In the salad days of open-outcry, U.S.-based futures traders could trade any commodity futures contracts they wanted to anywhere in the world, provided the regulatory agencies of the nation in which the exchange was located allowed it.
That’s still the case if the exchange in question is an open-outcry exchange trading hard commodities, or an electronic commodity exchange that has no screens in the United States. But if it runs on an electronic platform and wants to place its screens inside the United States, it has to either become registered under U.S. law or ask U.S. regulators for a so-called ‘no action’ letter exempting it from regulation.
Several industry leaders and regulators, including CFTC Commis-sioner Mike Dunn, have criticized the no-action process because the letters aren’t issued after public requests for comment and the considered input from industry participants, but rather after a request from the parties involved. The decisions are made by CFTC staff and are not subject to judicial revue.
“It really is a staff document, but people rely on it as if it were a Commission policy,” says CFTC Commissioner Walter Lukken.
The issue becomes doubly complicated if the futures contracts in question are based on financial instruments regulated by the Securities and Exchange Commission (SEC). In that case, even an open-outcry exchange, or an electronic exchange with no screens in the United States, will need a no-action letter for every such contract it wants to offer to U.S. traders.
No-action letters don’t just cover foreign boards of trade and foreign futures contracts. In fact, they are issued for scores of regulatory relief.
The first two no-action letters relating to screen-based access to non-U.S. exchanges concerned the Chicago Mercantile Exchange’s (CME) Globex platform, which listed contracts from non-U.S. exchanges. The CFTC’s division of trading and markets essentially gave both the CME and France’s Marché à Terme International de France (Matif, now part of Euronext.Liffe) permission to list French products on Globex, but reserved the right to review all contracts traded on Globex.
That’s been the procedure ever since, with exchanges receiving an initial and conditional no-action letter, which is then amended through time (see “The ICE-Nymex clash,” below).
Regulators around the world have come up with similar regimes, some more structured than others. In the United Kingdom, for example, foreign boards of trade looking to place screens in London must become Recognized Overseas Investment Exchanges (ROIEs). Like the recipients of no-action letters in the United States, ROIEs have to demonstrate that U.K. investors get the same protection as they would at home and that both the ROIE and its home regulator will share information with the FSA.
“The CFTC’s no-action letter achieves pretty much the same end as we do through our ROIE regime by looking up front at whether there is an equivalent regime and proper home state regulation,” says Verena Ross, who is responsible for markets infrastructure for the FSA. “The CFTC also continues to have, probably more than we do, ongoing information flow abroad about trades coming through from the U.S. and other information about new contracts and so on.”