17 Nov 2021

Eurex

Introduction of eligible foreign security futures products for trading by eligible U.S. customers

Eurex Circular 105/21 Introduction of eligible foreign security futures products for trading by eligible U.S. customers


1.   Introduction

Eurex Deutschland offers foreign security futures products (FSFPs) eligible under U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC) rules (eligible FSFPs) for trading by eligible U.S. customers (eligible U.S. customers) with effect as of 1 January 2022.

Therefore, the Executive Board of Eurex Frankfurt AG has decided to amend the General Terms and Conditions on the technical connection and the utilization of the Exchange-EDP of Eurex Deutschland (GTC Connection Agreement Eurex Frankfurt) accordingly, as follows:

  • A new provision in the GTC Connection Agreement Eurex Frankfurt requiring intermediaries that intend to trade eligible FSFPs (eligible intermediaries) on behalf of eligible U.S. customers to notify Eurex Frankfurt of their intent to do so and to permit only their U.S. customers that are eligible U.S. customers to trade eligible FSFPs. In addition, the provision requires U.S. persons that intend to trade eligible FSFPs for own accounts to notify Eurex Frankfurt of their intent and be eligible to do so.
  • Furthermore, the new provision stipulates a quarterly verification process whereby eligible intermediaries that have notified Eurex Frankfurt of their intent to trade eligible FSFPs on behalf of eligible U.S. customers will verify to Eurex Frankfurt, in alignment with Eurex Clearing, quarterly that they have taken reasonable steps to verify that their affected clients meet the eligibility requirements. In case of trading for their own accounts, they will be required to notify Eurex Frankfurt of their intent to trade FSFPs and to verify that they continue to meet the eligibility requirements.

The amendments, as set out in Attachment 1, will become effective on 1 January 2022.

2.   Required action

All eligible U.S. customers and eligible intermediaries that intend to trade eligible FSFPs are affected by this change and have to ensure compliance with the new provisions.

3.   Details of the initiative

A.   Purpose

Futures on individual stocks or narrow-based equity indexes under U.S. law are foreign security futures products (FSFPs). FSFP contracts are not offered or sold to Persons in the United States (U.S. Persons) except as permitted by U.S. securities and commodity futures laws. Under U.S. law, only qualifying U.S. Persons may trade such contracts. To be eligible to purchase or sell FSFPs, such U.S. Persons must qualify each as a Qualified Institutional Buyer (QIB), Accredited Investor (AI), and Eligible Contract Participant (ECP). Intermediaries must be registered or exempt from registration under both the U.S. securities and commodity futures regulatory frameworks.

A system of controls shall be established to ensure that the U.S. Persons that transact in FSFPs listed on Eurex Deutschland are all eligible to do so and that reasonable steps have been taken by eligible intermediaries to ensure that only eligible persons transact in FSFPs listed on Eurex Deutschland. Eurex Frankfurt also separately may qualify certain U.S. participants as eligible for certain purposes.

Because U.S. tradability of FSFPs (i.e., single-stock futures and narrow-based stock index futures) listed on Eurex Deutschland falls under the joint jurisdiction of the CFTC and SEC and the trading of FSFPs on Eurex Deutschland must be in compliance with the regulatory frameworks of both commissions, transactions in FSFPs listed on Eurex Deutschland by or for U.S. Persons must meet eligibility conditions relating to the U.S. participant, the intermediary, and the instrument itself.

B.   Eligible U.S. Persons

U.S. Persons that intend to trade eligible FSFPs must meet all three of the following criteria: (i) qualified institutional buyer as defined in SEC Rule 144A (QIBs) under the Securities Act of 1933 (Securities Act); (ii) eligible contract participant (ECP) as defined in section 1a(18) of the U.S. Commodity Exchange Act (CEA) and CFTC Regulation 1.3; and (iii) accredited investor (AI) as defined in SEC Rule 501 of Regulation D (collectively, eligible U.S. customers).

The SEC published a 2009 Order governing U.S. tradability of FSFPs (2009 SEC Order).1 The 2009 SEC Order provides that the only U.S. Persons that may trade eligible FSFPs are U.S. QIBs and the eligible intermediaries listed in section C. below on behalf of U.S. QIBs and that an eligible intermediary that effects transactions in eligible FSFPs on behalf of a U.S. Person must reasonably believe that such person is a QIB.

The CEA Section 2(a)(1)(F)(ii) provides that ECPs may transact FSFPs so long as any underlying security for an FSFP is traded principally on, by, or through a foreign exchange.

Lastly, as discussed in section E. below, because this offering is being made pursuant to the safe harbor of Rule 506(c) of Regulation D under the Securities Act, the purchaser must also be an AI.

Therefore, to be eligible to trade FSFPs listed on Eurex Deutschland, a U.S. customer must qualify as each of a QIB, ECP and AI.

SEC Release No. 34-60194, Order under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Exchange Act Section 6(h)(1) for Certain Persons Effecting Transactions in Foreign Security Futures and under Exchange Act Section 15(a)(2) and Section 36 Granting Exemptions from Exchange Act Section 15(a)(1) and Certain Other Requirements (June 30, 2009).

C.   Eligible intermediaries

In order to trade contracts included under this FSFP initiative on behalf of eligible U.S. customers, a U.S. intermediary must be: (i) a dually registered FCM/BD, (ii) a registered FCM/notice-registered BD, (iii) a registered BD/notice-registered FCM, (iv) a bank, as defined in Section 3(a)(6) of the Securities and Exchange Act, acting pursuant to an exception or exemption from the definition of “broker” or “dealer” in Sections 3(a)(4)(B), 3(a)(4)(E), or 3(a)(5)(C) of the Securities and Exchange Act or the rules thereunder that are also registered FCMs, or (v) a person exempt from registration as an FCM under CFTC Rule 30.10 that is registered, or exempt from registration, with the SEC in one of the foregoing categories (collectively (i) – (v), eligible intermediaries). U.S. Persons trading for their own account must qualify as a QIB, ECP, and AI, as well as be registered or exempt from registration in the capacities required for their trading.

D.   FSFP eligibility

Under the 2009 SEC Order, in order for an FSFP to be eligible to be traded by U.S. Persons, it must meet the following test:

  • For single-stock futures, the underlying security must be (1) issued by a foreign private issuer and have its primary trading market outside the U.S., or (2) a note, bond, debenture, or evidence of indebtedness (“debt”) security issued or guaranteed by a foreign government that is eligible to be registered with the Commission under Schedule B of the Securities Act.
  • For narrow-based stock futures, at least 90 percent of the underlying securities in the index, at the time of the transaction, both in terms of the number of underlying securities and their weighting in the index, must be (1) issued by foreign private issuers where the primary trading market of each such underlying security is outside the U.S., or (2) debt securities issued or guaranteed by a foreign government that are eligible to be registered with the Commission under Schedule B of the Securities Act.

For purposes of the above tests, the 2009 SEC Order provides that a primary trading market is deemed to be outside the U.S. if at least 55 percent of the worldwide trading volume in the security took place in, on, or through the facilities of a securities market or markets located either (i) in a single foreign jurisdiction, or (ii) in no more than two foreign jurisdictions during the issuer’s most recently completed fiscal year. If the trading in the foreign private issuer’s security is in two foreign jurisdictions, the trading for the issuer’s security in at least one of the two foreign jurisdictions must be greater than the trading in the U.S. for the same class of the issuer’s securities in order for such security’s primary trading market to be considered outside the U.S.

In addition, the CEA provides that to be eligible to be traded by U.S. ECPs, an FSFP must be “traded principally on, by, or through a foreign exchange.” 

U.S. Persons should consult with their legal and other advisors if they have questions about whether they may trade FSFPs listed on Eurex Deutschland. Any eligible U.S. customer wishing to trade FSFPs should consult with its eligible intermediary. Eurex Deutschland has compiled a list of FSFPs that it believes comply with the above tests. This list is not intended to be exhaustive. As of 1 January 2022, the list will be made available on the Eurex website www.eurex.com under the path: 

Rules & Regs > Eurex derivatives in the U.S. > Eligible foreign security futures under 2009 SEC Order.

Separate from this FSFP offering, Eurex Deutschland also offers in the U.S.: 

  • Futures and options on futures subject the CFTC’s jurisdiction

A complete list is available on the Eurex website under the following link: 

Rules & Regs > Eurex derivatives in the U.S. > Direct market access from the U.S.;

  • Equity options and equity index options subject the CFTC’s jurisdiction

A complete list and a link to the circular explaining the terms of this offering is available on the Eurex website under the following link:

Rules & Regs > Eurex derivatives in the U.S. > Eligible options under SEC class no-action relief

Only for Eurex Deutschland products listed on these three webpages can Eurex Deutschland confirm trading eligibility from the U.S.

E.   Sign-up form for eligible intermediaries wishing to transact U.S. client or U.S. proprietary FSFP orders pursuant to SEC Regulation D

The 2009 SEC Order provides that an offer and sale of eligible FSFPs must be made in reliance on an exemption from registration under the Securities Act. Eurex is conducting the offer and sale of eligible FSFPs pursuant to SEC Rule 506(c) of Regulation D, a safe harbor to the exemption provided under Section 4(a)(2) of the Securities Act.

The 2009 SEC Order defines the issuer for purposes of offering FSFPs in the U.S. as the clearing agency, and thus Eurex Clearing is responsible for conducting this offering pursuant to SEC Rule 506(c) of Regulation D. For avoidance of doubt, this offering does not change clearing access from the U.S., which is not allowed for FSFPs at this time. SEC Rule 506(c) provides that the issuer must take “reasonable steps to verify” that U.S. Persons who transact in eligible FSFPs are AIs.

SEC Rule 506(c) provides a list of non-exclusive methods of verifying that participants in a Rule 506(c) Regulation D offering are accredited, including obtaining a written confirmation every quarter from a registered broker-dealer that such broker-dealer has taken reasonable steps to verify within the prior three months, and has determined, that all purchasers of eligible FSFPs are AIs. Eurex Frankfurt, in alignment with Eurex Clearing as issuer, will be implementing this method to comply with the verification requirement of SEC Rule 506(c). 

All eligible intermediaries, or an affiliate acting on their behalf, that intend to trade FSFPs on behalf of eligible U.S. customers, or U.S. Persons trading for own accounts, must notify Eurex Frankfurt of their intent to trade FSFPs via the sign-up form discussed, as provided in Attachment 2, which will then subject them to the quarterly confirmation process by Eurex Clearing discussed below in section G. 

Due to the requirement that eligible U.S. customers also be a QIB and ECP, such quarterly verification will also require verification of these statuses. Eurex Frankfurt will have the right to provide and disclose such quarterly confirmations to Eurex Clearing. To implement this requirement, the GTC Connection Agreement Eurex Frankfurt is being amended as set forth in section F. below.

F.   Amendment to GTC Connection Agreement

Due to the requirements set forth in the CEA, the 2009 SEC Order, and SEC Regulation D, Eurex Frankfurt is hereby amending the GTC Connection Agreement Eurex Frankfurt as provided in Attachment 1.

G.   Quarterly confirmation process

As provided in the amendment to the GTC Connection Agreement Eurex Frankfurt, eligible intermediaries that intend to trade eligible FSFPs on behalf of their eligible U.S. customers as well as eligible U.S. Persons that intend to trade for own accounts must notify Eurex Frankfurt of their intent and must confirm in writing quarterly to Eurex Frankfurt, in alignment with Eurex Clearing, that they have taken reasonable steps to verify within the prior three months, and determined, that all U.S. Persons for whom they effect transactions are eligible and U.S. Persons trading for own account must confirm in writing that they remain eligible. The confirmation process will be as follows:

  1. On the first business day of the start of every quarter (January, April July, October), Eurex will send an automated e-mail to participating eligible intermediaries trading for eligible U.S customers and eligible U.S. customers trading for own accounts or their affiliated Eurex participant or Clearing Member, requiring them to use the voting response function to confirm “Yes” that the eligible intermediary has, within the prior three months, taken reasonable steps to verify, and determined, that the U.S. Persons for whom the FSFPs are effected qualify as QIBs, ECPs, and AIs, or if trading for own accounts, that they themselves qualify as QIBs, ECPs, and AIs. In addition, eligible intermediaries or their affiliated Eurex participant or Clearing Member must confirm that it maintains the registrations necessary under the U.S. securities and commodity laws to engage in their trading.
  2. If a participant does not respond, Eurex will send a follow-up e-mail five business days later.
  3. If a participant does not respond to the second e-mail, Eurex will send another follow-up e-mail five business days later.
  4. If a participant does not respond to the third e-mail within three business days, Eurex will send an e-mail informing the eligible intermediary or affiliated Eurex participant or Clearing Member that the eligible intermediary may no longer trade eligible FSFPs on behalf of U.S. customers or proprietary accounts.

Eurex reminds participants that it is a violation of U.S. law to effectuate FSFPs on behalf of U.S. Persons except in compliance with U.S. securities and commodity futures requirements. Eligible intermediaries must determine whether their customers qualify to transact in FSFPs and are required to abide by the conditions in the GTC Connection Agreement Eurex Frankfurt to do so regardless of whether Eurex has separately done so.

Amendments to the GTC Connection Agreement Eurex Frankfurt will be notified to the Contracting Party at least six weeks prior to their effective date. They are deemed to have been approved if the Contracting Party does not lodge objections with Eurex Frankfurt AG within six weeks of notification of the amendment.

Attachments:

  • 1 – Updated sections of the General Terms and Conditions on the technical connection and the utilization of the Exchange-EDP of Eurex Deutschland (Connection Agreement)
  • 2 – Regulation D Quarterly Verification Sign-Up Form for U.S. Trading of Eligible Foreign Security Futures Products Listed on Eurex Deutschland


Further information

Recipients:

All Trading Participants of Eurex Deutschland and Vendors

Target groups:

Front Office/Trading, Middle + Backoffice, IT/System Administration, Auditing/Security Coordination

Contact:

client.services@eurex.com

Web:

www.eurex.com

Authorized by:

Randolf Roth


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