CFTC Exempts Certain HK-Regulated Firms from US Derivatives Rules | Practical Law

CFTC Exempts Certain HK-Regulated Firms from US Derivatives Rules | Practical Law

The CFTC has granted an order exempting certain firms designated by the Hong Kong Securities and Futures Commission (HKSFC) from certain CFTC regulations. The order indicates the criteria the CFTC will use in evaluating substituted compliance applications involving foreign-regulated firms.

CFTC Exempts Certain HK-Regulated Firms from US Derivatives Rules

Practical Law Legal Update 4-606-5026 (Approx. 4 pages)

CFTC Exempts Certain HK-Regulated Firms from US Derivatives Rules

by Practical Law Finance
Published on 31 Mar 2015 • USA (National/Federal)
The CFTC has granted an order exempting certain firms designated by the Hong Kong Securities and Futures Commission (HKSFC) from certain CFTC regulations. The order indicates the criteria the CFTC will use in evaluating substituted compliance applications involving foreign-regulated firms.
On March 25, 2015, the CFTC issued an order granting an exemption to certain firms designated by the Hong Kong Securities and Futures Commission (HKSFC) from the application of certain of the CFTC's foreign futures and options regulations. The decision is limited to the organizations identified in the order. However, the finding indicates the criteria the CFTC will use in evaluating substituted compliance applications involving other regulatory and self-regulatory requirements under a foreign regulatory authority pursuant to CFTC Regulation 30.10 (17 C.F.R. § 30.10).
Regulation 30.10 permits persons to file a petition with the CFTC for exemption from the application of certain CFTC regulations if that action would not be otherwise contrary to either the:
  • Public interest.
  • Purposes of the provision from which the exemption is sought.
On September 8, 2012, the HKSFC petitioned the CFTC on behalf of its member firms located and doing business in Hong Kong, for which it is the sole regulatory body, for an exemption from the application of the following provisions to those firms:
  • Registration with the CFTC for firms and for firm representatives.
  • The requirement in CFTC Regulation 30.6(a) and (d) (17 C.F.R. § 30.6(a) and 17 C.F.R. § 30.6(d)), that firms provide customers located in the US with the risk disclosure statements in CFTC Regulation 1.55(b) (17 C.F.R. § 1.55(b)) and CFTC Regulation 1.55(c) (17 C.F.R. § 1.55(c)), or as otherwise approved under CFTC Regulation 1.55(c).
  • The separate account requirement contained in CFTC Regulation 30.7 (17 C.F.R. § 30.7).
  • The sections of Part 1 of the CFTC's financial regulations that apply to foreign futures and options sold in the US, as set forth in Regulation 30.
  • The sections of Part 1 of the CFTC's regulations relating to books and records that apply to transactions subject to Regulation 30, based upon substituted compliance by those persons with the applicable statutes and regulations in effect in Hong Kong.
The CFTC granted the HKSFC's request based on a finding that the regulatory framework governing the firms in Hong Kong has each of the following elements:
  • A system of authorization and disqualification of firms that deal in transactions subject to regulation under Regulation 30 which includes, for example:
    • criteria and procedures for granting, monitoring, suspending and revoking licenses; and
    • provisions for requiring and obtaining access to information about authorized firms and persons who act on behalf of those firms.
  • Financial requirements for firms including, without limitation:
    • a requirement for a minimal level of working capital; and
    • daily mark-to-market settlement and/or accounting procedures.
  • A system for the protection of customer assets that is designed to preclude the use of customer assets to satisfy house obligations and requires separate accounting for those assets.
  • Recordkeeping and reporting requirements pertaining to financial and trade information.
  • Sales-practice standards for authorized firms and persons acting on their behalf that include, for example:
    • required disclosures to prospective customers; and
    • prohibitions on improper trading advice.
  • Procedures to audit for compliance with, and to redress violations of, these customer-protection and sales-practice requirements including, without limitation, an affirmative surveillance program designed to detect trading activities that take advantage of customers, and the existence of broad powers of investigation relating to sales practice abuses.
  • Mechanisms for sharing of information between the CFTC and HKSFC on an "as needed" basis including, without limitation:
    • confirmation data;
    • data necessary to trace funds related to trading futures products subject to regulation in Hong Kong;
    • position data; and
    • data on firms' standing to do business and financial condition.
The CFTC noted that the relief granted in this order was not applicable to:
  • Licensed corporations subject to joint oversight by the Hong Kong Monetary Authority (HKMA) and the HKSFC.
  • Registered institutions subject to oversight solely by the HKMA.
  • Any transaction in swaps, as defined in Section 1a(47) of the Commodity Exchange Act (7 U.S.C. § 1a(47)).