conduct their business of dealing in futures contracts will promote efficiency, honesty and fair practice in relation to such dealings;

- a mechanism exists for the exclusion from membership of a person or a body corporate, where that person or in the case of a body, corporate a director of the body corporate, a person concerned in the management of the body corporate or a person who has control or substantial control of the body corporate, is not of good character and high business integrity;

- the classes of futures contracts that may be dealt in are acceptable;

- the conditions under which members may deal in futures contracts are adequate;

- provisions exist for the equitable and expeditious settlement of claims and grievances between members; and

- appropriate mechanisms exist for the conciliation and settlement of disputes between members and their clients.

OSC

Since the OSC has by blanket order exempted all foreign exchanges from the need to be recognized the recognition criteria are irrelevant.

CVMQ

SFC

Inapplicable.

SVS

See A.2.b.

FSA

In the introduction of the advisory provisions for applying for authorization or license SFSA has stated that these provisions shall in an applicable extension be valid for the application by a foreign firm, too.

NZSC

Not applicable.