On March 31, 2020, the Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) announced the release of a targeted, temporary no-action letter aimed at foreign affiliates of futures commission merchants (FCMs). This relief is meant to ease regulatory burdens in the face of the global COVID-19 pandemic. In short, the relief relaxes restrictions on CFTC registrants’ affiliated foreign brokers by allowing them to address the needs of the registrants’ U.S.-based customers without having to register as introducing brokers. The CFTC has now issued four waves of no-action relief. It issued the first two waves on March 17, 2020, and a third wave three days later.
The DSIO issued the no-action relief in CFTC Staff Letter No. 20-12, which centers on the application of CFTC Regulation 3.10(c)(4). Regulation 3.10(c)(4) applies to persons outside of the United States that are exempt from registration as a FCM, so-called foreign brokers, and exempts them from also having to register as an introducing broker (IB) if they comply with certain restrictions on their trading activities. These include maintaining an affiliation with a registered FCM and refraining from soliciting or handling customer funds of any person located in the U.S. for trading on a DCM. CFTC Regulation 3.12(a) prohibits any person from associating with an FCM or IB as an associated person (AP), which includes employees soliciting or accepting customer orders, unless such person has registered with the CFTC as an AP of the FCM or IB, or the person is exempt from registration.
No-Action Letter No. 20-12 addresses FCMs that are constituent parts of international financial services groups operating in major financial centers all over the world and that have registered APs who solicit and accept orders for futures transactions from U.S customers to be executed on U.S. DCMs. The CFTC recognizes that, due to the pandemic, the implementation of the FCMs’ business continuity plans and government-imposed social distancing orders may require APs to be physically absent from the FCMs’ offices, which could in turn impede the FCMs’ abilities to ensure that APs handle the needs of U.S.-based customers. Therefore, under Letter No. 20-12, the CFTC will temporarily relax registration requirements on certain FCM affiliates to allow these affiliates to act to address the needs of U.S.-based customers while APs are displaced. Specifically, the letter grants no-action relief to foreign brokers who have received an exemption from registration under Regulation 30.5 and who are affiliates of FCMs, to accept orders from U.S. customers for execution on U.S. DCMs even though such foreign brokers do not qualify for exemption from registration as an IB under Regulation 3.10(c)(4). This relief is subject to the following conditions:
- The foreign broker is an affiliate of a registered FCM;
- The foreign broker is licensed or registered in a jurisdiction that the CFTC has recognized through a Regulation 30.10 exemptive order;
- The foreign broker introduces only institutional customers as defined in Regulation 1.3, and does so on a fully-disclosed basis for the purpose of trading on a DCM;
- The foreign broker does not solicit orders from or handle customer funds of any U.S. person for trading on a DCM (although the person may accept orders);
- The foreign broker creates and maintain records required by Regulation 1.35 (although the recordkeeping requirements are subject to no-action relief set forth in CFTC Staff Letter 20-03);
- The foreign broker FCM files an acknowledgment of joint and several liability for the person’s violations of commodities regulations related to reliance on the no-action relief; and
- The foreign broker provides the DSIO with written notice upon beginning reliance on the no-action relief and before ceasing to rely on it (if the person ceases to rely on the no-action relief before September 30, 2020).
Foreign brokers meeting these requirements will be protected from enforcement actions related to failure to register as an IB. The CFTC indicated that the relief would extend until September 30, 2020.