Setting the Record Straight: CFTC Staff Reaffirm the Commission’s FBOT Framework, Providing Clarity to Non-US Exchanges

Amid “recent confusion and disruption regarding whether non-US exchanges should register [with the Commodity Futures Trading Commission (CFTC or Commission)] as a designated contract market (DCM) or [foreign board of trade (FBOT)] due to recent enforcement actions…,” staff from the CFTC’s Division of Market Oversight (DMO) issued an advisory letter on August 28 (Letter 25-27) to provide clarity to non-US exchanges seeking to provide direct market access to members or participants physically located in the United States (US Members or Participants). Letter 25-27 is framed as a reaffirmation of the CFTC’s longstanding FBOT regime, which applies to all markets and asset classes, including digital assets.

In a related press release, CFTC Acting Chairman Caroline D. Pham noted that Letter 25-27 provides legal clarity for onshore trading in the United States, which was otherwise adversely affected by the Commission’s “regulation by enforcement approach of the past several years….” It was further noted in the press release that the CFTC had observed confusion regarding whether non-US exchanges are required to register as an FBOT or a DCM when providing access to US Members or Participants.

FBOT Background

Letter 25-27 starts by recounting the statutory basis of the FBOT framework; under the Commodity Exchange Act (CEA) a futures contract can be lawfully traded in the United States only if it is subject to the rules of a board of trade that is a DCM. However, the CEA also sets forth an exclusion for contracts that are made on or subject to the rules of an FBOT. After the Commission’s issuance of several no-action letters and official statements in the 1990s and 2000s, allowing FBOTs to operate without being registered as DCMs, the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the CFTC to establish a registration regime for FBOTs offering direct access to members or participants in the United States. The Commission adopted final FBOT rules in 2011 in Part 48 of the CFTC regulations, which provide that a non-US exchange cannot provide access to US Members or Participants without first being eligible for registration and then registering with the CFTC as an FBOT. 

Letter 25-27

DMO staff issued Letter 25-27 as a reminder that a non-US exchange must be registered with the CFTC in accordance with the requirements and conditions of Part 48 in order to provide US Members or Participants with direct access to the electronic trading and order matching system of the exchange. Letter 25-27 also reminded these exchanges that CFTC-registered FBOTs are not required to register as a DCM. In other words, the key distinguishing feature between whether a board of trade, exchange or market needs to register as an FBOT or a DCM is its geographic location, with DCM registration being required only for those exchanges that are organized and operating domestically within the United States. 

Letter 25-27 also provides an overview of certain FBOT requirements. For instance, access to an FBOT is limited to US Members or Participants who are, subject to certain conditions, trading using proprietary accounts, or are registered as a futures commission merchant, commodity pool operator, commodity trading advisor, or an introducing broker (meeting certain conditions) and, broadly speaking, are submitting orders for execution in accordance with such capacity.

As noted above, Letter 25-27 also highlights that, in order to qualify for CFTC registration as an FBOT, a non-US exchange must be eligible by meeting a number of conditions, including:

• possessing the attributes of an established, organized exchange; 
• adhering to appropriate rules prohibiting abusive trading practices; 
• enforcing appropriate rules to maintain market and financial integrity; 
• being authorized by a regulatory process that examines customer and market protections; and 
• being subject to continued oversight by a local regulator that has the power to intervene in the market and the authority to share information with the CFTC.

Impact for Katten Non-US Exchange Clients and Others 

Letter 25-27 serves as a welcome clarification for Katten’s non-US exchange clients and others seeking to trade on non-US exchanges of the dividing line between DCMs and FBOTs. Previous administrations' enforcement actions in respect of non-US derivative exchanges, especially in the digital asset space, had blurred this line.

Letter 25-27 and its related press release are available here. For more information, please contact one of the Katten attorneys listed in this post.