The Commodity Futures Trading Commission granted a so-called Part 30.10 exemption last week to the Hong Kong Securities and Futures Commission. Under this exemption, qualified brokers under the oversight of the SFC may apply to carry accounts for United States persons to trade futures products traded on the Hong Kong Futures Exchange Limited only. Although HK’s Part 30.10 relief does not seem to be broad-based based on its plain language, it is intended, according to CFTC staff, to cover all non-US futures and options exchanges and automated trading services under the oversight of the SFC whether located in HK or not (click here for a full list of such execution facilities). To qualify for a specific Part 30.10 exemption, eligible HK-based firms must be authorized and be in good standing with the SFC, consent to jurisdiction in the US by appointing a US agent for service of process, and agree to provide access to their books and records related to transactions with US persons to the CFTC and the US Department of Justice, upon request, among other conditions. Eligible HK firms cannot offer US persons the option of not segregating their funds.
Compliance Weeds: Part 30.10 permits futures brokers located outside the United States who are subject to a comparable regulatory framework in the country where they are located to carry accounts for US persons for certain designated non-US futures and options. In the first instance, Part 30.10 eligibility is negotiated with the CFTC and a local non-US regulator or exchange. Afterwards, local non-US brokers apply to the National Futures Association to obtain specific Part 30.10 status. Part 30.10 exemptions are only as broad, however, as their precise terms. Some permit regulated brokers in a jurisdiction to carry accounts for US persons for products on futures exchanges in that jurisdiction as well as certain other designated non-US futures exchanges (e.g., exemptions granted to regulators in the United Kingdom and Australia; click here for the UK Part 30.10 Exemption and here for the Australia Part 30.10 Exemption.). Other exemptions under Part 30.10 are limited solely to specific exchanges in the broker’s jurisdictions (such as the exemption granted to the Taiwan Futures Exchange which only extends to TAIFEX members trading TAIFEX futures products for US persons; click here for details). Even where an exemption is broad-based, however, it may not permit a local broker to carry in an account for a US person all non-US futures and options. For example, the UK Part 30.10 exemption is limited to futures products traded on certain Financial Conduct Authority-recognized investment exchanges, designated investment exchanges and regulated markets only (click here for a current list of these entities). Although the HK Part 30.10 exemption is narrow, it potentially could be used to allow US persons to access futures traded in China through a potential expansion of the Shanghai-HK Stock Connect to futures. (Click here for an overview of the Shanghai-HK Stock Connect.)