The no-action relief provided by the staff of the Division of Trading and Markets is generally consistent with the relief previously provided to foreign options markets.
On July 1, the staff of the Securities and Exchange Commission's (SEC's) Division of Trading and Markets (TM Staff) issued a class no-action letter (Class Relief) that permits foreign options markets to familiarize certain registered broker-dealers and large financial institutions in the United States with the foreign options market and some of the products available on that market without becoming subject to regulation in the United States.
The Class Relief contains a number of conditions with which a foreign options market and persons affiliated with that market must comply. In addition, although the Class Relief does not require a foreign options market to prepare and distribute an options disclosure document, it does require a foreign options market that plans to rely on the relief to notify the Division of Trading and Markets of its intent to do so, make certain representations in that respect, and make certain information about the market available on its website in English.
The following are listed in the Class Relief as permissible activities that foreign options markets and their affiliated persons may engage in when performing familiarization activities:
In order to rely on the Class Relief, foreign options markets, members of foreign options markets, and representatives of foreign options markets must satisfy the below conditions set forth in the Class Relief.
Foreign Options Markets
Foreign options markets must satisfy the following conditions:
Members of Foreign Options Markets
Members of foreign options markets that are not U.S.-registered broker-dealers may only deal with eligible institutions in accordance with the provisions of Exchange Act Rule 15a-6. Before effecting a transaction in eligible options, a member of a foreign options market is required to obtain and maintain a record of representations from the eligible broker-dealer/eligible institution that sets forth the following:
Representatives of Foreign Options Markets
Representatives of foreign options markets must satisfy the following conditions:
The Class Relief improves the ability of foreign options markets to familiarize U.S. institutional investors with the products and services available in those markets. The Class Relief is a significant operational improvement because foreign options markets will no longer need to seek individualized no-action relief; the Class Relief is self-executing, provided a foreign options market submits the appropriate notification to the Division of Trading and Markets. Additionally, although foreign options markets that have already received individualized relief may continue to rely on their particular letters, they may instead elect to rely on the Class Relief. In that case, if foreign options markets provide the proper notification to the Division of Trading and Markets of their intent to rely on the Class Relief, they would no longer have to prepare and require their members to provide options disclosure documents to U.S. investors.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys:
Ignacio A. Sandoval
Michael M. Philipp
. View the no-action letter here. In the Class Relief, TM Staff provided assurances that it would not recommend enforcement action against foreign options markets and certain affiliated persons and entities under sections 5 (exchange registration), 6 (exchange registration), 15 (broker-dealer registration), and 17A (clearing agency registration) of the Securities Exchange Act of 1934 (Exchange Act).
. A "representative" is defined as an employee of the foreign options market who is located inside or outside the United States, has been appointed to act as a representative of the foreign options market, and may engage in the permissible activities.
. A "foreign options market" means a non-U.S. derivatives market (1) on which eligible options trade and (2) that is an organized exchange operated and regulated outside the United States.
. These terms are defined to mean a "qualified institutional buyer," as defined in Rule 144A(a)(1) under the Securities Act of 1933 (Securities Act), or an international organization excluded from the definition of "U.S. person" in Rule 902(k)(2)(vi) of Regulation S under the Securities Act that has prior experience with traded options in the U.S. options market (and therefore would have received the disclosure document for U.S. standardized options called for by Rule 9b-1 under the Exchange Act).
. An "eligible option" means an index option or option on an individual security traded on a foreign options market that is not fungible or interchangeable with options traded on any market other than the foreign options market, and, accordingly, each position in an eligible option issued by a clearing member of the foreign options market can be closed out only on the foreign options market.
. "OTC options processing service" means a mechanism for submitting to a foreign options market an options contract on a foreign security that has been negotiated and completed in an OTC transaction so that the foreign options market may replace the OTC contract with an equivalent exchange-traded options contract.
. TM Staff made clear that such letters would be made publicly available.
. As an eligible broker-dealer/eligible institution, it owns and invests, on a discretionary basis, eligible securities in amounts that would make it qualify as a qualified institutional buyer under Securities Act Rule 144A; it has prior actual experience in the U.S. standardized options market; and it has received the options disclosure document prepared by the Options Clearing Corporation and the U.S. options exchanges.