The Commodity Futures Trading Commission (CFTC) last Wednesday adopted changes with respect to its regulation of foreign brokers operating within the United States. Specifically, the CFTC said it will exempt foreign firms from registration as a futures commission merchant (FCM) and any associated requirements if they limit their customers to persons located outside of the U.S. and submit transactions executed on U.S. exchanges for clearing on an omnibus basis through a registered FCM.

An FCM is an individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures, and accepts money or other assets to support the orders.

The CFTC said, however, that foreign brokers operating under the exemption will remain subject to existing provisions that apply to activities of a foreign broker, such as the large trader reporting requirements and the provisions of the Commodity Exchange Act and CFTC regulations that prohibit fraud or manipulation by a foreign broker.

While the move was seen as a positive one for U.S. exchanges, some industry insiders felt there are other areas that are more pressing. "The CFTC can start regulating all of the over the counter transactions right here in the United States," said one East Coast broker. "They don't have to go to Europe for that. We have to take care of things here first."

Others agreed that the more pressing problems involve Americans. Borrowing Walt Kelly's famous 1970s Pogo comic strip quote, one Washington, DC-based analyst said regulating foreign participation in U.S. markets is "all fine and well, but 'We have met the enemy and he is us.'"

"I really don't think that foreign money overrunning U.S. markets is really the chief issue here. I think there is far more U.S. money overrunning U.S. markets than anything else," the analyst said. "The foreign influence might be something that needs to be addressed, but I don't expect it to make a material difference in how our markets function. As a broader observation, this kind of surveillance is the CFTC's job. This is a reminder that they are there and that they are monitoring markets. I think that is something that all market participants need to be aware of. To the extent that this type of thing contributes to market transparency, that is a good thing."

The CFTC also has revised its regulations to exempt from registration any foreign person functioning as an introducing broker, commodity pool operator or commodity trading advisor solely on behalf of customers located outside of the U.S., if all commodity interest transactions are submitted for clearing to a registered FCM. In addition, the exemption would apply to any individual located in a branch office of a commission registrant that does not solicit or accept orders from customers located in the United States.

The amended regulations will be published shortly in the Federal Register and will become effective 30 days after publication, the CFTC said.

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