FR Doc E9-6044[Federal Register: March 23, 2009 (Volume 74, Number 54)]
[Rules and Regulations]
[Page 12177-12203]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23mr09-12]
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Part II
Commodity Futures Trading Commission
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17 CFR Parts 15, 16, 17 et al.
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Significant Price Discovery Contracts on Exempt Commercial Markets;
Final Rule
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 15, 16, 17, 18, 19, 21, 36, 40
RIN 3038-AC76
Significant Price Discovery Contracts on Exempt Commercial
Markets
AGENCY: Commodity Futures Trading Commission.
ACTION: Final Rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is promulgating final rules to implement those
provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization
Act'') \1\ relating to exempt commercial markets (``ECMs'') on which
significant price discovery contracts (``SPDCs'') are traded or
executed. In addition to promulgating regulations mandated by the
Reauthorization Act, the Commission also is amending existing
regulations applicable to registered entities in order to clarify that
such regulations are now applicable to ECMs with SPDCs.
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\1\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
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DATES: Effective Date: April 22, 2009.
FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5133. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
A. Overview
The Commodity Futures Modernization Act of 2000 (``CFMA'') amended
the Commodity Exchange Act (``CEA'' or the ``Act'') \2\ to replace the
Act's ``one-size-fits-all'' supervisory framework for futures trading
with a multi-tiered approach to oversight of derivatives markets. The
CFMA applies different levels of oversight to markets based primarily
on the nature of the underlying commodity being traded, the
participants who are trading, and the manner in which trading is
conducted. In general, the more sophisticated the traders or commercial
participants, or the less susceptible a commodity is to manipulation or
other market or trading abuses, the less regulatory oversight is
required under the CFMA. In addition to creating three new categories
of trading facility,\3\ the CFMA created a number of exemptions and
exclusions from regulation for certain swaps and other derivative
products traded either bilaterally or on electronic trading facilities-
including an exemption for transactions in exempt commodities traded on
electronic trading facilities, also known as exempt commercial markets
(``ECMs'').\4\
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\2\ 7 U.S.C. 1 et seq.
\3\ Designated Contract Markets (``DCMs'') are open to all
participants and may offer all types of commodities; Derivatives
Transaction Execution Facilities (``DTEFs'') generally are open only
to sophisticated participants and are limited as to the types of
commodities that may be traded; and Exempt Boards of Trade
(``EBOTs'') may trade only excluded commodities and are open only to
eligible contract participants and are subject to no regulatory
oversight, exempt from most provisions of the CEA and not registered
with or designated by the CFTC.
\4\ The CFMA established the ECM exemption in section 2(h)(3) of
the CEA, 7 U.S.C. 2(h)(3).
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Since the adoption of the CFMA, ECMs have evolved such that some no
longer are simple trading platforms with low trading volumes relative
to DCMs. Also over time, these facilities began to offer ``look-alike''
contracts that are linked to the settlement prices of their exchange-
traded counterparts, and in at least one case these look-alike
contracts began to garner significant volumes. More recently, several
active ECMs began to offer the option of centralized clearing for their
contracts--an option which became widely utilized by their customers to
manage counterparty risk. This evolution, particularly the linkage of
ECM contract settlement prices to DCM futures contract settlement
prices, began to raise questions about whether ECM trading activity
could impact trading on DCMs and whether the CFTC had adequate
authority to address that impact and protect markets from manipulation
and abuse.
The Commission responded to these changing markets in a variety of
ways. Its Office of the Chief Economist (``OCE'') conducted a study of
the relationship between the natural gas contracts that trade on the
New York Mercantile Exchange (``NYMEX''), a DCM, and the
InterContinental Exchange (``ICE''), an ECM. Concurrently, the
Commission's Division of Market Oversight issued a series of special
calls \5\ for information related to ICE's cleared natural gas swap
contracts that are cash-settled based on the settlement price of the
NYMEX physical delivery natural gas contract. Following the OCE study
and the special calls, the Commission held a public hearing in
September 2007 to further explore a number of issues, including the
adequacy of the CFMA's regulatory approach; the similarities and
differences between ECMs and DCMs; the associated regulatory risks of
each market category; the types of regulatory changes that might be
appropriate to address identified risks; and the impact that regulatory
or legislative changes might have on the U.S. futures industry and the
global competitiveness of the U.S. financial industry. Based on
information developed as a result of these efforts, the Commission
published its October 2007 ``Report on the Oversight of Trading on
Regulated Futures Exchanges and Exempt Commercial Markets'' (``ECM
Report''). The ECM Report, which was provided to the Commission's
Congressional oversight committees, recommended, among other things,
that the CEA be amended to grant the CFTC additional authority over ECM
contracts serving a significant price discovery function and that
certain self-regulatory responsibilities be assigned to ECMs offering
such contracts.
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\5\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.
2(h)(5)(B)(iii), requires that an ECM relying on the exemption
provided in section 2(h)(3) must, upon a special call by the
Commission, provide such information related to its business as the
Commission may determine appropriate to enforce the antifraud
provisions of the Act, to evaluate a systemic market event, or to
obtain information requested by a Federal financial regulatory
authority in connection with its regulatory or supervisory
responsibilities.
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The Reauthorization Act's provisions regarding ECMs were based
largely on the Commission's recommendations for improving oversight of
ECMs whose contracts perform a significant price discovery function.
The legislation significantly expanded the CFTC's regulatory authority
over ECMs by adding a new section 2(h)(7) to the CEA establishing
criteria for the Commission to consider in determining whether a
particular ECM contract performs a significant price discovery function
and providing for greater regulation of SPDCs traded on ECMs. In
addition to extending the CFTC's regulatory oversight to the trading of
SPDCs, the Reauthorization Act requires ECMs to adopt position limit
and accountability level provisions for SPDCs; authorizes the
Commission to require the reporting of large trader positions in SPDCs;
and establishes core principles governing ECMs with SPDCs. The core
principles applicable to ECMs with SPDCs are derived from selected DCM
core principles and designation criteria set forth in the CEA, and
Congress intended that they be construed in a like manner.\6\
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\6\ Joint Explanatory Statement of the Committee of Conference,
H.R. Rep. No. 110-627, 110 Cong., 2d Sess. at 985 (2008)
(``Conference Committee Report''). The core principles and
designation criteria for DCMs are contained in section 5 of the CEA,
7 U.S.C. 7.
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The legislation directed the Commission to issue rules implementing
the provisions of new section 2(h)(7) and to include in such rules the
conditions under which an ECM will have the responsibility to notify
the Commission that an agreement, contract or transaction conducted in
reliance on section 2(h)(3) of the Act may perform a significant price
discovery function. The Reauthorization Act mandated that the
``significant price discovery standards'' rules be proposed not later
than 180 days after the date of enactment of the Reauthorization Act,
and that the Commission issue final rules not later than 270 days after
the date of implementation of that Act.\7\
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\7\ Public Law 110-246, sec. 13204(b)(1).
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Consistent with Congress' directive, the Commission on December 12,
2008 issued a notice of proposed rulemaking (``NPRM'' or ``proposing
release'') to substantially amend rule 36.3 \8\ of the Commission's
rules applicable to ECMs to implement the broadened regulatory
authority conferred by section 2(h)(7) of the CEA over ECMs with SPDCs.
In addition, the proposed rules implicated parts 16 through 21 (market,
transaction and large trader reporting rules) and part 40 (provisions
common to contract markets, derivatives transaction execution
facilities and derivatives clearing organizations). In promulgating
these final rules, the Commission recognizes that these are rapidly
evolving markets. We are mindful that, as we carry out Congressional
directives in the present context, we continue to maintain careful
scrutiny of the marketplace with regard to new products and trading
platforms in the future. As markets evolve, we acknowledge our
obligation to continue to adapt our regulatory oversight to protect
consumers and ensure the integrity of the core risk management and
price discovery functions of our markets.
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\8\ Part 36 of the Commission's rules contains the provisions
that apply to exempt markets regardless of whether the markets are a
significant source for price discovery. Rule 36.3 imposes a number
of requirements on ECMs, including required notification of intent
to rely on the exemption in section 2(h)(3) of the Act; initial and
ongoing information submission requirements; prohibited
representations; required price discovery notification; and price
dissemination requirements.
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B. The Proposed Rules
1. Part 36: Exempt Markets--Rules Applicable to ECMs
The Commission proposed to amend rule 36.3(b) to: (1) Specify the
information submission requirements, both initially and on an ongoing
basis, for all ECMs and also for ECMs with respect to agreements,
contracts or transactions that have not been determined to perform a
significant price discovery function; and (2) to enumerate separately
the enhanced information submission obligations for ECMs with SPDCs.
Consistent with the Reauthorization Act's directive that the
Commission's rulemaking address specific statutory criteria for
identifying a SPDC and the conditions under which an ECM will be
responsible for notifying the Commission of a possible SPDC, proposed
rule 36.3(c) addressed (1) The criteria on which the Commission will
rely in making a determination that an agreement, contract or
transaction performs a significant price discovery function; (2) the
factors that will trigger an ECM's obligation to notify the Commission
of a possible SPDC; (3) the procedures the Commission will follow in
reaching its determination whether a contract is a SPDC; and (4) the
procedures, standards and timetables by which an ECM with a SPDC must
demonstrate compliance with the core principles. Because the criteria
mandated by Congress for determining the existence of a SPDC do not
lend themselves to bright-line rules or formulas, proposed Appendix A
to Part 36 explains how the Commission anticipates applying the
criteria, on a case-by-case basis, to the facts and circumstances under
consideration.
Consistent with the Reauthorization Act, the CFTC's proposed rules
required ECMs with SPDCs to establish a self-regulatory regime with
respect to those contracts. Those responsibilities generally are set
forth in nine core principles, largely derived from counterpart
provisions for DCMs, including core principles that require the ECM to
implement an acceptable trade monitoring program; to develop an audit
trail in order to detect and deter market abuses; to adopt position
limitations or position accountability levels for speculators in SPDCs;
to develop and implement procedures for the exercise of emergency
authority; to make public daily trading information; to develop a
program to monitor compliance with the ECM's rules; to establish rules
to minimize conflicts of interest in the decision-making process of the
ECM; and to avoid taking any actions or adopting any rules that result
in any unreasonable restraints of trade or impose any material
anticompetitive burden on trading on the ECM. Proposed Appendix B to
Part 36 offers guidance and non-exclusive safe harbors for compliance
with the core principles. In proposing this guidance, the Commission
made every effort to construe the ECM core principles in a like manner
as it construes the DCM core principles.
Parts 15-21: Market, Transaction and Large Trader Reporting Rules
Collectively, the Commission's market, transaction, and large
trader reporting rules (``reporting rules'') effectuate the
Commission's market and financial surveillance programs. The market
surveillance program analyzes market data to detect and prevent market
manipulation and disruptions and to enforce speculative position
limits. The financial surveillance program uses market data to measure
the financial and systemic risks that large contract positions may pose
to Commission registrants and clearing organizations. The
Reauthorization Act authorized the Commission to establish a
comprehensive transaction and position reporting system for SPDCs when
it defined ECMs with SPDCs as registered entities and made certain
provisions of the Act directly applicable to SPDCs.\9\ In addition to
proposing technical and conforming amendments to parts 15 through 21 of
its rules, the Commission sought in the proposed rules to extend to
SPDCs the reporting rules that currently apply to DCMs and DTEFs by
defining clearing member and clearing organization and amending the
definition of reporting market in Commission rule 15.00 to apply to
positions in, and the trading and clearing of, SPDCs.\10\
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\9\ Specifically, section 4a of the CEA permits the Commission
to set, approve exchange-set, and enforce speculative position
limits. 7 U.S.C. 6a. Section 4c(b) of the Act, 7 U.S.C. 6c(b), gives
the Commission plenary authority to establish rules pursuant to
which the terms and conditions on which commodity options
transactions may be conducted and provides the basis for the
Commission's authority to establish a large trader reporting system
for transactions on ECMs that involve commodity options. Section 4g
of the Act imposes reporting and recordkeeping obligations on
registered persons and requires them to file reports on positions
executed on any board of trade and in any SPDC traded or executed on
an ECM. 7 U.S.C. 6g. Finally, section 4i of the Act requires the
filing of such reports as the Commission may require when positions
made or obtained on DCMs, DTEFs or ECMs with respect to SPDCs equal
or exceed Commission-set levels. 7 U.S.C. 6i.
\10\ Consistent with ECM Core Principle IV's directive that ECMs
take into account contracts that are treated by DCOs as fungible
with a SPDC when establishing position limits or accountability
levels for SPDCs, in this section the term SPDC will include any
contracts that are fungible and cleared by DCOs together with SPDCs.
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Specifically, the NPRM proposed that ECMs be required to provide
clearing member reports for SPDCs pursuant to rule16.00. Under proposed
rule 16.01, ECMs, like DCMs, would be required to
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submit to the Commission and publicly disseminate option deltas and
aggregated trading data on a daily basis.\11\ ECM clearing members that
clear SPDCs would, regardless of their registration status with the
Commission or their status as domestic or foreign persons, be required
to file reports for large SPDC positions when the positions meet or
exceed the contract reporting levels of Commission rule 15.03(b). In
addition, the NPRM proposed to require clearing members to identify the
owners of reportable SPDC positions on Form 102.\12\ Under the proposed
rules, SPDC traders likewise would be subject to the special call
provisions of the Commission's part 18 rules for reportable positions.
Furthermore, the Commission proposed that clearing members clearing
SPDCs, SPDC traders, and ECMs listing SPDCs would each be subject to
the special call provisions of the part 21 rules.\13\
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\11\ The NPRM also proposed to uniformly apply the public
dissemination requirement of Commission rule 16.01(e) to DCMs,
DTEFs, and ECMs with SPDCs.
\12\ The Commission's Division of Market Oversight (``DMO'')
increasingly has been charged with administering the procedural
requirements of the reporting rules. Accordingly, the Commission
proposed to shift the delegation of the Commission's authority to
determine the format of reports and the manner of reporting under
parts 15 to 21 of the Commission's rules from the Executive Director
to the Director of DMO.
\13\ Part 21 of the Commission's rules establishes the
Commission's ability to request information on persons that exercise
trading control over commodity futures and options accounts along
with additional account-related information for positions that may
or may not be reportable under Commission rule 15.03(b). The final
rules amend paragraphs (i)(1) and (i)(2) of rule 21.02 to ensure
that any special call to an intermediary for information that
classifies a trader as commercial or noncommercial, and the
positions of the trader as speculative, spread positions, or
positions held to hedge commercial risks, can be made with respect
to both commodity futures and commodity options contracts. 17 CFR
21.02)(i).
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In order to communicate effectively with foreign clearing members
and foreign traders and to properly administer the proposed special
call provisions of parts 17, 18 and 21 of the Commission's rules, the
Commission also proposed to amend the designation of agent provisions
of rule 15.05 to require ECMs that list SPDCs to act as the agent of
foreign clearing members and foreign traders for the purpose of
accepting service or delivery of any communication, including special
calls, issued by the Commission to a foreign clearing member or trader.
The Commission also proposed new rule 16.02 to require all reporting
markets, including ECMs listing SPDCs, to report on a daily basis trade
data and related order information for each transaction that is
executed on the market,\14\ and to specify the information to be
included in such reports.\15\ In this regard, while the Commission
proposed amendments to its part 17 rules dealing with reportable
positions, it did not extend those proposals to SPDC transactions that
are not cleared for the simple reason that no clearing members are
involved in clearing such transactions. For purposes of enforcing SPDC
position limits and monitoring large SPDC positions, the Commission
anticipated using proposed rule 16.02 to access transaction information
and trader identification to enforce position limits and monitor large
positions for market and financial surveillance purposes.
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\14\ For some time, DCMs consistently have provided transaction
level data on request by the Commission pursuant to rule 38.5(a).
Proposed rule 16.02 would make such submissions mandatory.
\15\ Such reports would include time and sales data, reference
files and other information as the Commission or its designee may
request; upon request, this information could be accompanied by data
that identifies or facilitates the identification of each trader for
each transaction or order included in a submitted report. The
Commission noted in the NPRM that recent acquisitions of technology
have enabled the agency to more effectively integrate trade data and
related orders into its trade practice, market, and financial
surveillance programs. Accordingly, new rule 16.02 would make the
submission of such information mandatory.
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Part 40: Provisions Common to Registered Entities
The Reauthorization Act amended the definition of ``registered
entity'' in section 1a(29) of the CEA to include ECMs with SPDCs.
Because certain provisions in part 40 of the Commission's rules apply
to registered entities--and, accordingly, to ECMs with SPDCs--the
Commission proposed to amend part 40 to specify the provisions which
would be applicable to all registered entities.\16\ The Commission
emphasized in its NPRM that although not all provisions of part 40 will
be applicable to ECMs with SPDCs, even sections that are not being
amended in this rulemaking may be de facto amended by virtue of the
fact that the term ``registered entity'' now includes ECMs with SPDCs.
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\16\ In particular, the proposed amendments to part 40 made
rules 40.1, 40.2 and 40.5-40.8 and Appendix D specifically
applicable to ECMs with SPDCs.
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C. Overview of Comments Received \17\
General. The Commission received a total of eleven comments from a
range of commenters, including a government agency,\18\ several trade
associations,\19\ two ECMs,\20\ an interdealer broker in over-the-
counter (``OTC'') energy markets,\21\ and a DCM.\22\ Most commenters
expressed support for the proposed rules and several particularly
commended the Commission's adherence to the letter and spirit of the
Reauthorization Act. Several commenters offered specific
recommendations for clarification or modification of certain
provisions. These comments will be addressed more fully below. The
Commission notes that some commenters requested that particular rules
and core principle guidance proposed for ECMs be modified to mirror
analogous provisions for DCMs. In this regard, the Commission reminds
interested parties that the Reauthorization Act did not mandate
identical rules for ECMs and DCMs, and the Commission has attempted to
craft rules tailored to the special concerns raised by SPDCs. In that
same vein, interested parties should bear in mind that Commission
acceptable practices for all core principles do not denote requirements
under the Act; rather, they offer safe harbors. Registered entities
always have the option of crafting alternate means of complying with
core principles than those set forth in the Commission's acceptable
practices.
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\17\ In this NPRM, comment letters (``CL'') are referenced by
the letter's author and/or file number and page. These letters are
available through the Commission's Internet Web site: http://
www.cftc.gov/lawandregulation/federalregister/
federalregistercomments/2008/08-012.html.
\18\ The Federal Energy Regulatory Commission (``FERC'') (CL 05)
responded to the CFTC's request for comments but did not comment on
the particulars of the proposed rules.
\19\ American Feed Industry Association (``AFIA'') (CL 04)
(representing animal feed interests); International Swaps and
Derivatives Association, Inc. (``ISDA'') (CL 06) (representing
participants in the privately negotiated derivatives industry);
American Public Gas Association (``APGA'') (CL 07) (the national
association for publicly-owned natural gas distribution systems);
Society of Independent Gasoline Marketers of America (``SIGMA'') (CL
08) (a national trade association representing independent chain
retailers and marketers of motor fuel); Air Transport Association of
America, Inc. (``ATA'') (CL 09) (airline trade association); Managed
Funds Association (``MFA'') (CL 10) (representing the global
alternative investment community).
\20\ HoustonStreet Exchange (CL 01); InterContinental Exchange,
Inc. (``ICE'') (CL 03).
\21\ OTC Global Holdings, Inc. (CL 11) OTC Global Holdings has
submitted notification to the Commission of its intent to operate a
market pursuant to the exemption found in section 2(h)(3) of the
Act.
\22\ CME Group (CL 02).
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Core Principle IV. Several commenters expressed substantive
concerns with respect to the Commission's proposed guidance and
acceptable practices for compliance with Core Principle IV (Position
Limitations or Accountability). Specifically, these commenters objected
to the Commission's proposal that ECM market surveillance programs
account
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for uncleared transactions through volume accountability levels (based
on a measure of net uncleared trading calculated by netting each
trader's long and short uncleared transactions against the same
counterparty). As more fully discussed below, the Commission believes
the issues and recommendations raised by these commenters merit further
attention and study. The Commission is mindful, however, that the time
constraints imposed by the Reauthorization Act for issuing final rules
implementing section 2(h)(7) do not permit the level of study necessary
to properly address and resolve these issues.\23\ Moreover, even if the
Commission was prepared immediately to adopt some or all of the
suggested changes, they reflect a substantial departure from the
proposed guidance that might warrant re-proposal under the
Administrative Procedure Act.\24\
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\23\ Congress has directed that the Commission issue proposed
rules implementing section 2(h)(7) of the CEA not later than 180
days after the date of enactment of the Reauthorization Act (June
18, 2008), and that the Commission issue final rules no later than
270 days after the date of enactment. Public Law 110-246 at section
13204.
\24\ 5 U.S.C. 553.
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For these reasons, the Commission, in an abundance of caution, has
determined not to make final its Core Principle IV proposed guidance
and acceptable practices relating to uncleared trades pending a full
and complete evaluation of the issues raised in these comments.
Accordingly, upon publication of this notice of final rulemaking, the
Commission intends to immediately examine these issues and to issue a
notice of proposed rulemaking that specifically addresses appropriate
guidance and acceptable practices for uncleared trades on ECMs.
Like all core principles, Core Principle IV is statutory, and the
Commission's decision not to provide particular guidance or safe
harbors with respect to ECM uncleared trades at this time does not
diminish an ECM's obligation to comply with the core principle itself.
In that regard, the Commission reminds interested parties that section
2(h)(7)(C)(ii) of the CEA gives an electronic trading facility explicit
discretion to take into account differences between cleared and
uncleared SPDCs in applying the position limits and accountability core
principle.\25\ Likewise, the Commission will take these differences
into account when reviewing an ECM's implementation of a core
principle, as directed by section 2(h)(7)(D)(i).
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\25\ See also Conference Committee Report at 985-86.
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II. The Final Rules
A. Part 36--Exempt Markets
Part 36 of the Commission's rules governs both exempt boards of
trade and ECMs, regardless of whether any individual contract traded
thereon is a significant source for price discovery. As described
infra, Rule 36.3 more particularly imposes a number of requirements and
restrictions on ECMs, including notification of the ECM's intent to
rely on the section 2(h)(3) exemption; initial and ongoing information
submission requirements; prohibited representations; price discovery
notification; and price dissemination requirements. The Commission is
adopting as proposed the provisions of Rule 36.3(b) that separately
specify the information submission requirements, both initially and on
an ongoing basis, for all ECMs and for ECMs with respect to agreements,
contracts or transactions that have not been determined to perform a
significant price discovery function.
The Commission is adopting as proposed the substance of that
provision's enhanced reporting requirements for ECMs with SPDCs.
However, the final rules will correct an error in numbering in rule
36.3(b)(2). As proposed, rule 36.3(b)(2)(i) provided that ECMs, with
respect to contracts that have not been determined to be SPDCs, must
identify to the CFTC those contracts that averaged five trades per day
or more over the most recent calendar quarter, and for each such
contract, either: pursuant to subparagraph (A), submit a weekly report
to the CFTC showing specific information; or, pursuant to subparagraph
(B)(1), provide the Commission with electronic access sufficient to
allow it to compile the same information. The rule then also required
in subparagraph (B)(2) through (B)(4) that the ECM maintain and provide
the CFTC with other records.\26\ These last three requirements were
incorrectly numbered. Because they apply regardless of whether the ECM
has elected the weekly reporting path of rule 36.3(b)(2)(i)(A) or to
provide access to the CFTC pursuant to rule 36.3(b)(2)(i)(B), these
requirements properly are numbered as 36.3(b)(2)(ii)-(iv) rather than
as 36.3(b)(2)(i)(B)(2)-(4).\27\
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\26\ Subparagraph (B)(2) required that the ECM maintain a record
of allegations and complaints; subparagraph (B)(3) direct the ECM to
provide the CFTC with a copy of the record of each complaint
relating to violations of the CEA; pursuant to subparagraph (B)(4)
the ECM must provide the Commission with a quarterly list of
transactions executed in reliance on the section 2(h)(3) exemption
and indicate the terms and conditions, average daily trading volume,
and most recent open interest figures for each such transaction.
\27\ To complete this technical correction, proposed rule
36.3(b)(2)(i)(B)(1) is properly numbered as 36.3(b)(2)(i)(B) in the
final rules.
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Proposed rule 36.3(c) and Appendix A to Part 36 set forth the
procedures and guidance, respectively, which the Commission will use in
determining whether an ECM agreement, contract or transaction is a
SPDC. The Commission is adopting, substantially as proposed, Appendix A
and its general guidance as to how the Commission expects flexibly to
apply the four criteria specified in section 2(h)(7) of the CEA for
determining a SPDC--price linkage, arbitrage, material price reference
and material liquidity. Although much of rule 36.3(c) and its SPDC-
determination procedures are being adopted as proposed, some provisions
have been modified in response to comments and some have been modified
to reflect technical and clarifying changes.
The Commission has made a technical correction to proposed new rule
36.3(c)(1)(i). This rule is intended to track the statutory language
added to the CEA by the Reauthorization Act as section 2(h)(7)(B)(i),
which provides that in determining a SPDC, the Commission shall
consider, as appropriate,
PRICE LINKAGE--The extent to which the agreement, contract, or
transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated
contract market or a derivatives transaction execution facility, or
a significant price discovery contract traded on an electronic
trading facility, to value a position, transfer or convert a
position, cash or financially settle a position, or close out a
position.
As proposed, section 36.3(c)(1)(i) inadvertently dropped a portion
of the statutory language. The final rules have been corrected to
reflect the complete statutory provision.
As proposed, rule 36.3(c)(3) provides that the Commission will
issue an order determining whether a contract is a SPDC after
consideration of all relevant information, including any ``data, views
and arguments'' submitted to the Commission in response to Federal
Register notification of the Commission's intent to so evaluate the
contract. The proposed rule did not include a timeframe for issuance of
such an order. CME Group suggests that the public interests underlying
the regulatory oversight requirements for
[[Page 12182]]
SPDCs dictate that such determinations be issued within a reasonable
timeframe following the close of the comment period for the Federal
Register notification.\28\ The Commission is committed to the prompt
and thorough processing of SPDC determinations and agrees, as CME Group
suggests, that absent special circumstances, its order generally should
issue within 60 days of the closing of the comment period. We are
aware, however, that the term ``special circumstances'' may take its
meaning from the particular context, including but not limited to the
volume of work before the agency and the complexity of the submission
under review, and we are reluctant to define those circumstances by
rule. The Commission instead has modified rule 36.3(c)(3) to specify
that the Commission shall promptly consider relevant information and
shall issue an order explaining its determination within a reasonable
period of time after the close of the comment period.\29\
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\28\ CME Group CL 02 at 7-8.
\29\ The ATA urged the Commission to revise proposed rule
36.3(c)(3) ``to provide 14 calendar days notice, not 30, of its
intention to designate a contract as an SPDC.'' CL 09 at 5. The
Commission wishes to clarify that rule 36.3(c)(3) establishes a 30-
day notice and comment period following the Commission's notice of
its intention to undertake a determination whether a particular
contract is a SPDC. ATA further urges the Commission to specify that
it will issue a final determination no later than 14 days from the
end of the comment period. As discussed supra, while the Commission
is committed to reviewing potential SPDCs as expeditiously as
possible, in our view 14 days is inadequate to review and issue a
determination on any SPDC and in most cases would preclude an
adequate evaluation of complex matters.
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Proposed rule 36.3(c)(4) established the timetables for compliance
with the core principles by ECMs that have been determined to have a
SPDC, providing a 90-day grace period for an ECM's initial SPDC and a
15-day grace period for subsequently-identified SPDCs traded on the
same ECM. CME Group suggests that the passage of the Reauthorization
Act put ECMs on notice that one or more of their contracts may become a
SPDC at some future date; in its view, a 45-day grace period should be
sufficient for all ECMs. ATA also views a 90-day grace period as
excessive in light of ECMs' sophistication and suggests that ECMs can
demonstrate compliance with the core principles in 60 days. With due
regard for the market integrity interests associated with the core
principles, we disagree that all ECMs will be able, in every
circumstance, to demonstrate compliance with all the core principles
within 45 or 60 days. While larger, established ECMs may be prepared to
develop core principle compliance strategies in anticipation of a SPDC
determination, the grace period must also permit ECMs that are less
well-established sufficient time to develop and implement programs
responsive to the core principles. Accordingly, the Commission has
adopted as final the 90-day grace period for initial compliance with
the core principles.
Although ISDA found the 90-day time frame reasonable, noting that
it allows market participants to make necessary changes to their
trading system to ensure compliance with the core principles,\30\ it
objected to the 15-day grace period for subsequently-identified SPDCs
and urged the Commission to extend the timeframe in recognition of the
additional obligations compliance imposes and the likely system changes
required of ECMs.\31\ ICE noted that both the 90-day and 15-day grace
periods generally allow sufficient time for an ECM to comply with the
core principles, but warned that 15 calendar days may not be sufficient
time for clearing firms that outsource large trader reporting to meet
the reporting requirements. The Commission has considered these
suggestions and believes that 30 calendar days should be sufficient to
ensure that clearing firms can meet the reporting requirements and
avoid market disruptions. Rule 36.3(c)(4) has been modified accordingly
to grant a 30-day period for ECMs to come into core principle
compliance for their subsequent SPDCs. In addition to this change, the
Commission has determined to clarify rule 36.3(c)(4) by changing the
second sentence of this provision \32\ to read ``* * * one of the
electronic trading facility's agreements, contracts or transactions
performs a significant price discovery function* * *''
---------------------------------------------------------------------------
\30\ ISDA CL 06 at 3.
\31\ Id. ISDA's comment did not recommend a specific time
period.
\32\ As proposed, the relevant phrase reads as follows: ``* * *
the electronic trading facility's agreement, contract or transaction
performs a significant price discovery function* * *'' See 73 FR
75888 at 75911.
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In order to clarify its intent and eliminate a redundancy in
paragraph (B)(4) of Appendix A, the Commission is amending Appendix A
to part 36 as follows: Paragraph (B)(4) is deleted in its entirety as
repetitive of paragraph (B)(3). In paragraph (B)(3), the language
beginning with ``In combination with this volume level'' will become
new paragraph (B)(4).
B. Substantive Compliance With Core Principle IV: Guidance and
Acceptable Practices
Although comments addressing the nine ECM SPDC core principles
generally expressed satisfaction with the Commission's proposed
guidance and acceptable practices, the Commission's guidance for
substantive compliance with Core Principle IV--particularly with
respect to speculative position limits and the treatment of uncleared
contracts--was a cause for concern among several commenters. Their
comments are summarized below.
1. The Commission's authority with respect to uncleared trades. In
its comment letter, ISDA questioned the Commission's authority under
the Reauthorization Act to address limits for uncleared SPDC
transactions in its Core Principle IV acceptable practices.\33\ In
support, ISDA cites Core Principle IV's direction that ECMs take into
account positions in other ``agreements, contracts, and transactions
that are treated by a derivatives clearing organization, whether
registered or not registered, as fungible'' with a SPDC when
determining appropriate position limitations or accountability for the
SPDC.\34\ The Commission believes that Congress did not so limit the
Commission's authority with respect to uncleared SPDC transactions; on
the contrary, both the statutory language and the legislative history
make plain that Congress intended for new CEA section 2(h)(7) to apply
to all SPDCs, whether cleared or uncleared. The Conference Committee
report emphasizes that the legislation gives electronic trading
facilities ``the explicit discretion to take into account differences
between cleared and uncleared SPDCs in applying the position limits or
accountability core principle.'' \35\ And CEA section 2(h)(7)(D)
directs the Commission to ``take into consideration the differences''
between cleared and uncleared trades in reviewing an ECM's
implementation of the core principles. Under principles of statutory
construction, Congress must be presumed to have said what it meant.\36\
The Commission believes that the ECM SPDC Core Principle IV clause
cited by ISDA in support of its argument stands for a different
proposition altogether. Specifically, the clause pertains to
[[Page 12183]]
transactions in ``other agreements, contracts and transactions.''
Accordingly, Congress directed ECMs to include certain non-SPDC
transactions when applying position limitations and/or accountability
levels to a SPDC. So, for example, if another non-SPDC ECM contract or
even a contract executed off of a trading facility pursuant to CEA
Section 2(h)(1) is fungible and cleared together with a SPDC, the
subject ECM should take those non-SPDC positions ``into account'' when
administering the SPDC's position limit or accountability regime.
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\33\ ISDA CL 06 at 2.
\34\ Id.
\35\ Conference Committee Report at 985-86; Public Law 110-246
at 13201.
\36\ Where the plain language of a statute is clear, courts
generally will presume that Congress meant precisely what it said
absent a showing that ``as a matter of historical fact, Congress did
not mean what it appears to have said, or that, as a matter of logic
and statutory structure, it almost surely could not have meant it.''
Engine Mfrs. Ass'n v. EPA, 88 F.3d 1075, 1089 (D.C. Cir. 1996),
quoted in National Public Radio, Inc. et al. v. FCC, 254 F.3d 226,
230 (D.C. Cir. 2001).
---------------------------------------------------------------------------
2. Grace period for open positions. As proposed, the acceptable
practices for Core Principle IV permitted a grace period of 90 calendar
days from the ECM's implementation of speculative position limit rules
for traders to comply with those rules unless a hedge exemption is
granted by the ECM. MFA has recommended that the Commission, rather
than creating a new grace period applicable only to SPDCs, should rely
on the existing standards of section 4a(b)(2) of the CEA\37\ and the
standards applied to exchange-set speculative position limits under
rule 150.5(f).\38\ The Commission believes that this recommendation is
premised on a misunderstanding of the statutory and regulatory
structures governing exchange-set speculative position limits. As MFA
notes, section 4a(b)(2) applies to Commission-set speculation limits,
not exchange-set limits.\39\
---------------------------------------------------------------------------
\37\ 7 U.S.C. 6a(b)(2).
\38\ MFA CL 10 at 6.
\39\ Id.
---------------------------------------------------------------------------
Furthermore, Rule 150.5(f) no longer has direct application to DCM-
set position limits. The statutory authority governing DCM-set limits
is found in CEA section 5(d)(5)-- DCM Core Principle 5.\40\ That core
principle does not contain any aspect of the exemptive language found
in either CEA section 4a or Rule 150.5(f). Moreover, it should be noted
that the part 38 rules explicitly exempt agreements, contracts or
transactions traded on a DCM from all Commission rules other than those
specifically referenced in Rule 38.2. That provision did not retain
Rule 150.5(f).\41\ Further, although the acceptable practices for Core
Principle 5 (which are found in Appendix B to part 38) contain many of
rule 150.5's provisions, they do not specify the rule 150.5(f) good
faith exemption. Accordingly, the part 150 rules essentially constitute
guidance for DCMs administering position limit regimes, Commission
staff in overseeing such regimes has not required that position limits
include an exemption for positions acquired in good faith.
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\40\ ``(5) Position Limitations or Accountability.--To reduce
the potential threat of market manipulation or congestion,
especially during trading in the delivery month, the board of trade
shall adopt position limitations or position accountability for
speculators, where necessary and appropriate.'' 7 U.S.C. 7(d)(5).
\41\ 17 CFR 38.2.
---------------------------------------------------------------------------
The Reauthorization Act established Core Principle IV as part of
new CEA section 2(h)(7) to require the establishment of position
limitations or accountability levels for SPDCs listed on ECMs. As with
DCM Core Principle 5, ECM Core Principle IV does not contain the
exemptive provision for positions established in good faith--nor do its
acceptable practices rely for authority on section 4a of the CEA. For
this reason, the Commission was not obliged to adopt such a good faith
exemption.\42\ In the Commission's view, the primary goal for an ECM
with a SPDC should be to ensure that large positions not be disruptive
to the market. Indeed, a sudden decrease in a position to meet an ECM's
newly-adopted position limit could itself be disruptive. The
Commission's proposed acceptable practice was crafted to permit market
participants to make any necessary adjustments to their positions in an
orderly fashion, thus reducing market disruptions and avoiding, as much
as possible, an unfair impact on position holders. For the reasons
discussed in these sections, the Commission has determined to adopt the
acceptable practice as proposed (except with respect to uncleared
trades, as discussed infra), and reminds interested parties that
acceptable practices serve as a safe harbor and do not represent the
only means of compliance with the core principles.
---------------------------------------------------------------------------
\42\ In part for the reasons discussed in this section, the
Commission expects in the near future to revisit and clarify Core
Principle 5 for DCMs.
---------------------------------------------------------------------------
3. Position Accountability
MFA also encourages the Commission to bring its Core Principle IV
acceptable practices with respect to position accountability into
closer alignment with its acceptable practices for DCMs. Although
perfect symmetry between the DCM and ECM core principles and acceptable
practices was not mandated by the Reauthorization Act and is not a
primary goal of this rulemaking, it is the Commission's view that its
expectations for DCMs and ECMs in this regard are not significantly
different. MFA argues that ``DCMs are not mandated to conduct an
inquiry in response to every breach of a position accountability level.
Rather, DCMs have the discretion to determine whether to open an
inquiry in particular cases.'' \43\ So, too, do ECMs under the Core
Principle IV acceptable practices.\44\ Unlike position limits,
accountability levels are not limitations on position sizes, as traders
are permitted to take positions in excess of the established
accountability levels. ECMs are obliged to monitor trading in their
markets and to discourage manipulative activity in the spot month as
well as in back months; the purpose of accountability levels is to
provide the ECM with additional information and authority to address
positions that threaten to create disorderly trading or market abuses.
For positions that exceed a position accountability level, appropriate
action by the ECM may be dictated by a number of factors, including
characteristics of the market and the size of the position relative to
the market. For smaller positions that exceed the accountability level,
the ECM may find that placing such positions on a ``close watch'' is
appropriate. For larger positions, depending on the potential threat to
the market, it may be appropriate for the ECM to request that the
trader not further increase (or even reduce) a position. Market
liquidity also should be considered when monitoring traders with
positions above the accountability level; an ECM may find it
appropriate to more aggressively limit positions in markets that are
relatively illiquid. In any event, ECMs are reminded that the
acceptable practices serve as safe harbors; alternative methods to
monitor trading may be sufficient.
---------------------------------------------------------------------------
\43\ MFA CL 10 at 4.
\44\ MFA points to the directive in the Core Principle IV
acceptable practices that an ECM ``should initiate'' an inquiry once
a trader exceeds a position accountability level as an indication
that action is mandated in every case. The Commission does not view
this language as a mandate; as noted above, acceptable practices
serve as safe harbors and do not represent the only means of
compliance with the core principles.
---------------------------------------------------------------------------
Also in connection with the ECM's monitoring of positions, the
Commission has considered MFA's concern that the term ``investigation''
may connote a level of wrongdoing which, in turn, might inadvertently
render a commodity pool ineligible to receive investor funds\45\ or
otherwise have an adverse effect on a trader's business. Although the
Commission believes such a misimpression is unlikely, we have modified
the acceptable practice to replace the word ``investigation'' with
``inquiry.''
---------------------------------------------------------------------------
\45\ MFA CL 10 at 4.
---------------------------------------------------------------------------
With regard to establishing position accountability levels in non-
spot months and all months combined, MFA questioned why ECMs are given
specific guidance--that is, the ``10% of open
[[Page 12184]]
interest'' standard--while DCMs are free to determine their own
methodology.\46\ Again, the Commission wishes to emphasize that its
guidance for ECMs need not follow precisely the guidance it has
offered--or not offered--for DCMs. The Commission believes it is sound
practice for DCMs and ECMs to adopt non-spot month and all-months-
combined position accountability levels or position limits and believes
the specific guidance offered in this acceptable practice will be
beneficial to ECMs wishing to take advantage of the safe harbor.
Moreover, the Commission intends shortly to revisit DCM Core Principle
5 with a view to providing more specific guidance with respect to non-
spot month and all-months-combined position accountability levels.
Finally, the Commission wishes to remind interested parties that the
``10% of open interest'' standard for determining position
accountability levels applies to unique SPDCs (i.e., cleared ECM
contracts that are determined to be SPDCs based on material price
reference grounds, rather than on the basis of economic equivalence
\47\ with another contract through a price linkage or arbitrage
relationship). The acceptable practices for non-unique, economically-
equivalent SPDCs provide that the ECM may adopt the accountability
levels adopted by the DCM for the underlying contract.\48\ As noted,
the Commission expects to further consider the treatment of uncleared
trades and anticipates proposing rule amendments as well as guidance
and acceptable practices in the near future.
Speculative Position Limits: Accountability Levels for Uncleared
Trades.
---------------------------------------------------------------------------
\46\ Id. at 4-5.
\47\ With regard to ICE and ISDA's concern that economic
equivalence is subjective (ICE CL 03 at 5; ISDA CL 06 at 2-3); the
Commission believes the concept of economic equivalence is
relatively straightforward. Essentially, the concept is designed to
capture SPDCs that replicate or serve as a close substitute for a
corresponding DCM, DTEF or second ECM SPDC contract. In this regard,
any SPDC that is cash settled based on another contract's settlement
price will be considered economically equivalent, assuming
sufficient volume. In addition, SPDCs that can be used to arbitrage
price discrepancies may be considered economically equivalent to DCM
contracts. For arbitragable contracts to be considered economically
equivalent, both the prices and the contract terms would have to be
highly correlated. As part of its determination whether a particular
contract is an SPDC, the Commission will indicate whether it
considers the SPDC economically equivalent to another contract.
\48\ ICE and ISDA warned that requiring an ECM to adopt a DCM's
position limits for its economically-equivalent SPDCs may have
anticompetitive implications for trading on an ECM (ICE CL 03 at 6;
ISDA CL 06 at 3): a DCM could set an artificially low position limit
for its own contract in order to squeeze out an ECM. The Commission
does not believe this is a likely consequence of its acceptable
practice. First, assuming that the DCM contract is the dominant
market, setting the spot-month limit at an extraordinarily low level
would limit trading in its own contract, which would be self-
defeating. Secondly, the instant procedures are acceptable practices
that provide a safe harbor; they are not rules or requirements, and
they do not comprise all possible means of satisfying Core Principle
IV. If an ECM believes that a DCM is engaging in anticompetitive
behavior (which is itself the subject of a core principle for both
ECMs and DCMs), it should notify the Commission and should propose
alternative position limits and/or accountability levels that are
reasonable and based on economic analysis.
---------------------------------------------------------------------------
Both ISDA\49\ and ICE \50\ opined that requiring ECMs to adopt the
same speculative position limits as an ``unaffiliated'' DCM would be
anticompetitive since the DCM would have the authority to dictate the
ECM's position limits even where an ECM is the dominant, more liquid
market. CME Group and APGA suggest that the Commission should propose
comprehensive, industry-wide speculative position limits that would
apply to both cleared and uncleared transactions.\51\ Similarly, MFA
suggested that SPDCs should be incorporated into the existing
regulatory framework because a separate category for uncleared trades
could impede a trader's ability to reflect the true net economic
exposure of a position and could chill legitimate economic
activity.\52\
---------------------------------------------------------------------------
\49\ ISDA CL 06 at 3.
\50\ ICE CL 03 at 5-6.
\51\ CME Group CL 02 at 6; APGA CL 07 at 3-4.
\52\ MFA CL 10 at 6. AFIA requests that as part of the final
rule the Commission exercise its authority to remove the exemption
for position limits that has been given to Index Speculator Funds.
CL 04 at 2-3. The Commission appreciates AFIA's concern but notes
that such an action is beyond the scope of the instant rulemaking.
---------------------------------------------------------------------------
APGA supports the use of spot month speculative position limits as
an effective tool for addressing contracts on commodities--such as
natural gas--with constrained deliverable supplies.\53\ It urges,
however, that the Commission modify its proposed guidance such that an
ECM must account for positions that may be held on another registered
entity in economically-related SPDCs in setting such limits. Without
such a revision, APGA believes that traders will be able to amass a far
larger speculative position in the spot month by dividing its position
among several markets or market segments for SPDCs.\54\ Accordingly
APGA urges that the volume accountability level for uncleared contracts
should be included in calculating the size of a trader's position for
speculative position limits purposes. APGA expresses similar concerns
with respect to the Commission's proposal in the Core Principle IV
guidance, and similarly suggests the establishment of separate
accountability levels for cleared and uncleared trades and a separate
volume accountability level in the spot month.\55\ CME Group agrees
that the proposed guidance should be reconsidered, and pointed out that
the disparate standards provided by the acceptable practices make it
possible for a trader to maintain double the position permitted for an
economically equivalent contract on a DCM. CME Group believes that
there should be one position limit and one associated set of
accountability levels for non-spot contracts that apply across all
activities for a SPDC, including cleared and uncleared trades.\56\
---------------------------------------------------------------------------
\53\ APGA CL 07 at 2-3. APGA also suggested that the Commission
set federal speculative limits for exempt commodities and that such
limits should be applied to a given trader's aggregate position in
economically-equivalent contracts across all registered entities.
While innovative and worthy of further consideration in the future,
the Commission believes these recommendations are beyond the scope
of the instant rulemaking.
\54\ APGA CL 07 at 2-3.
\55\ Id. at 5-6. APGA argues that the separate volume
accountability category potentially would enable speculative traders
to amass a larger position before prompting an inquiry by the ECM.
More critically, where there is a separate volume accountability
level in the spot-month, APGA stated that a trader can readily avoid
a spot month speculative position limit by holding a combination of
cleared and uncleared positions, even on the same market.
\56\ CME Group CL 02 at 6.
---------------------------------------------------------------------------
As noted above, these and other recommendations related to the
proposed guidance and acceptable practices for Core Principle IV with
respect to uncleared trades raise complex issues which, in the
Commission's view, warrant further serious consideration before a
decision can be made whether, and to what extent, they should be
implemented. For this reason, the Commission has determined not to make
final those aspects of the Core Principle IV guidance and acceptable
practices relating to uncleared trades pending additional study of
these comments and consultation with the commenters and others,
culminating in a subsequent rulemaking proposing guidance and
acceptable practices applicable to uncleared trades. As part of this
process, and in the course of formulating that proposed guidance, the
Commission will consider the issues raised in the comments received in
connection with the instant rulemaking.
C. Market, Transaction and Large Trader Reporting Rules
Reporting Rules. With the three substantive exceptions noted below,
the
[[Page 12185]]
Commission is promulgating the reporting rules as proposed.\57\ Five
commenters addressed the proposed reporting rules. ATA expresses
support for the extension of the reporting rules to SPDCs--
specifically, ATA endorses the application of the reporting
requirements to ECM clearing members that clear SPDCs, regardless of
their registration status with the Commission or their status as
foreign or domestic persons.\58\ ATA additionally expressed support for
the use of transaction and trader identification data that would be
collected under new rule 16.02 to monitor large SPDC positions. Four
commenters expressed general concerns or recommended the adoption of
additional or alternative amendments to the reporting rules.
---------------------------------------------------------------------------
\57\ 17 CFR parts 15 through 21.
\58\ ATA CL 09 at 8.
---------------------------------------------------------------------------
CME Group, for example, observes that while the acceptable
practices for Core Principle IV advise ECMs to establish an effective
program for enforcement of SPDC position limits that should include a
large trader reporting system to monitor and enforce daily compliance
with position limit rules, Appendix B to Part 36 does not establish
similar acceptable practices that tie large trader reporting
requirements to the daily monitoring of volume accountability levels
for uncleared SPDCs.\59\ As noted above, the Commission intends
expeditiously to propose rules and acceptable practices that will focus
on position limit and accountability rules for uncleared SPDCs. The
Commission intends to address CME Group's concern at that time.
---------------------------------------------------------------------------
\59\ CME Group CL 02 at 5.
---------------------------------------------------------------------------
HoustonStreet, an ECM, opined that voice brokers must be subject to
the same reporting requirements as ECMs to ensure a level playing field
in the OTC energy markets and to prevent market participants from
avoiding transparency and disclosure obligations.\60\ The Commission
does not have authority under the CEA to directly extend the reporting
rules to voice-brokered transactions which are not entered into in
reliance on a section 2(h)(3) exemption and are not otherwise fungible
with SPDCs for clearing purposes. Although the Commission does have the
authority to require the reporting of all OTC and cash market positions
(including voice-brokered transactions) under section 4i of the Act
when traders' positions in contracts executed on or subject to the
rules of a registered entity exceeds fixed thresholds, such an
extension of the reporting rules is beyond the scope of this
rulemaking.\61\
---------------------------------------------------------------------------
\60\ HoustonStreet, CL 01 at 1.
\61\ A routine trader reporting requirement, including the
routine reporting of OTC positions, is not a current requirement for
any contract traded on or subject to the rules of a DCM.
---------------------------------------------------------------------------
ISDA comments that the reporting rules' references to clearing
members ``carrying'' large positions may be inappropriate in the
context of transactions that are executed on ECMs, which by definition
are principal-to-principal markets that do not permit some forms of
intermediation.\62\ With respect to ECMs, the Commission reiterates
that the large trader reporting requirements of part 17 place the
burden of routine position reporting on clearing members that clear
positions for market participants or clear proprietary transactions.
The term ``carry'' is used in the reporting rules to refer to and
encompass both positions that are cleared for market positions and
those that are cleared for the benefit of proprietary accounts. In
either instance, the reporting rules view the clearing member to be
carrying positions that, when in excess of the levels delineated in
rule 15.03, would be reportable as part of a special account under part
17 of the Commission's rules. The continued use of the term ``carry''
in the reporting rules is consistent with the nature of ECM
transactions. In coming to this determination, the Commission
understands that clearing members that clear transactions for ECM
market participants, although not executing SPDC or SPDC-fungible
transactions on behalf of market participants, are in part providing
clearing intermediation and taking on certain responsibilities that may
be associated with executing brokers. In addition, the reporting rules
generally need a working vocabulary that is flexible enough to cover
transactions that are executed on disparate market structures and
subject to different clearing methods. Because the reporting rules
heretofore have not been applied to ECM transactions, the Commission
will be mindful of the potential for ambiguities in the application of
the rules to SPDCs and SPDC-fungible transactions, will monitor for the
specific concerns raised by ISDA, and will implement appropriate
amendments should they be required.
---------------------------------------------------------------------------
\62\ ISDA CL 06 at 3-4.
---------------------------------------------------------------------------
APGA raises a number of concerns and offered several
recommendations. APGA noted that as proposed, the reporting rules would
not routinely provide information on a SPDC trader's large uncleared
positions and thus would leave a gap in the Commission's ability to
collect necessary trader and market data. APGA initially notes that the
transaction reporting requirements of new rule 16.02, which the
Commission intends to use in part for market surveillance purposes, may
not significantly improve the Commission's surveillance capability
because of the possible inability to link the transaction-based
information collected under the rule with a particular trader.\63\ The
language of new rule 16.02 requires all reporting markets, including
ECMs with SPDCs, to report trade data and related order information for
each transaction executed on the market, and upon request to accompany
such data with information that identifies or facilitates the
identification of each trader for each reported transaction. Since rule
16.02 only extends the identification requirement to markets that
independently maintain such data, APGA is concerned that unless ECMs
are explicitly required to maintain identifying information, the
Commission will be unable to obtain the data it needs to construct an
accurate picture of a trader's large positions in SPDCs.
---------------------------------------------------------------------------
\63\ APGA CL 07 at 7-8.
---------------------------------------------------------------------------
Section 2(h)(5)(B)(ii)(I) of the Act requires all ECMs to maintain
current records that include the name and address of each participant
that is authorized to enter into transactions on the facility in
reliance on section 2(h)(3) of the Act. In addition, final rule
36.3(b)(1) mandates that ECMs demonstrate that they require each
authorized market participant to be an eligible commercial entity and
that all contracts will be entered into solely on a principal-to-
principal basis. The rule also requires that ECMs have in place a
program to routinely monitor participants' compliance with these
requirements. The Commission believes that the nature of the section
2(h)(3) qualified exemption itself, along with the above-mentioned
statutory and regulatory requirements, mandates that ECMs know the
identity of each trader for each transaction effected by such trader on
or subject to the rules of the electronic trading facility regardless
of whether such transactions are subject to centralized clearing or
settled bilaterally by the executing traders. New rule 16.02 applies to
all reporting markets, including DCMs. DCMs do not, as a matter of
routine practice, collect detailed trader identifying data.\64\
[[Page 12186]]
Accordingly, rule 16.02 has been drafted to take into consideration
current DCM practice while permitting the Commission to collect
detailed trader identification data--which ECMs are required to
maintain--from ECMs that are reporting markets.
---------------------------------------------------------------------------
\64\ Unlike SPDCs traded on ECMs, however, all contracts on DCMs
are funneled through clearing members that are subject to the large
trader reporting rules. Therefore, the Commission need not rely on
new rule 16.02 to conduct DCM market surveillance.
---------------------------------------------------------------------------
APGA also argues that even if the Commission did collect
identifying data under rule 16.02 from ECMs that are reporting markets,
it still would be unable to determine a particular trader's ability to
impact market prices without routinely obtaining information with
respect to uncleared contracts that are economically related to SPDCs
but effectuated off of a registered entity. Accordingly, APGA urges the
Commission to use its authority under section 4i of the Act to require
that large traders routinely report such transactions.\65\
Alternatively, APGA recommends that the Commission at a minimum adopt a
formal policy of aggressively using its special call authority under
rule 18.05 to request information with respect to such uncleared
transactions. APGA describes this policy as one that could require
staff to issue special calls for information regarding uncleared
positions for all traders that hold positions that are below
speculative position limits but which are large enough to be
significant.\66\
---------------------------------------------------------------------------
\65\ APGA CL 07 at 10.
\66\ Id. at 9-10.
---------------------------------------------------------------------------
As discussed above in connection with HoustonStreet's comment
letter, the Commission does have the authority, under section 4i of the
CEA and the special call provisions of part 18 of its rules, to require
traders that hold reportable SPDC positions to report their OTC
(cleared and uncleared) and cash market positions. An extension of
routine reporting requirements to such positions is, however, beyond
the scope of this rulemaking and at odds with a long-established large
trader reporting system that places the initial burden of reporting on
intermediaries that are typically regulated and well-versed in
complying with routine reporting requirements. Any routine reporting
requirement imposed on traders as a class would represent a substantial
departure from the Commission's current reporting system and would
necessitate careful study and consideration prior to a final
determination.
Lastly, APGA recommends that for the purpose of regulatory clarity
the Commission's special call authority under rule 18.05 be amended to
refer directly to traders that hold or control reportable futures or
option SPDC positions on ECMs operating under sections 2(h)(3) through
2(h)(5) of the Act.\67\ The language of rule 18.05 applies directly to
traders with reportable positions. A reportable position, in turn, is
defined in rule 15.00 to include commodity futures and options
positions on reporting markets--including, with respect to a contract
that the Commission determines to be a SPDC--that exceeds the reporting
levels established by Commission rule 15.03. Accordingly, the
Commission believes that the plain language of rule 18.05, as proposed,
is directly applicable to traders that hold or control reportable
futures or options SPDC positions on ECMs operating pursuant to
sections 2(h)(3) through 2(h)(5) of the Act.
---------------------------------------------------------------------------
\67\ Id.
---------------------------------------------------------------------------
Changes to the Final Rules. For the purpose of regulatory clarity
and to address generally the concerns raised by the commenters with
respect to the scope of the reporting rules, the Commission is defining
the terms futures and options contract solely for the purpose of the
reporting rules as contracts executed on or subject to the rules of a
reporting market, and all agreements, contracts and transactions that
are treated by DCOs as fungible with such contracts.\68\ The new
definition impacts all of the operative provisions of parts 15 through
21 and reinforces and clarifies the applicability of the reporting
rules, as proposed and adopted, to ECMs that list SPDCs, to SPDCs and
to transactions that are treated as fungible with SPDCs by DCOs.
---------------------------------------------------------------------------
\68\ As noted in text, the Commission is utilizing these
definitions solely to clarify the scope of its reporting rules. It
does not intend these definitions to have any bearing on determining
the boundaries of futures and options transactions over which it has
jurisdiction under the CEA.
---------------------------------------------------------------------------
Rule 16.02 as adopted substitutes for the phrase ``for each
transaction executed on the reporting market,'' the phrase ``for each
futures or options contract.'' The Commission recognizes that certain
transactions that are treated as fungible with SPDCs by DCOs may not
clearly be executed on a reporting market, and this change is intended
to address that point. In addition, final rule 15.05, which
independently defines futures and options transactions, differs from
the proposed rule in that it includes a conforming amendment to account
for defining the terms futures and options contract in final rule
15.00. Lastly, the final definition of reportable position in rule
15.00 and final rule 19.00 differ from the proposed definitions in that
they include nonsubstantive editorial amendments.
III. Related Matters
A. Cost Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act. Section 15(a) does not require the Commission to quantify the
costs and benefits of new regulations or to determine whether the
benefits of adopted rules outweigh their costs. Rather, section 15(a)
requires the Commission to consider the costs and benefits of the
subject rules. Section 15(a) further specifies that the costs and
benefits of the rules shall be evaluated in light of five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness and financial integrity of
the market for listed derivatives; (3) price discovery; (4) sound risk
management practices; and (5) other public interest considerations. The
Commission may, in its discretion, give greater weight to any one of
the five enumerated areas of concern and may, in its discretion,
determine that, notwithstanding its costs, a particular rule is
necessary and appropriate to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the Act.
The final rules implement the Reauthorization Act by establishing
an enhanced level of oversight of ECMs and ECM market participants. As
a result, in certain cases, it is more appropriate to attribute the
compliance costs imposed by the proposed rules to requirements that
directly arise from the provisions of the Reauthorization Act.
Under the final rules, all DCMs, DTEFs (unless the Commission
determines otherwise) and ECMs with SPDCs are required to provide daily
transaction and related data reports to the Commission under rule
16.02. The costs associated with the daily transaction and related data
reporting requirements of final rule 16.02, however, are ameliorated by
the fact that DCMs have voluntarily provided transactional data to the
Commission on a daily basis since the mid-1980s. The Commission
estimates that DCMs would account for the substantial majority of the
markets that likely would be required to file such reports under final
rule 16.02.
The final rules extend the reporting requirements of parts 15 to 21
of the Commission's rules to ECMs with SPDCs and to transactions in
SPDCs and SPDC-fungible contracts. The
[[Page 12187]]
requirements of the adopted rules are substantial, involve the
submission of daily reports, and impose burdens on market participants
that clear and trade SPDCs and SPDC-fungible contracts. More
specifically, the adopted rules require ECMs with SPDCs to provide
clearing member reports for SPDCs and SPDC-fungible contracts to the
Commission pursuant to CFTC rule 16.00. Final rule 16.01 requires ECMs
to submit to the Commission and publicly disseminate option deltas and
aggregated trading data on a daily basis for such transactions.
Pursuant to rule 17.00, ECM clearing members that clear SPDCs and SPDC-
fungible contracts are required to file reports with the Commission for
large positions when such positions meet or exceed the contract
reporting levels of rule 15.03. Under rule 17.01, clearing members also
must identify the owners of reportable positions on Form 102. SPDC
traders likewise are subject to the special call provisions of final
part 18 of the Commission's rules for reportable positions, and
clearing members, SPDC traders, and ECMs listing SPDCs are each subject
to the special call provisions of final part 21 of the Commission's
rules.
The costs associated with the requirements of the reporting rules
should be reduced in part by the substantial overlap between the
persons that already are subject to the reporting rules and the persons
that are subject to the reporting rules pursuant to the Commission's
final rules. For example, there is substantial overlap between traders
of the natural gas contract on ICE and traders of the same contract on
NYMEX. With respect to clearing members of ICE, for example, such
persons often are clearing members or affiliates of clearing members of
NYMEX.
The benefits of extending the reporting rules to SPDCs and SPDC-
fungible contracts are substantial. As an initial matter, it is
important to note that a significant focus of the Reauthorization Act
concerned amending the CEA with the specific intent of giving the CFTC
authority to extend its reporting rules to SPDC markets and market
participants. To the extent that contracts listed on ECMs serve a
significant price discovery function, the regulatory value of enhanced
oversight, through the application of the reporting rules to such
contracts, is elevated. The Commission analyzes the information
funneled to it by the requirements of the reporting rules to conduct
financial, market and trade practice surveillance. Without such
information, the ability of the Commission to discharge its regulatory
responsibilities--including the responsibilities to prevent market
manipulations and commodity price distortions and ensure the financial
integrity of the listed derivatives marketplace--would be compromised.
The bulk of the costs that are imposed by the requirements of final
rule 36.3 relate to significant and increased submission of information
requirements. For example, under final rule 36.3(b)(1), all ECMs are
required to file certain basic information (including contract terms
and conditions) with, and to make certain demonstrations related to
compliance with the terms of the CEA section 2(h)(3) exemption to, the
Commission. Final rule 36.3(b)(2) requires ECMs to submit transactional
information on a weekly basis to the Commission for certain traded
contracts that are not SPDCs and would not be subject to the terms of
final rule 16.02. Likewise, final rule 36.3(c)(4) imposes a substantial
cost on ECMs with SPDCs as a result of the information that such
markets are required to submit to the Commission.
In enacting the Reauthorization Act, Congress directed the
Commission to take an active role in determining whether contracts
listed by ECMs qualify as SPDCs. Accordingly, the Commission has
adopted enhanced informational requirements for ECMs with respect to
contracts that have not been identified as SPDCs specifically for the
purpose of acquiring the information that it needs to discharge this
newly-mandated responsibility. In addition, the substantial information
submission and demonstration requirements that are imposed on ECMs with
SPDCs have been adopted because ECMs with SPDCs, by statute, acquire
certain of the self-regulatory responsibilities of fully regulated
DCMs. The submission requirements associated with final rule 36.3(c)(4)
are therefore tailored to enable the Commission to ensure that ECMs
with SPDCs, as entities with the elevated status of a registered entity
under the Act, are in compliance with the statutory terms of the core
principles of section 2(h)(7)(C) of the Act. As with the final
reporting rules, the primary benefit to the public of final rule 36.3
is that its requirements enable the Commission to discharge its
statutory responsibility for monitoring for the presence of SPDCs and
extending its oversight to the trading of SPDCs.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of their rules on small
businesses. As noted in the proposing release, the requirements related
to the proposed amendments fall mainly on registered entities,
exchanges, futures commission merchants, clearing members, foreign
brokers and large traders. The Commission previously has determined
that exchanges, futures commission merchants and large traders are not
``small entities'' for purposes of the RFA.\69\ Similarly, clearing
members, foreign brokers and traders would be subject to the final
rules only if clearing, carrying or holding large positions.
Accordingly, the Acting Chairman, on behalf of the Commission,
certified in the NPRM pursuant to 5 U.S.C. 605(b) that the actions to
be taken herein will not have a significant economic impact on a
substantial number of small entities.\70\
---------------------------------------------------------------------------
\69\ 47 FR 18618 (April 30, 1982).
\70\ 73 FR 75888 at 75900.
---------------------------------------------------------------------------
C. Paperwork Reduction Act
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number. Final rule 16.02, the Commission's
reporting rules, and certain provisions of final rule 36.3 result in
information collection requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\71\ The Commission submitted the
proposing release along with supporting documentation to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve,
and with respect to rules 36.3 and 16.02 assign a new control number
for, the collections of information covered by the proposing release.
The information collection burdens created by the Commission's proposed
rules, which were discussed in detail in the proposing release, are
identical to the collective information collection burdens of the final
rules.
---------------------------------------------------------------------------
\71\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------
The Commission invited the public and other Federal agencies to
comment on any aspect of the information collection requirements
discussed above.\72\ Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicited comments in order to: (i) Evaluate whether the
proposed collections of information were necessary for the proper
performance of the functions of the Commission, including whether the
information will have practical utility; (ii) evaluate the accuracy of
the Commission's estimates of the burden of
[[Page 12188]]
the proposed collections of information; (iii) determine whether there
are ways to enhance the quality, utility and clarity of the information
to be collected; and (iv) minimize the burden of the collections of
information on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology. The Commission received no comment on its burden estimates
or on any other aspect of the information collection requirements
contained in its proposing release.
---------------------------------------------------------------------------
\72\ 73 FR 75888 at 75903.
---------------------------------------------------------------------------
The title for the collection of information under rule 36.3 is
``Regulation 36.3--Exempt Commercial Market Submission Requirements.''
OMB has approved and assigned OMB control number 3038-0060 to this
collection of information. The requirements of Commission rule 36.3
were covered previously by OMB control number 3038-0054 which applied
to both EBOTs and ECMs. As a result of the Reauthorization Act, EBOTs
and ECMs must comply with additional, divergent regulatory
requirements. Accordingly, the Commission sought a new and separate
control number for ECMs operating in compliance with the requirements
of rule 36.3. As a result of OMB's approval of a control number
specifically for ECMs, the Commission intends to submit the necessary
documentation to OMB to enable it to apply OMB control number 3038-0054
exclusively to EBOTs.
The final amendments to parts 15 to 21 of the Commission's rules
affect two existing collections of information titled ``Large Trader
Reports'' (OMB control number 3038-0009) and ``Futures Volume, Open
Interest, Price, Deliveries, and Exchanges of Futures'' (OMB control
number 3038-0012). OMB has approved the amendments made to these two
collections of information.
Finally, the title for the collection of information of new rule
16.02 is ``Regulation 16.02--Daily Trade and Supporting Data Reports.''
OMB has approved assigned OMB control number 3038-0061 to this
collection of information.
List of Subjects
17 CFR Part 15
Brokers, Commodity futures, Reporting and recordkeeping
requirements
17 CFR Part 16
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 17
Brokers, Commodity futures, Reporting and recordkeeping
requirements
17 CFR Part 18
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 19
Commodity futures, Cottons, Grains, Reporting and recordkeeping
requirements.
17 CFR Part 21
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 36
Commodity futures, Commodity Futures Trading Commission
17 CFR Part 40
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Act, as amended by the Reauthorization Act of 2008,
Title XIII of Public Law 110-246, 122 Stat. 1624 (2008), and in
particular sections 2, 5, 6, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9,
12a, 19, and 21, the Commodity Futures Trading Commission hereby amends
17 CFR parts 15, 16, 17, 18, 19, 21, 36 and 40 as follows:
PART 15--REPORTS--GENERAL PROVISIONS
0
1. The authority citation for part 15 is revised to read as follows:
Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a,
9, 12a, 19, and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.
1624 (June 18, 2008).
0
2. Section 15.00 is revised to read as follows:
Sec. 15.00 Definitions of terms used in parts 15 to 21 of this
chapter.
As used in parts 15 to 21 of this chapter:
(a) Cash or Spot, when used in connection with any commodity, means
the actual commodity as distinguished from a futures or options
contract in such commodity.
(b) Clearing member means any person who is a member of, or enjoys
the privilege of clearing trades in his own name through, the clearing
organization of a designated contract market, registered derivatives
transaction execution facility, or registered entity under section
1a(29) of the Act.
(c) Clearing organization means the person or organization which
acts as a medium for clearing transactions in commodities for future
delivery or commodity option transactions, or for effecting settlements
of contracts for future delivery or commodity option transactions, for
and between members of any designated contract market, registered
derivatives transaction execution facility or registered entity under
section 1a(29) of the Act.
(d) Compatible data processing media means data processing media
approved by the Commission or its designee.
(e) Customer means ``customer'' (as defined in Sec. 1.3(k) of this
chapter) and ``options customer'' (as defined in Sec. 1.3(jj) of this
chapter).
(f) Customer trading program means any system of trading offered,
sponsored, promoted, managed or in any other way supported by, or
affiliated with, a futures commission merchant, an introducing broker,
a commodity trading advisor, a commodity pool operator, or other
trader, or any of its officers, partners or employees, and which by
agreement, recommendations, advice or otherwise, directly or indirectly
controls trading done and positions held by any other person. The term
includes, but is not limited to, arrangements where a program
participant enters into an expressed or implied agreement not obtained
from other customers and makes a minimum deposit in excess of that
required of other customers for the purpose of receiving specific
advice or recommendations which are not made available to other
customers. The term includes any program which is of the character of,
or is commonly known to the trade as, a managed account, guided
account, discretionary account, commodity pool or partnership account.
(g) Discretionary account means a commodity futures or commodity
option trading account for which buying or selling orders can be placed
or originated, or for which transactions can be effected, under a
general authorization and without the specific consent of the customer,
whether the general authorization for such orders or transactions is
pursuant to a written agreement, power of attorney, or otherwise.
(h) Exclusively self-cleared contract means a cleared contract for
which no persons, other than a reporting market and its clearing
organization, are permitted to accept any money, securities, or
property (or extend credit in lieu thereof) to margin, guarantee, or
secure any trade.
(i) Foreign clearing member means a ``clearing member'' (as defined
by
[[Page 12189]]
paragraph (b) of this section) who resides or is domiciled outside of
the United States, its territories or possessions.
(j) Foreign trader means any trader (as defined in paragraph (s) of
this section) who resides or is domiciled outside of the United States,
its territories or possessions.
(k) Futures, futures contract, future delivery or contract for
future delivery, means any contract for the purchase or sale of any
commodity for future delivery that is executed on or subject to the
rules of a reporting market, including all agreements, contracts and
transactions that are treated by a clearing organization as fungible
with such contracts.
(l) Guided account program means any customer trading program which
limits trading to the purchase or sale of a particular contract for
future delivery of a commodity or a particular commodity option that is
advised or recommended to the participant in the program.
(m) Managed account program means a customer trading program which
includes two or more discretionary accounts traded pursuant to a common
plan, advice or recommendations.
(n) Open contracts means ``open contracts'' (as defined in Sec.
1.3(t) of this chapter) and commodity option positions held by any
person on or subject to the rules of a board of trade which have not
expired, been exercised, or offset.
(o) Option, options, option contract, or options contract, unless
specifically provided otherwise, means any contract for the purchase or
sale of a commodity option that is executed on or subject to the rules
of a reporting market, including all agreements, contracts and
transactions that are treated by a clearing organization as fungible
with such contracts.
(p) Reportable position means:
(1) For reports specified in parts 17, 18 and Sec. 19.00(a)(2) and
(a)(3) of this chapter any open contract position that at the close of
the market on any business day equals or exceeds the quantity specified
in Sec. 15.03 of this part in either:
(i) Any one futures of any commodity on any one reporting market,
excluding futures contracts against which notices of delivery have been
stopped by a trader or issued by the clearing organization of a
reporting market; or
(ii) Long or short put or call options that exercise into the same
future of any commodity, or long or short put or call options for
options on physicals that have identical expirations and exercise into
the same physical, on any one reporting market.
(2) For the purposes of reports specified in Sec. 19.00(a)(1) of
this chapter, any combined futures and futures-equivalent option open
contract position as defined in part 150 of this chapter in any one
month or in all months combined, either net long or net short in any
commodity on any one reporting market, excluding futures positions
against which notices of delivery have been stopped by a trader or
issued by the clearing organization of a reporting market, which at the
close of the market on the last business day of the week exceeds the
net quantity limit in spot, single or in all-months fixed in Sec.
150.2 of this chapter for the particular commodity and reporting
market.
(q) Reporting market means a designated contract market, registered
entity under section 1a(29) of the Act, and unless determined otherwise
by the Commission with respect to the facility or a specific contract
listed by the facility, a registered derivatives transaction execution
facility.
(r) Special account means any commodity futures or option account
in which there is a reportable position.
(s) Trader means a person who, for his own account or for an
account which he controls, makes transactions in commodity futures or
options, or has such transactions made.
0
3. Section 15.01 is amended by revising paragraph (a) to read as
follows:
Sec. 15.01 Persons required to report.
* * * * *
(a) Reporting markets--as specified in parts 16, 17, and 21 of this
chapter.
* * * * *
0
4. Section 15.05 is amended by revising the heading and paragraph (a);
and by adding paragraph (i) to read as follows:
Sec. 15.05 Designation of agent for foreign persons.
(a) For purposes of this section, the term ``futures contract''
means any contract for the purchase or sale of any commodity for future
delivery, or a contract identified under section 36.3(b)(1)(i) as
traded in reliance on the exemption in section 2(h)(3) of the Act,
traded or executed on or subject to the rules of any designated
contract market or registered derivatives transaction execution
facility, or for the purposes of paragraph (i) of this section, a
reporting market (including all agreements, contracts and transactions
that are treated by a clearing organization as fungible with such
contracts); the term ``option contract'' means any contract for the
purchase or sale of a commodity option, or as applicable, any other
instrument subject to the Act pursuant to section 5a(g) of the Act,
traded or executed on or subject to the rules of any designated
contract market or registered derivatives transaction execution
facility, or for the purposes of paragraph (i) of this section, a
reporting market (including all agreements, contracts and transactions
that are treated by a clearing organization as fungible with such
contracts); the term ``customer'' means any person for whose benefit a
foreign broker makes or causes to be made any futures contract or
option contract; and the term ``communication'' means any summons,
complaint, order, subpoena, special call, request for information, or
notice, as well as any other written document or correspondence.
* * * * *
(i) Any reporting market that is a registered entity under section
1a(29)(E) of the Act that permits a foreign clearing member or foreign
trader to clear or effect contracts, agreements or transactions on the
trading facility or its clearing organization, shall be deemed to be
the agent of the foreign clearing member or foreign trader with respect
to any such contracts, agreements or transactions cleared or executed
by the foreign clearing member or the foreign trader. Service or
delivery of any communication issued by or on behalf of the Commission
to the reporting market shall constitute valid and effective service
upon the foreign clearing member or foreign trader. The reporting
market which has been served with, or to which there has been
delivered, a communication issued by or on behalf of the Commission to
a foreign clearing member or foreign trader shall transmit the
communication promptly and in a manner which is reasonable under the
circumstances, or in a manner specified by the Commission in the
communication, to the foreign clearing member or foreign trader.
(1) It shall be unlawful for any such reporting market to permit a
foreign clearing member or a foreign trader to clear or effect
contracts, agreements or transactions on the facility or its clearing
organization unless the reporting market prior thereto informs the
foreign clearing member or foreign trader of the requirements of this
section.
(2) The requirements of paragraphs (i) and (i)(1) of this section
shall not apply to any contracts, transactions or agreements if the
foreign clearing member or foreign trader has duly executed and
maintains in effect a
[[Page 12190]]
written agency agreement in compliance with this paragraph with a
person domiciled in the United States and has provided a copy of the
agreement to the reporting market prior to effecting or clearing any
contract, agreement or transaction on the trading facility or its
clearing organization. This agreement must authorize the person
domiciled in the United States to serve as the agent of the foreign
clearing member or foreign trader for the purposes of accepting
delivery and service of all communications issued by or on behalf of
the Commission to the foreign clearing member or the foreign trader and
must provide an address in the United States where the agent will
accept delivery and service of communications from the Commission. This
agreement must be filed with the Commission by the reporting market
prior to permitting the foreign clearing member or the foreign trader
to clear or effect any transactions in futures or option contracts.
Unless otherwise specified by the Commission, the agreements required
to be filed with the Commission shall be filed with the Secretary of
the Commission at Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
(3) A foreign clearing member or a foreign trader shall notify the
Commission immediately if the written agency agreement is terminated,
revoked, or is otherwise no longer in effect. If the reporting market
knows or should know that the agreement has expired, been terminated,
or is no longer in effect, the reporting market shall notify the
Secretary of the Commission immediately. If the written agency
agreement expires, terminates, or is not in effect, the reporting
market, the foreign clearing member and the foreign trader shall be
subject to the provisions of paragraphs (i) and (i)(1) of this section.
* * * * *
0
5. Section 15.06 is added to read as follows:
Sec. 15.06 Delegations.
(a) The Commission hereby delegates, until the Commission orders
otherwise, the authority to approve data processing media, as
referenced in Sec. 15.00(d), for data submissions to the Director of
the Division of Market Oversight, to be exercised by such Director or
by such other employee or employees of such Director as designated from
time to time by the Director. The Director may submit to the Commission
for its consideration any matter which has been delegated in this
paragraph. Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in this paragraph.
(b) [Reserved]
PART 16--REPORTS BY REPORTING MARKETS
0
6. The authority citation for part 16 is revised to read as follows:
Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended
by Title XIII of the Food, Conservation and Energy Act of 2008,
Public Law 110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise
noted.
0
7. Section 16.01 is amended by revising paragraph (e) to read as
follows:
Sec. 16.01 Trading volume, open contracts, prices, and critical
dates.
* * * * *
(e) Publication of recorded information. (1) Reporting markets
shall make the information in paragraph (a) of this section readily
available to the news media and the general public without charge, in a
format that readily enables the consideration of such data, no later
than the business day following the day to which the information
pertains. The information in paragraphs (a)(4) through (a)(6) of this
section shall be made readily available in a format that presents the
information together.
(2) Reporting markets shall make the information in paragraphs
(b)(1) and (b)(2) of this section readily available to the news media
and the general public, and the information in paragraph (b)(3) of this
section readily available to the general public, in a format that
readily enables the consideration of such data, no later than the
business day following the day to which the information pertains.
* * * * *
0
8. Section 16.02 is added to read as follows:
Sec. 16.02 Daily trade and supporting data reports.
Reporting markets shall provide trade and supporting data reports
to the Commission on a daily basis. Such reports shall include
transaction-level trade data and related order information for each
futures or options contract. Reports shall also include time and sales
data, reference files and other information as the Commission or its
designee may require. All reports must be submitted at the time, and in
the manner and format, and with the specific content specified by the
Commission or its designee. Upon request, such information shall be
accompanied by data that identifies or facilitates the identification
of each trader for each transaction or order included in a submitted
trade and supporting data report if the reporting market maintains such
data.
0
9. Section 16.07 is amended by revising the heading and introductory
text; and by adding paragraph (c) to read as follows:
Sec. 16.07 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the authority set forth in paragraphs (a), (b) and (c) of
this section to the Director of the Division of Market Oversight, to be
exercised by such Director or by such other employee or employees of
such Director as may be designated from time to time by the Director.
The Director of the Division of Market Oversight may submit to the
Commission for its consideration any matter which has been delegated in
this paragraph. Nothing in this paragraph prohibits the Commission, at
its election, from exercising the authority delegated in this
paragraph.
* * * * *
(c) Pursuant to Sec. 16.02, the authority to determine the
specific content of any daily trade and supporting data report, request
that such reports be accompanied by data that identifies or facilitates
the identification of each trader for each transaction or order
included in a submitted trade and supporting data report, and establish
the time for the submission of and the manner and format of such
reports.
PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS
0
10. The authority citation for part 17 is revised to read as follows:
Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008), unless
otherwise noted.
0
11. Revise the heading of part 17 as set forth above.
0
12. Section 17.00 is amended by the heading of paragraph (a) and
paragraphs (a)(1), (b)(1), and (f); and by adding and reserving
paragraph (c) to read as follows:
Sec. 17.00 Information to be furnished by futures commission
merchants, clearing members and foreign brokers.
(a) Special accounts--reportable futures and options positions,
delivery notices, and exchanges of futures. (1) Each futures commission
merchant, clearing member and foreign broker shall submit a report to
the Commission
[[Page 12191]]
for each business day with respect to all special accounts carried by
the futures commission merchant, clearing member or foreign broker,
except for accounts carried on the books of another futures commission
merchant or clearing member on a fully-disclosed basis. Except as
otherwise authorized by the Commission or its designee, such report
shall be made in accordance with the format and coding provisions set
forth in paragraph (g) of this section. The report shall show each
futures position, separately for each reporting market and for each
future, and each put and call options position separately for each
reporting market, expiration and strike price en each special account
as of the close of market on the day covered by the report and, in
addition, the quantity of exchanges of futures for commodities or for
derivatives positions and the number of delivery notices issued for
each such account by the clearing organization of a reporting market
and the number stopped by the account. The report shall also show all
positions in all contract months and option expirations of that same
commodity on the same reporting market for which the special account is
reportable.
* * * * *
(b) * * *
(1) Accounts of eligible entities--Accounts of eligible entities as
defined in Sec. 150.1 of this chapter that are traded by an
independent account controller shall, together with other accounts
traded by the independent account controller or in which the
independent controller has a financial interest, be considered a single
account.
* * * * *
(c) [Reserved]
* * * * *
(f) Omnibus accounts. If the total open long positions or the total
open short positions for any future of a commodity carried in an
omnibus account is a reportable position, the omnibus account is in
Special Account status and shall be reported by the futures commission
merchant or foreign broker carrying the account in accordance with
paragraph (a) of this section.
* * * * *
0
13. Section 17.03 is amended by revising the heading, the introductory
text, and paragraphs (a) and (b) to read as follows:
Sec. 17.03 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the authority set forth in the paragraphs below to the
Director of the Division of Market Oversight to be exercised by such
Director or by such other employee or employees of such Director as
designated from time to time by the Director. The Director of the
Division of Market Oversight may submit to the Commission for its
consideration any matter which has been delegated in this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
(a) Pursuant to Sec. 17.00(a) and (h), the authority to determine
whether futures commission merchants, clearing members and foreign
brokers can report the information required under paragraphs (a) and
(h) of Sec. 17.00 on series '01 forms or using some other format upon
a determination that such person is unable to report the information
using the format, coding structure or electronic data transmission
procedures otherwise required.
(b) Pursuant to Sec. 17.02, the authority to instruct or approve
the time at which the information required under Sec. Sec. 17.00 and
17.01 must be submitted by futures commission merchants, clearing
members and foreign brokers provided that such persons are unable to
meet the requirements set forth in Sec. Sec. 17.01(g) and 17.02.
* * * * *
0
14. Section 17.04 is amended by revising the heading, paragraph (a),
and paragraph (b)(1)(ii) to read as follows:
Sec. 17.04 Reporting omnibus accounts to reporting firms.
(a) Any futures commission merchant, clearing member or foreign
broker who establishes an omnibus account with another futures
commission merchant, clearing member or foreign broker shall report to
that futures commission merchant, clearing member or foreign broker the
total open long positions and the total open short positions in each
future of a commodity and, for commodity options transactions, the
total open long put options, the total open short put options, the
total open long call options, and the total open short call options for
each commodity options expiration date and each strike price in such
account at the close of trading each day. The information required by
this section shall be reported in sufficient time to enable the futures
commission merchant, clearing member or foreign broker with whom the
omnibus account is established to comply with the regulations of this
part and the reporting requirements established by the reporting
markets.
(b) * * *
(1) * * *
(ii) The account is an omnibus account of another futures
commission merchant, clearing member or foreign broker; or
* * * * *
PART 18--REPORTS BY TRADERS
0
15. The authority citation for part 18 is revised to read as follows:
Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a
and 19, as amended by Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.
0
16. Section 18.01 is revised to read as follows:
Sec. 18.01 Interest in or control of several accounts.
If any trader holds, has a financial interest in or controls
positions in more than one account, whether carried with the same or
with different futures commission merchants or foreign brokers, all
such positions and accounts shall be considered as a single account for
the purpose of determining whether such trader has a reportable
position and, unless instructed otherwise in the special call to report
under Sec. 18.00 for the purpose of reporting.
0
17. Section 18.04 is amended by revising paragraphs (a)(7) and
(b)(3)(i) to read as follows:
Sec. 18.04 Statement of reporting trader.
* * * * *
(a) * * *
(7) The names and locations of all futures commission merchants,
clearing members, introducing brokers, and foreign brokers through whom
accounts owned or controlled by the reporting trader are carried or
introduced at the time of filing a Form 40, if such accounts are
carried through more than one futures commission merchant, clearing
member or foreign broker or carried through more than one office of the
same futures commission merchant, clearing member or foreign broker, or
introduced by more than one introducing broker clearing accounts
through the same futures commission merchant, and the name of the
reporting trader's account executive at each firm or office of the
firm.
* * * * *
(b) * * *
(3) * * *
(i) Commercial activity associated with use of the option or
futures market (such as and including production, merchandising or
processing of a cash commodity, asset or liability risk management by
depository institutions, or security portfolio risk management).
* * * * *
[[Page 12192]]
0
18. Section 18.05 is amended by revising paragraphs (a)(2), (a)(3), and
(a)(4) to read as follows:
Sec. 18.05 Maintenance of books and records.
(a) * * *
(2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-
(2) of the Act or part 35 of this chapter;
(3) On exempt commercial markets operating pursuant to sections
2(h)(3)-(5) of the Act;
(4) On exempt boards of trade operating pursuant to section 5d of
the Act; and
* * * * *
PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS
PURSUANT TO Sec. 1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND
DEALERS IN COTTON
0
19. The authority citation for part 19 is revised to read as follows:
Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title
XIII of the Food, Conservation and Energy Act of 2008, Public Law
110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.
0
20. Section 19.00 is amended by revising paragraph (a) to read as
follows:
Sec. 19.00 General provisions.
(a) Who must file series '04 reports. The following persons are
required to file series '04 reports:
(1) All persons holding or controlling futures and option positions
that are reportable pursuant to Sec. 15.00(p)(2) of this chapter and
any part of which constitute bona fide hedging positions as defined in
Sec. 1.3(z) of this chapter;
(2) Merchants and dealers of cotton holding or controlling
positions for futures delivery in cotton that are reportable pursuant
to Sec. 15.00(p)(1)(i) of this chapter, or
(3) All persons holding or controlling positions for future
delivery that are reportable pursuant to Sec. 15.00(p)(1) of this
chapter who have received a special call for series '04 reports from
the Commission or its designee. Filings in response to a special call
shall be made within one business day of receipt of the special call
unless otherwise specified in the call. For the purposes of this
paragraph, the Commission hereby delegates to the Director of the
Division of Market Oversight, or to such other person designated by the
Director, authority to issue calls for series '04 reports.
* * * * *
0
21. Section 19.01 is amended by revising paragraph (b) introductory
text and paragraph (b)(1) to read as follows:
Sec. 19.01 Reports on stocks and fixed price purchases and sales
pertaining to futures positions in wheat, corn, oats, soybeans, soybean
oil, soybean meal or cotton.
* * * * *
(b) Time and place of filing reports--Except for reports filed in
response to special calls made under Sec. 19.00(a)(3), each report
shall be made monthly, as of the close of business on the last Friday
of the month, and filed at the appropriate Commission office specified
in paragraph (b)(1) or (2) of this section not later than the second
business day following the date of the report in the case of the 304
report and not later than the third business day following the date of
the report in the case of the 204 report. Reports may be transmitted by
facsimile or, alternatively, information on the form may be reported to
the appropriate Commission office by telephone and the report mailed to
the same office, not later than midnight of its due date.
(1) CFTC Form 204 reports with respect to transactions in wheat,
corn, oats, soybeans, soybean meal and soybean oil should be sent to
the Commission's office in Chicago, IL, unless otherwise specifically
authorized by the Commission or its designee.
* * * * *
PART 21--SPECIAL CALLS
0
22. The authority citation for part 21 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.
1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise
noted.
0
23. Section 21.01 is revised to read as follows:
Sec. 21.01 Special calls for information on controlled accounts from
futures commission merchants, clearing members and introducing brokers.
Upon call by the Commission, each futures commission merchant,
clearing member and introducing broker shall file with the Commission
the names and addresses of all persons who, by power of attorney or
otherwise, exercise trading control over any customer's account in
commodity futures or commodity options on any reporting market.
0
24. Section 21.02 is amended by revising the heading, introductory
text, and paragraphs (f) and (i) to read as follows:
Sec. 21.02 Special calls for information on open contracts in
accounts carried or introduced by futures commission merchants,
clearing members, members of reporting markets, introducing brokers,
and foreign brokers.
Upon special call by the Commission for information relating to
futures or option positions held or introduced on the dates specified
in the call, each futures commission merchant, clearing member, member
of a reporting market, introducing broker, or foreign broker, and, in
addition, for option information, each reporting market, shall furnish
to the Commission the following information concerning accounts of
traders owning or controlling such futures or option positions, except
for accounts carried on a fully disclosed basis by another futures
commission merchant or clearing member, as may be specified in the
call:
* * * * *
(f) The number of open futures or option positions introduced or
carried in each account, as specified in the call;
* * * * *
(i) As applicable, the following identifying information:
(1) Whether a trader who holds commodity futures or option
positions is classified as a commercial or as a noncommercial trader
for each commodity futures or option contract;
(2) Whether the open commodity futures or option contracts are
classified as speculative, spreading (straddling), or hedging; and
(3) Whether any of the accounts in question are omnibus accounts
and, if so, whether the originator of the omnibus account is another
futures commission merchant, clearing member or foreign broker.
* * * * *
0
25. Section 21.03 is amended as follows:
0
A. By revising the heading and paragraphs (a), (b), (c) and (d);
0
B. By revising paragraph (e) introductory text and paragraphs (e)(1)
introductory text, (e)(1)(iv) and (e)(1)(v); and
0
C. By revising paragraphs (f), (g) and (h) to read as follows:
Sec. 21.03 Selected special calls-duties of foreign brokers, domestic
and foreign traders, futures commission merchants, clearing members,
introducing brokers, and reporting markets.
(a) For purposes of this section, the term ``accounts of a futures
commission merchant, clearing member or foreign broker'' means all open
contracts and transactions in futures and options on the records of the
futures commission merchant, clearing member or foreign
[[Page 12193]]
broker; the term ``beneficial interest'' means having or sharing in any
rights, obligations or financial interest in any futures or options
account; the term ``customer'' means any futures commission merchant,
clearing member, introducing broker, foreign broker, or trader for whom
a futures commission merchant, clearing member or reporting market that
is a registered entity under section 1a(29) of the Act makes or causes
to be made a futures or options contract. Paragraphs (e), (g) and (h)
of this section shall not apply to any futures commission merchant,
clearing member or customer whose books and records are open at all
times to inspection in the United States by any representative of the
Commission.
(b) It shall be unlawful for a futures commission merchant to open
a futures or options account or to effect transactions in futures or
options contracts for an existing account, or for an introducing broker
to introduce such an account, for any customer for whom the futures
commission merchant or introducing broker is required to provide the
explanation provided for in Sec. 15.05(c) of this chapter, or for a
reporting market that is a registered entity under section 1a(29)(E) of
the Act, to cause to open an account in a contract traded in reliance
on the exemption in section 2(h)(3) of the Act or to cause to be
effected transactions in a contract traded in reliance on the exemption
in section 2(h)(3) of the Act for an existing account for any person
that is a foreign clearing member or foreign trader, until the futures
commission merchant, introducing broker, clearing member, or reporting
market has explained fully to the customer, in any manner that such
persons deem appropriate, the provisions of this section.
(c) Upon a determination by the Commission that information
concerning accounts may be relevant information in enabling the
Commission to determine whether the threat of a market manipulation,
corner, squeeze, or other market disorder exists on any reporting
market, the Commission may issue a call for information from a futures
commission merchant, clearing member, introducing broker or customer
pursuant to the provisions of this section.
(d) In the event the call is issued to a foreign broker, foreign
clearing member or foreign trader, its agent, designated pursuant to
Sec. 15.05 of this chapter, shall, if directed, promptly transmit
calls made by the Commission pursuant to this section by electronic
mail or a similarly expeditious means of communication.
(e) The futures commission merchant, clearing member, introducing
broker, or customer to whom the special call is issued must provide to
the Commission the information specified below for the commodity,
reporting market and delivery months or option expiration dates named
in the call. Such information shall be filed at the place and within
the time specified by the Commission.
(1) For each account of a futures commission merchant, clearing
member, introducing broker, or foreign broker, including those accounts
in the name of the futures commission merchant, clearing member or
foreign broker, on the dates specified in the call issued pursuant to
this section, such persons shall provide the Commission with the
following information:
* * * * *
(iv) Whether the account is carried for and in the name of another
futures commission merchant, clearing member, introducing broker, or
foreign broker; and
(v) For the accounts which are not carried for and in the name of
another futures commission merchant, clearing member, introducing
broker, or foreign broker, the name and address of any other person who
controls the trading of the account, and the name and address of any
person who has a ten percent or more beneficial interest in the
account.
* * * * *
(f) If the Commission has reason to believe that any person has not
responded as required to a call made pursuant to this section, the
Commission in writing may inform the reporting market specified in the
call and that reporting market shall prohibit the execution of, and no
futures commission merchant, clearing member, introducing broker, or
foreign broker shall effect a transaction in connection with trades on
the reporting market and in the months or expiration dates specified in
the call for or on behalf of the futures commission merchant or
customer named in the call, unless such trades offset existing open
contracts of such futures commission merchant or customer.
(g) Any person named in a special call that believes he or she is
or may be adversely affected or aggrieved by action taken by the
Commission under paragraph (f) of this section shall have the
opportunity for a prompt hearing after the Commission acts. That person
may immediately present in writing to the Commission for its
consideration any comments or arguments concerning the Commission's
action and may present for Commission consideration any documentary or
other evidence that person deems appropriate. Upon request, the
Commission may, in its discretion, determine that an oral hearing be
conducted to permit the further presentation of information and views
concerning any matters by any or all such persons. The oral hearing may
be held before the Commission or any person designated by the
Commission, which person shall cause all evidence to be reduced to
writing and forthwith transmit the same and a recommended decision to
the Commission. The Commission's directive under paragraph (f) of this
section shall remain in effect unless and until modified or withdrawn
by the Commission.
(h) If, during the course of or after the Commission acts pursuant
to paragraph (f) of this section, the Commission determines that it is
appropriate to undertake a proceeding pursuant to section 6(c) of the
Act, the Commission shall issue a complaint in accordance with the
requirements of section 6(c), and, upon further determination by the
Commission that the conditions described in paragraph (c) of this
section still exist, a hearing pursuant to section 6(c) of the Act
shall commence no later than five business days after service of the
complaint. In the event the person served with the complaint under
section 6(c) of the Act has, prior to the commencement of the hearing
under section 6(c) of the Act, sought a hearing pursuant to paragraph
(g) of this section and the Commission has determined to accord him
such a hearing, the two hearings shall be conducted simultaneously.
Nothing in this section shall preclude the Commission from taking other
appropriate action under the Act or the Commission's regulations
thereunder, including action under section 6(c) of the Act, regardless
of whether the conditions described in paragraph (c) of this section
still exist, and no ruling issued in the course of a hearing pursuant
to paragraph (g) or this paragraph shall constitute an estoppel against
the Commission in any other action.
* * * * *
0
26. Section 21.04 is revised to read as follows:
Sec. 21.04 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the special call authority set forth in Sec. Sec. 21.01 and
21.02 to the Director of the Division of Market Oversight to be
exercised by such Director or by such other employee or employees of
such Director as designated from time to time
[[Page 12194]]
by the Director. The Director of the Division of Market Oversight may
submit to the Commission for its consideration any matter which has
been delegated in this paragraph. Nothing in this section shall be
deemed to prohibit the Commission, at its election, from exercising the
authority delegated in this section to the Director.
PART 36--EXEMPT MARKETS
0
27. The authority citation for part 36 is revised to read as follows:
Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by
Title XIII of the Food, Conservation and Energy Act of 2008, Public
Law 110-246, 122 Stat. 1624 (June 18, 2008).
0
28. Section 36.3 is amended by revising paragraph (b) to read as
follows:
Sec. 36.3 Exempt commercial markets.
* * * * *
(b) Required information.
(1) All electronic trading facilities. A facility operating in
reliance on the exemption in section 2(h)(3) of the Act, initially and
on an on-going basis, must:
(i) Provide the Commission with the terms and conditions, as
defined in Sec. 40.1(i) of this chapter and product descriptions for
each agreement, contract or transaction listed by the facility in
reliance on the exemption set forth in section 2(h)(3) of the Act, as
well as trading conventions, mechanisms and practices;
(ii) Provide the Commission with information explaining how the
facility meets the definition of ``trading facility'' contained in
section 1a(33) of the Act and provide the Commission with access to the
electronic trading facility's trading protocols, in a format specified
by the Commission;
(iii) Demonstrate to the Commission that the facility requires, and
will require, with respect to all current and future agreements,
contracts and transactions, that each participant agrees to comply with
all applicable laws; that the authorized participants are ``eligible
commercial entities'' as defined in section 1a(11) of the Act; that all
agreements, contracts and transactions are and will be entered into
solely on a principal-to-principal basis; and that the facility has in
place a program to routinely monitor participants' compliance with
these requirements;
(iv) At the request of the Commission, provide any other
information that the Commission, in its discretion, deems relevant to
its determination whether an agreement, contract, or transaction
performs a significant price discovery function; and
(v) File with the Commission annually, no later than the end of
each calendar year, a completed copy of CFTC Form 205--Exempt
Commercial Market Annual Certification. The information submitted in
Form 205 shall include:
(A) A statement indicating whether the electronic trading facility
continues to operate under the exemption; and
(B) A certification that affirms the accuracy of and/or updates the
information contained in the previous Notification of Operation as an
Exempt Commercial Market.
(2) Electronic trading facilities trading or executing agreements,
contracts or transactions other than significant price discovery
contracts. In addition to the requirements of paragraph (b)(1) of this
section, a facility operating in reliance on the exemption in section
2(h)(3) of the Act, with respect to agreements, contracts or
transactions that have not been determined to perform significant price
discovery function, initially and on an on-going basis, must:
(i) Identify to the Commission those agreements, contracts and
transactions conducted on the electronic trading facility with respect
to which it intends, in good faith, to rely on the exemption in section
2(h)(3) of the Act, and which averaged five trades per day or more over
the most recent calendar quarter; and, with respect to such agreements,
contracts and transactions, either:
(A) Submit to the Commission, in a form and manner acceptable to
the Commission, a report for each business day. Each such report shall
be electronically transmitted weekly, within such time period as is
acceptable to the Commission after the end of the week to which the
data applies, and shall show for each such agreement, contract or
transaction executed the following information:
(1) The underlying commodity, the delivery or price-basing location
specified in the agreement, contract or transaction maturity date,
whether it is a financially settled or physically delivered instrument,
and the date of execution, time of execution, price, and quantity;
(2) Total daily volume and, if cleared, open interest;
(3) For an option instrument, in addition to the foregoing
information, the type of option (i.e., call or put) and strike prices;
and
(4) Such other information as the Commission may determine; or
(B) Provide to the Commission, in a form and manner acceptable to
the Commission, electronic access to those transactions conducted on
the electronic trading facility in reliance on the exemption in section
2(h)(3) of the Act, and meeting the average five trades per day or more
threshold test of this section, which would allow the Commission to
compile the information described in paragraph (b)(2)(i)(A) of this
section and create a permanent record thereof.
(ii) Maintain a record of allegations or complaints received by the
electronic trading facility concerning instances of suspected fraud or
manipulation in trading activity conducted in reliance on the exemption
set forth in section 2(h)(3) of the Act. The record shall contain the
name of the complainant, if provided, date of the complaint, market
instrument, substance of the allegations, and name of the person at the
electronic trading facility who received the complaint;
(iii) Provide to the Commission, in the form and manner prescribed
by the Commission, a copy of the record of each complaint received
pursuant to paragraph (b)(2)(ii) of this section that alleges, or
relates to, facts that would constitute a violation of the Act or
Commission regulations. Such copy shall be provided to the Commission
no later than 30 calendar days after the complaint is received.
Provided, however, that in the case of a complaint alleging, or
relating to, facts that would constitute an ongoing fraud or market
manipulation under the Act or Commission rules, such copy shall be
provided to the Commission within three business days after the
complaint is received; and
(iv) Provide to the Commission on a quarterly basis, within 15
calendar days of the close of each quarter, a list of each agreement,
contract or transaction executed on the electronic trading facility in
reliance on the exemption set forth in section 2(h)(3) of the Act and
indicate for each such agreement, contract or transaction the contract
terms and conditions, the contract's average daily trading volume, and
the most recent open interest figures.
(3) Electronic trading facilities trading or executing significant
price discovery contracts. In addition to the requirements of paragraph
(b)(1) of this section, if the Commission determines that a facility
operating in reliance on the exemption in section 2(h)(3) of the Act
trades or executes an agreement, contract or transaction that performs
a significant price discovery function, the facility must, with respect
to any significant price discovery contract, publish and provide to the
Commission the information required by Sec. 16.01 of this chapter.
(4) Delegation of authority. The Commission hereby delegates, until
the
[[Page 12195]]
Commission orders otherwise, the authority to determine the form and
manner of submitting the required information under paragraphs (b)(1)
through (3) of this section, to the Director of the Division of Market
Oversight and such members of the Commission's staff as the Director
may designate. The Director may submit to the Commission for its
consideration any matter that has been delegated by this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
(5) Special calls. (i) All information required upon special call
of the Commission under section 2(h)(5)(B)(iii) of the Act shall be
transmitted at the time and to the office of the Commission as may be
specified in the call.
(ii) The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls as set forth in section
2(h)(5)(B)(iii) of the Act to the Directors of the Divisions of Market
Oversight, the Division of Clearing and Intermediary Oversight, and the
Division of Enforcement to be exercised by each such Director or by
such other employee or employees as the Director may designate. The
Directors may submit to the Commission for its consideration any matter
that has been delegated in this paragraph. Nothing in this paragraph
prohibits the Commission, at its election, from exercising the
authority delegated in this paragraph.
(6) Subpoenas to foreign persons. A foreign person whose access to
an electronic trading facility is limited or denied at the direction of
the Commission based on the Commission's belief that the foreign person
has failed timely to comply with a subpoena as provided under section
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt
hearing under the procedures provided in Sec. 21.03(b) and (h) of this
chapter.
(7) Prohibited representation. An electronic trading facility
relying upon the exemption in section 2(h)(3) of the Act, with respect
to agreements, contracts or transactions that are not significant price
discovery contracts, shall not represent to any person that it is
registered with, designated, recognized, licensed or approved by the
Commission.
* * * * *
0
29. Section 36.3 is amended by revising paragraph (c) to read as
follows:
Sec. 36.3 Exempt commercial markets.
* * * * *
(c) Significant price discovery contracts--(1) Criteria for
significant price discovery determination. The Commission may
determine, in its discretion, that an electronic trading facility
operating a market in reliance on the exemption in section 2(h)(3) of
the Act performs a significant price discovery function for
transactions in the cash market for a commodity underlying any
agreement, contract or transaction executed or traded on the facility.
In making such a determination, the Commission shall consider, as
appropriate:
(i) Price linkage. The extent to which the agreement, contract or
transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market or a derivatives transaction execution facility, or a
significant price discovery contract traded on an electronic trading
facility, to value a position, transfer or convert a position, cash or
financially settle a position, or close out a position;
(ii) Arbitrage. The extent to which the price for the agreement,
contract or transaction is sufficiently related to the price of a
contract or contracts listed for trading on or subject to the rules of
a designated contract market or derivatives transaction execution
facility, or a significant price discovery contract or contracts
trading on or subject to the rules of an electronic trading facility,
so as to permit market participants to effectively arbitrage between
the markets by simultaneously maintaining positions or executing trades
in the contracts on a frequent and recurring basis;
(iii) Material price reference. The extent to which, on a frequent
and recurring basis, bids, offers, or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility;
(iv) Material liquidity. The extent to which the volume of
agreements, contracts or transactions in the commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a designated contract market, a derivatives
transaction execution facility, or an electronic trading facility
operating in reliance on the exemption in section 2(h)(3) of the Act;
(v) Other material factors [Reserved].
(2) Notification of possible significant price discovery contract
conditions. An electronic trading facility operating in reliance on
section 2(h)(3) of the Act shall promptly notify the Commission, and
such notification shall be accompanied by supporting information or
data concerning any contract that:
(i) Averaged five trades per day or more over the most recent
calendar quarter; and
(ii) (A) For which the exchange sells its price information
regarding the contract to market participants or industry publications;
or
(B) Whose daily closing or settlement prices on 95 percent or more
of the days in the most recent quarter were within 2.5 percent of the
contemporaneously determined closing, settlement or other daily price
of another agreement, contract or transaction.
(3) Procedure for significant price discovery determination. Before
making a final price discovery determination under this paragraph, the
Commission shall publish notice in the Federal Register that it intends
to undertake a determination with respect to whether a particular
agreement, contract or transaction performs a significant price
discovery function and to receive written data, views and arguments
relevant to its determination from the electronic trading facility and
other interested persons. Any such written data, views and arguments
shall be filed with the Secretary of the Commission, in the form and
manner specified by the Commission, within 30 calendar days of
publication of notice in the Federal Register or within such other time
specified by the Commission. After prompt consideration of all relevant
information, the Commission shall, within a reasonable period of time
after the close of the comment period, issue an order explaining its
determination whether the agreement, contract or transaction executed
or traded by the electronic trading facility performs a significant
price discovery function under the criteria specified in paragraph
(c)(1)(i) through (v) of this section.
(4) Compliance with core principles. Following the issuance of an
order by the Commission that the electronic trading facility executes
or trades an agreement, contract or transaction that performs a
significant price discovery function, the electronic trading facility
must demonstrate, with respect to that agreement, contract or
transaction, compliance with the Core Principles under section
2(h)(7)(C) of the Act and the applicable provisions of this part. If
the Commission's order represents the first time it has determined that
one of the electronic trading facility's agreements, contracts or
transactions performs a significant price discovery function, the
facility must submit a
[[Page 12196]]
written demonstration of compliance with the Core Principles within 90
calendar days of the date of the Commission's order. For each
subsequent determination by the Commission that the electronic trading
facility has an additional agreement, contract or transaction that
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 30 calendar days of the date of the Commission's order.
Attention is directed to Appendix B of this part for guidance on and
acceptable practices for complying with the Core Principles.
Submissions demonstrating how the electronic trading facility complies
with the Core Principles with respect to its significant price
discovery contract must be filed with the Secretary of the Commission
at its Washington, DC headquarters. Submissions must include the
following:
(i) A written certification that the significant price discovery
contract(s) complies with the Act and regulations thereunder;
(ii) A copy of the electronic trading facility's rules (as defined
in Sec. 40.1 of this chapter) and any technical manuals, other guides
or instructions for users of, or participants in, the market, including
minimum financial standards for members or market participants.
Subsequent rule changes must be certified by the electronic trading
facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this
chapter. The electronic trading facility also may request Commission
approval of any rule changes pursuant to section 5c(c) of the Act and
Sec. 40.5 of this chapter;
(iii) A description of the trading system, algorithm, security and
access limitation procedures with a timeline for an order from input
through settlement, and a copy of any system test procedures, tests
conducted, test results and contingency or disaster recovery plans;
(iv) A copy of any documents pertaining to or describing the
electronic trading system's legal status and governance structure,
including governance fitness information;
(v) An executed or executable copy of any agreements or contracts
entered into or to be entered into by the electronic trading facility,
including partnership or limited liability company, third-party
regulatory service, or member or user agreements, that enable or
empower the electronic trading facility to comply with a Core
Principle;
(vi) A copy of any manual or other document describing, with
specificity, the manner in which the trading facility will conduct
trade practice, market and financial surveillance;
(vii) To the extent that any of the items in paragraphs (c)(4)(ii)
through (vi) of this section raise issues that are novel, or for which
compliance with a Core Principle is not self-evident, an explanation of
how that item satisfies the applicable Core Principle or Principles.
The electronic trading facility must identify with particularity
information in the submission that will be subject to a request for
confidential treatment pursuant to Sec. 145.09 of this chapter. The
electronic trading facility must follow the procedures specified in
Sec. 40.8 of this chapter with respect to any information in its
submission for which confidential treatment is requested.
(5) Determination of compliance with core principles. The
Commission shall take into consideration differences between cleared
and uncleared significant price discovery contracts when reviewing the
implementation of the Core Principles by an electronic trading
facility. The electronic facility also has reasonable discretion in
accounting for differences between cleared and uncleared significant
price discovery contracts when establishing the manner in which it
complies with the Core Principles.
(6) Information relating to compliance with core principles. Upon
request by the Commission, an electronic trading facility trading a
significant price discovery contract shall file with the Commission a
written demonstration, containing such supporting data, information and
documents, in the form and manner and within such time as the
Commission may specify, that the electronic trading facility is in
compliance with one or more Core Principles as specified in the
request, or that is otherwise requested by the Commission to enable the
Commission to satisfy its obligations under the Act.
(7) Enforceability. An agreement, contract or transaction entered
into on or pursuant to the rules of an electronic trading facility
trading or executing a significant price discovery contract shall not
be void, voidable, subject to rescission or otherwise invalidated or
rendered unenforceable as a result of:
(i) A violation by the electronic trading facility of the
provisions of section 2(h) of the Act or this part; or
(ii) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement or require an electronic trading facility
to adopt a specific term or condition, trading rule or procedure, or to
take or refrain from taking a specific action.
(8) Procedures for vacating a determination of a significant price
discovery function--(i) By the electronic trading facility. An
electronic trading facility that executes or trades an agreement,
contract or transaction that the Commission has determined performs a
significant price discovery function under paragraph (c)(3) of this
section may petition the Commission to vacate that determination. The
petition shall demonstrate that the agreement, contract or transaction
no longer performs a significant price discovery function under the
criteria specified in paragraph (c)(1), and has not done so for at
least the prior 12 months. An electronic trading facility shall not
petition for a vacation of a significant price discovery determination
more frequently than once every 12 months for any individual contract.
(ii) By the Commission. The Commission may, on its own initiative,
begin vacation proceedings if it believes that an agreement, contract
or transaction has not performed a significant price discovery function
for at least the prior 12 months.
(iii) Procedure. Before making a final determination whether an
agreement, contract or transaction has ceased to perform a significant
price discovery function, the Commission shall publish notice in the
Federal Register that it intends to undertake such a determination and
to receive written data, views and arguments relevant to its
determination from the electronic trading facility and other interested
persons. Written submissions shall be filed with the Secretary of the
Commission in the form and manner specified by the Commission, within
30 calendar days of publication of notice in the Federal Register or
within such other time specified by the Commission. After consideration
of all relevant information, the Commission shall issue an order
explaining its determination whether the agreement, contract or
transaction has ceased to perform a significant price discovery
function and, if so, vacating its prior order. If such an order issues,
and the Commission subsequently determines, on its own initiative or
after notification by the electronic trading facility, that the
agreement, contract or transaction that was subject to the vacation
order again performs a significant price discovery function, the
electronic trading facility must comply with the Core Principles within
30 calendar days of the date of the Commission's order.
[[Page 12197]]
(iv) Automatic vacation of significant price discovery
determination. Regardless of whether a proceeding to vacate has been
initiated, any significant price discovery contract that has no open
interest and in which no trading has occurred for a period of 12
complete and consecutive calendar months shall, without further
proceedings, no longer be considered to be a significant price
discovery contract.
0
30. Section 36.3 is amended by adding new paragraph (d) to read as
follows:
(d) Commission Review. The Commission shall, at least annually,
evaluate as appropriate agreements, contracts or transactions conducted
on an electronic trading facility in reliance on the exemption provided
in section 2(h)(3) of the Act to determine whether they serve a
significant price discovery function as described in Sec. (d)(1)
above.
0
31. Add a new Appendix A to Part 36 to read as follows:
Appendix A to Part 36--Guidance on Significant Price Discovery
Contracts
1. Section 2(h)(7) of the CEA specifies four factors that the
Commission must consider, as appropriate, in making a determination
that a contract is performing a significant price discovery
function. The four factors prescribed by the statute are: Price
Linkage; Arbitrage; Material Price Reference; and Material
Liquidity.
2. Not all listed factors must be present to support a
determination that a contract performs a significant price discovery
function. Moreover, the statutory language neither prioritizes the
factors nor specifies the degree to which a significant price
discovery contract must conform to the various factors. Congress has
indicated that it intends that the Commission should not make a
determination that an agreement, contract or transaction performs a
significant price discovery function on the basis of the Price
Linkage factor unless the agreement, contract or transaction also
has sufficient volume to impact other regulated contracts or to
become an independent price reference or benchmark that is regularly
utilized by the public. The Commission believes that the Arbitrage
and Material Price Reference factors can be considered separately
from each other. That is, the Commission could make a determination
that a contract serves a significant price discovery function based
on the presence of one of these factors and the absence of the
other. The presence of any of these factors, however, would not
necessarily be sufficient to establish the contract as a significant
price discovery contract. The fourth factor, Liquidity, would be
considered in conjunction with the arbitrage and linkage factors as
a significant amount of liquidity presumably would be necessary for
a contract to perform a significant price discovery function in
conjunction with these factors.
3. These factors do not lend themselves to a mechanical
checklist or formulaic analysis. Accordingly, this guidance is
intended to illustrate which factors, or combinations of factors,
the Commission will look to when determining that a contract is
performing a significant price discovery function, and under what
circumstances the presence of a particular factor or factors would
be sufficient to support such a determination.
(A) MATERIAL LIQUIDITY--The extent to which the volume of
agreements, contracts or transactions in the commodity being traded
on the electronic trading facility is sufficient to have a material
effect on other agreements, contracts or transactions listed for
trading on or subject to the rules of a designated contract market,
a derivatives transaction execution facility, or an electronic
trading facility operating in reliance on the exemption in section
2(h)(3) of the Act.
1. Liquidity is a broad concept that captures the ability to
transact immediately with little or no price concession.
Traditionally, objective measures of trading such as volume or open
interest have been used as measures of liquidity. So, for example, a
market in which trades occur multiple times per minute at prices
that differ by only fractions of a cent normally would be considered
highly liquid, since presumably a trader could quickly execute a
trade at a price that was approximately the same as the price for
other recently executed trades. Other factors also will affect the
characterization of liquidity, such as whether a large trade--e.g.,
100 contracts versus 1 contract--could be executed without a
significant price concession. For example, having to wait a day to
sell 1000 bushels of corn may be considered an illiquid market while
waiting a day to sell a home may be considered quite liquid. Thus,
quantifying the levels of immediacy and price concession that would
define material liquidity may differ from one market or commodity to
another.
2. The Commission believes that material liquidity alternatively
can be identified by the impact liquidity exhibits through observed
prices. In markets where material liquidity exists, a more or less
continuous stream of prices can be observed and the prices should be
similar. For example, if the trading of a contract occurs on average
five times a day, there will be on average five observed prices for
the contract per day. If the market is liquid in terms of traders
having to make little in the way of price concessions to execute
these trades, the prices of this contract should be similar to those
observed for similar or related contracts traded in liquid markets
elsewhere. Thus, in making determinations that contracts have
material liquidity, the Commission will look to transaction prices,
both in terms of how often prices are observed and the extent to
which observed prices tend to correlate with other contemporaneous
prices.
3. The Commission anticipates that material liquidity will
frequently be a consideration in evaluating whether a contract is a
significant price discovery contract; however, there may be
circumstances in which other factors so dominate the conclusion that
a contract is serving a significant price discovery function that a
finding of material liquidity in the contract would not be
necessary. Circumstances in which this might arise are discussed
with respect to the assessment of other factors below.
4. Finally, material liquidity itself would not be sufficient to
make a determination that a contract is a significant price
discovery contract, but combined with other factors it can serve as
a guidepost indicating which contracts are functioning as
significant price discovery contracts. As further discussed below,
material liquidity, as reflected through the prices of linked or
arbitraged contracts, will be a primary consideration in determining
whether such contracts are significant price discovery contracts.
(B) PRICE LINKAGE--The extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final
settlement price, or other major price parameter, of a contract or
contracts listed for trading on or subject to the rules of a
designated contract market or a derivatives transaction execution
facility, or a significant price discovery contract traded on an
electronic trading facility, to value a position, transfer or
convert a position, cash or financially settle a position, or close
out a position.
1. A price-linked contract is a contract that relies on a
contract traded on another trading facility to settle, value or
otherwise offset the price-linked contract. The link may involve a
one-to-one linkage, in that the value of the linked contract is
based on a single contract's price, or it may involve multiple
contracts. An example of a multiple contract linkage might be where
the settlement price is calculated as an index of prices obtained
from a basket of contracts traded on other exchanges.
2. For a linked contract, the mere fact that a contract is
linked to another contract will not be sufficient to support a
determination that a contract performs a significant price discovery
function. To assess whether such a determination is warranted, the
Commission will examine the relationship between transaction prices
of the linked contract and the prices of the referenced contract(s).
The Commission believes that where material liquidity exists, prices
for the linked contract would be observed to be substantially the
same as or move substantially in conjunction with the prices of the
referenced contract(s). Where such price characteristics are
observed on an ongoing basis, the Commission would expect to
determine that the linked contract is a significant price discovery
contract.
3. As an example, where the Commission has observed price
linkage, it will next consider whether transactions were occurring
on a daily basis for the linked contract in material volumes.
(Conversely, where volume has increased noticeably in a particular
contract, the Commission would look for linkage) The ultimate level
of volume that would be considered material for purposes of deeming
a contract a significant price discovery contract will likely differ
from one contract to another depending on the characteristics of the
underlying commodity and the overall size of the physical market in
which it is traded. At a minimum, however, the Commission will
consider a linked contract which has volume
[[Page 12198]]
equal to 5% of the volume of trading in the contract to which it is
linked to have sufficient volume potentially to be deemed a
significant price discovery contract.
4. In combination with this volume level, the Commission will
also examine the relationship between prices of the linked contract
and the contract to which it is linked to determine whether a
contract is serving a significant price discovery function. As a
threshold, the Commission will consider a 2.5 percent price range
for 95 percent of contemporaneously determined closing, settlement,
or other daily prices over the most recent quarter to be
sufficiently close for a linked contract potentially to be deemed a
significant price discovery contract. For example, if, over the most
recent quarter, it was found that 95 percent of the closing,
settlement, or other daily prices of the contract, which have been
calculated using transaction prices, were within 2.5 percent of the
contemporaneously determined closing, settlement, or other daily
prices of a contract to which it was linked, the Commission
potentially would consider the contract to perform a significant
price discovery function.
(C) ARBITRAGE CONTRACTS--The extent to which the price for the
agreement, contract or transaction is sufficiently related to the
price of a contract or contracts listed for trading on or subject to
the rules of a designated contract market or derivatives transaction
execution facility, or a significant price discovery contract or
contracts trading on or subject to the rules of an electronic
trading facility, so as to permit market participants to effectively
arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis.
1. Arbitrage contracts are those contracts that can be combined
with other contracts to exploit expected economic relationships in
anticipation of a profit. In assessing whether a contract can be
incorporated into an arbitrage strategy, the Commission will weigh
the terms and conditions of a contract in comparison to contracts
that potentially could be used in an arbitrage strategy; will
consult with industry or other sources regarding a contract's
viability in an arbitrage strategy; and will rely on direct
observation confirming the use of a contract in arbitrage
strategies.
2. As with linked contracts, the mere fact that a contract could
be employed in an arbitrage strategy will not be sufficient to make
a determination that a contract is a significant price discovery
contract. In addition, the level of liquidity will be considered. To
assess whether designation as a significant price discovery contract
is warranted, the Commission will examine the relationship between
transaction prices of an arbitrage contract and the prices of the
contract(s) to which it is related. The Commission believes that
where material liquidity exists, prices for the arbitrage contract
would be observed to move substantially in conjunction with the
prices of the related contract(s) to which it is economically
linked. Where such price characteristics are observed on an ongoing
basis, it is likely that the linked contract performs a significant
price discovery function.
3. The Commission will apply the same threshold liquidity and
price relationship standards for arbitrage contracts as it does for
linked contracts. That is, the Commission will view the average of
five trades per day or more threshold as the level of activity that
would potentially meet the material volume criterion. With respect
to prices, the Commission will consider an arbitrage contract
potentially to be a significant price discovery contract if, over
the most recent quarter, greater than 95 percent of the closing or
settlement prices of the contract, which have been calculated using
transaction prices, fall within 2.5 percent of the closing or
settlement price of the contract or contracts to which it could be
arbitraged.
(D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent
and recurring basis, bids, offers or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility.
1. The Commission will rely on one of two sources of evidence--
direct or indirect--to determine that the price of a contract was
being used as a material price reference and, therefore, serving a
significant price discovery function. The primary source of direct
evidence is that cash market bids, offers or transactions are
directly based on, or quoted at a differential to, the prices
generated on the market on a frequent and recurring basis. The
Commission expects that normally only contracts with material
liquidity will be referenced by the cash market; however, the
Commission notes that it may be possible for a contract to have very
low liquidity and yet still be used as a price reference. In such
cases, the simple fact that participants in the underlying cash
market broadly have elected to use the contract price as a price
reference would be a strong indicator that the contract is a
significant price discovery contract.
2. In evaluating a contract's price discovery role as a directly
referenced price source, the Commission will perform an analysis to
determine whether cash market participants are quoting bid or offer
prices or entering into transactions at prices that are set either
explicitly or implicitly at a differential to prices established for
the contract. Cash market prices are set explicitly at a
differential to the section 2(h)(3) contract when, for instance,
they are quoted in dollars and cents above or below the reference
contract's price. Cash market prices are set implicitly at a
differential to a section 2(h)(3) contract when, for instance, they
are arrived at after adding to, or subtracting from the section
2(h)(3) contract, but then quoted or reported at a flat price. The
Commission will also consider whether cash market entities are
quoting cash prices based on a section 2(h)(3) contract on a
frequent and recurring basis.
3. The second source of evidence is that the price of the
contract is being routinely disseminated in widely distributed
industry publications--or offered by the ECM itself for some form of
remuneration--and consulted on a frequent and recurring basis by
industry participants in pricing cash market transactions. As with
contract prices that are directly incorporated into cash market
prices, the Commission assumes that industry publications choose to
publish prices because of the value they transfer to industry
participants for the purpose of formulating prices in the cash
market.
4. In applying this criterion, consideration will be given to
whether prices established by a section 2(h)(3) contract are
reported in a widely distributed industry publication. In making
this determination, the Commission will consider the reputation of
the publication within the industry, how frequently it is published,
and whether the information contained in the publication is
routinely consulted by industry participants in pricing cash market
transactions.
5. Under a Material Price Reference analysis, the Commission
expects that material liquidity in the contract likely will be the
primary motivation for a publisher to publish particular prices. In
other words, the fact that the price of a contract is being used as
a reference by industry participants suggests, prima facie, that the
contract performs a significant price discovery function. But the
Commission recognizes that trading levels could nonetheless be low
for the contract while still serving a significant price discovery
function and that evidence of routine publication and consultation
by industry participants may be sufficient to establish the contract
as a significant price discovery contract. On the other hand, while
cash market participants may regularly refer to published prices of
a particular contract when establishing cash market prices, it may
be the case that the contract itself is a niche market for a
specialized grade of the commodity or for delivery at a minor
geographic location. In such cases, the Commission will look to such
measures as trading volume, open interest, and the significance of
the underlying cash market to make a determination that a contract
is functioning as a significant price discovery contract. If an
examination of trading in the contract were to reveal that true
price discovery was occurring in other more broadly defined
contracts and that this contract was itself simply reflective of
those broader contracts, it is less likely the Commission will deem
the contract a significant price discovery contract.
6. Because price referencing normally occurs out of the view of
the electronic trading facility, the Commission may have difficulty
ascertaining the extent to which cash market participants actually
reference or consult a contract's price when transacting. The
Commission expects, however, that as a contract begins to be relied
upon to set a reference price, market participants will be
increasingly willing to purchase price information. To the extent,
then, that an electronic trading facility begins to sell its price
information regarding a contract to market participants or industry
publications, the contract will meet a threshold standard to
indicate that the contract potentially is a significant price
discovery contract.
0
32. Add a new Appendix B to Part 36 to read as follows:
[[Page 12199]]
Appendix B to Part 36--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
1. This Appendix provides guidance on complying with the core
principles under section 2(h)(7)(C) of the Act and this part, both
initially and on an ongoing basis. The guidance is provided in
paragraph (a) following each core principle and can be used to
demonstrate to the Commission core principle compliance under Sec.
36.3(c)(4). The guidance for each core principle is illustrative
only of the types of matters an electronic trading facility may
address, as applicable, and is not intended to be used as a
mandatory checklist. Addressing the issues and questions set forth
in this guidance will help the Commission in its consideration of
whether the electronic trading facility is in compliance with the
core principles. A submission pursuant to Sec. 36.3(c)(4) should
include an explanation or other form of documentation demonstrating
that the electronic trading facility complies with the core
principles.
2. Acceptable practices meeting selected requirements of the
core principles are set forth in paragraph (b) following each core
principle. Electronic trading facilities on which significant price
discovery contracts are traded or executed that follow the specific
practices outlined under paragraph (b) for any core principle in
this appendix will meet the selected requirements of the applicable
core principle. Paragraph (b) is for illustrative purposes only, and
does not state the exclusive means for satisfying a core principle.
CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY
SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall
list only significant price discovery contracts that are not readily
susceptible to manipulation.
(a) Guidance. Upon determination by the Commission that a
contract listed for trading on an electronic trading facility is a
significant price discovery contract, the electronic trading
facility must self-certify the terms and conditions of the
significant price discovery contract under Sec. 36.3(c)(4) within
90 calendar days of the date of the Commission's order, if the
contract is the electronic trading facility's first significant
price discovery contract; or 30 days from the date of the
Commission's order if the contract is not the electronic trading
facility's first significant price discovery contract. Once the
Commission determines that a contract performs a significant price
discovery function, subsequent rule changes must be self-certified
to the Commission by the electronic trading facility pursuant to
Sec. 40.6 or submitted to the Commission for review and approval
pursuant to Sec. 40.5.
(b) Acceptable practices. Guideline No. 1, 17 CFR part 40,
Appendix A may be used as guidance in meeting this core principle
for significant price discovery contracts.
CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING.
The electronic trading facility shall monitor trading in significant
price discovery contracts to prevent market manipulation, price
distortion, and disruptions of the delivery of cash-settlement
process through market surveillance, compliance and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, demonstrate a capacity to prevent
market manipulation and have trading and participation rules to
detect and deter abuses. The facility should seek to prevent market
manipulation and other trading abuses through a dedicated regulatory
department or by delegation of that function to an appropriate third
party. An electronic trading facility also should have the authority
to intervene as necessary to maintain an orderly market.
(b) Acceptable practices--(1) An acceptable trade monitoring
program. An acceptable trade monitoring program should facilitate,
on both a routine and non-routine basis, arrangements and resources
to detect and deter abuses through direct surveillance of each
significant price discovery contract. Direct surveillance of each
significant price discovery contract will generally involve the
collection of various market data, including information on
participants' market activity. Those data should be evaluated on an
ongoing basis in order to make an appropriate regulatory response to
potential market disruptions or abusive practices. For contracts
with a substantial number of participants, an effective surveillance
program should employ a much more comprehensive large trader
reporting system.
(2) Authority to collect information and documents. The
electronic trading facility should have the authority to collect
information and documents in order to reconstruct trading for
appropriate market analysis. Appropriate market analysis should
enable the electronic trading facility to assess whether each
significant price discovery contract is responding to the forces of
supply and demand. Appropriate data usually include various
fundamental data about the underlying commodity, its supply, its
demand, and its movement through market channels. Especially
important are data related to the size and ownership of deliverable
supplies--the existing supply and the future or potential supply--
and to the pricing of the deliverable commodity relative to the
futures price and relative to similar, but non-deliverable, kinds of
the commodity. For cash-settled contracts, it is more appropriate to
pay attention to the availability and pricing of the commodity
making up the index to which the contract will be settled, as well
as monitoring the continued suitability of the methodology for
deriving the index.
(3) Ability to assess participants' market activity and power.
To assess participants' activity and potential power in a market,
electronic trading facilities, with respect to significant price
discovery contracts, at a minimum should have routine access to the
positions and trading of its participants and, if applicable, should
provide for such access through its agreements with its third-party
provider of clearing services.
CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN
INFORMATION. The electronic trading facility shall establish and
enforce rules that allow the electronic trading facility to obtain
any necessary information to perform any of the functions described
in this subparagraph, provide the information to the Commission upon
request, and have the capacity to carry out such international
information-sharing agreements as the Commission may require.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, have the ability and authority to
collect information and documents on both a routine and non-routine
basis, including the examination of books and records kept by
participants. This includes having arrangements and resources for
recording full data entry and trade details and safely storing audit
trail data. An electronic trading facility should have systems
sufficient to enable it to use the information for purposes of
assisting in the prevention of participant and market abuses through
reconstruction of trading and providing evidence of any violations
of the electronic trading facility's rules.
(b) Acceptable practices--(1) The goal of an audit trail is to
detect and deter market abuse. An effective contract audit trail
should capture and retain sufficient trade-related information to
permit electronic trading facility staff to detect trading abuses
and to reconstruct all transactions within a reasonable period of
time. An audit trail should include specialized electronic
surveillance programs that identify potentially abusive trades and
trade patterns. An acceptable audit trail must be able to track an
order from time of entry into the trading system through its fill.
The electronic trading facility must create and maintain an
electronic transaction history database that contains information
with respect to transactions executed on each significant price
discovery contract.
(2) An acceptable audit trail should include the following:
original source documents, transaction history, electronic analysis
capability, and safe storage capability. An acceptable audit trail
system would satisfy the following practices.
(i) Original source documents. Original source documents include
unalterable, sequentially identified records on which trade
execution information is originally recorded. For each order
(whether filled, unfilled or cancelled, each of which should be
retained or electronically captured), such records reflect the terms
of the order, an account identifier that relates back to the
account(s) owner(s), and the time of order entry.
(ii) Transaction history. A transaction history consists of an
electronic history of each transaction, including (a) all the data
that are input into the trade entry or matching system for the
transaction to match and clear; (b) timing and sequencing data
adequate to reconstruct trading; and (c) the identification of each
account to which fills are allocated.
(iii) Electronic analysis capability. An electronic analysis
capability that permits
[[Page 12200]]
sorting and presenting data included in the transaction history so
as to reconstruct trading and to identify possible trading
violations with respect to market abuse.
(iv) Safe storage capability. Safe storage capability provides
for a method of storing the data included in the transaction history
in a manner that protects the data from unauthorized alteration, as
well as from accidental erasure or other loss. Data should be
retained in the form and manner specified by the Commission or,
where no acceptable manner of retention is specified, in accordance
with the recordkeeping standards of Commission rule 1.31.
(3) Arrangements and resources for the disclosure of the
obtained information and documents to the Commission upon request.
To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading
facility should maintain records of all information and documents
related to each significant price discovery contract in a form and
manner acceptable to the Commission. Where no acceptable manner of
maintenance is specified, records should be maintained in accordance
with the recordkeeping standards of Commission rule 1.31.
(4) The capacity to carry out appropriate information-sharing
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the
Commission can act in conjunction with the electronic trading
facility to carry out such information sharing.
CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR
ACCOUNTABILITY. The electronic trading facility shall adopt, where
necessary and appropriate, position limitations or position
accountability for speculators in significant price discovery
contracts, taking into account positions in other agreements,
contracts and transactions that are treated by a derivatives
clearing organization, whether registered or not registered, as
fungible with such significant price discovery contracts to reduce
the potential threat of market manipulation or congestion,
especially during trading in the delivery month.
(a) Guidance. [Reserved]
(b) Acceptable practices for uncleared trades [Reserved]
(c) Acceptable practices for cleared trades--(1) Introduction.
In order to diminish potential problems arising from excessively
large speculative positions, and to facilitate orderly liquidation
of expiring contracts, an electronic trading facility relying on the
exemption in section 2(h)(3) should adopt rules that set position
limits or accountability levels on traders' cleared positions in
significant price discovery contracts. These position limit rules
specifically may exempt bona fide hedging; permit other exemptions;
or set limits differently by market, delivery month or time period.
For the purpose of evaluating a significant price discovery
contract's speculative-limit program for cleared positions, the
Commission will consider the specified position limits or
accountability levels, aggregation policies, types of exemptions
allowed, methods for monitoring compliance with the specified limits
or levels, and procedures for dealing with violations.
(2) Accounting for cleared trades--(i) Speculative-limit levels
typically should be set in terms of a trader's combined position
involving cleared trades in a significant price discovery contract,
plus positions in agreements, contracts and transactions that are
treated by a derivatives clearing organization, whether registered
or not registered, as fungible with such significant price discovery
contract. (This circumstance typically exists where an exempt
commercial market lists a particular contract for trading but also
allows for positions in that contract to be cleared together with
positions established through bilateral or off-exchange
transactions, such as block trades, in the same contract.
Essentially, both the on-facility and off-facility transactions are
considered fungible with each other.) In this connection, the
electronic trading facility should make arrangements to ensure that
it is able to ascertain accurate position data for the market. (ii)
For significant price discovery contracts that are traded on a
cleared basis, the electronic trading facility should apply position
limits to cleared transactions in the contract.
(3) Limitations on spot-month positions. Spot-month limits
should be adopted for significant price discovery contracts to
minimize the susceptibility of the market to manipulation or price
distortions, including squeezes and corners or other abusive trading
practices.
(i) Contracts economically equivalent to an existing contract.
An electronic trading facility that lists a significant price
discovery contract that is economically-equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market or derivatives transaction execution
facility should set the spot-month limit for its significant price
discovery contract at the same level as that specified for the
economically-equivalent contract.
(ii) Contracts that are not economically equivalent to an
existing contract. There may not be an economically-equivalent
significant price discovery contract or economically-equivalent
contract traded on a designated contract market or derivatives
transaction execution facility. In this case, the spot-month
speculative position limit should be established in the following
manner. The spot-month limit for a physical delivery market should
be based upon an analysis of deliverable supplies and the history of
spot-month liquidations. The spot-month limit for a physical-
delivery market is appropriately set at no more than 25 percent of
the estimated deliverable supply. In the case where a significant
price discovery contract has a cash settlement provision, the spot-
month limit should be set at a level that minimizes the potential
for price manipulation or distortion in the significant price
discovery contract itself; in related futures and options contracts
traded on a designated contract market or derivatives transaction
execution facility; in other significant price discovery contracts;
in other fungible agreements, contracts and transactions; and in the
underlying commodity.
(4) Position accountability for non-spot-month positions. The
electronic trading facility should establish for its significant
price discovery contracts non-spot individual month position
accountability levels and all-months-combined position
accountability levels. An electronic trading facility may establish
non-spot individual month position limits and all-months-combined
position limits for its significant price discovery contracts in
lieu of position accountability levels.
(i) Definition. Position accountability provisions provide a
means for an exchange to monitor traders' positions that may
threaten orderly trading. An acceptable accountability provision
sets target accountability threshold levels that may be exceeded,
but once a trader breaches such accountability levels, the
electronic trading facility should initiate an inquiry to determine
whether the individual's trading activity is justified and is not
intended to manipulate the market. As part of its investigation, the
electronic trading facility may inquire about the trader's rationale
for holding a position in excess of the accountability levels. An
acceptable accountability provision should provide the electronic
trading facility with the authority to order the trader not to
further increase positions. If a trader fails to comply with a
request for information about positions held, provides information
that does not sufficiently justify the position, or continues to
increase contract positions after a request not to do so is issued
by the facility, then the accountability provision should enable the
electronic trading facility to require the trader to reduce
positions.
(ii) Contracts economically equivalent to an existing contract.
When an electronic trading facility lists a significant price
discovery contract that is economically equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market or derivatives transaction execution
facility, the electronic trading facility should set the non-spot
individual month position accountability level and all-months-
combined position accountability level for its significant price
discovery contract at the same levels, or lower, as those specified
for the economically-equivalent contract.
(iii) Contracts that are not economically equivalent to an
existing contract. For significant price discovery contracts that
are not economically equivalent to an existing contract, the trading
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10
percent of the average combined futures and delta-adjusted option
month-end open interest for the most recent calendar year. For
electronic trading facilities that choose to adopt non-spot
individual month and all-months-combined position limits in lieu of
position accountability levels for their significant price discovery
contracts, the limits should be set in the same manner as the
accountability levels.
(iv) Contracts economically equivalent to an existing contract
with position limits. If a significant price discovery contract is
economically equivalent to another significant price discovery
contract or to a contract traded on a designated contract
[[Page 12201]]
market or derivatives transaction execution facility that has
adopted non-spot or all-months-combined position limits, the
electronic trading facility should set non-spot month position
limits and all-months-combined position limits for its significant
price discovery contract at the same (or lower) levels as those
specified for the economically-equivalent contract.
(5) Account aggregation. An electronic trading facility should
have aggregation rules for significant price discovery contracts
that apply to accounts under common control, those with common
ownership, i.e., where there is a ten percent or greater financial
interest, and those traded according to an express or implied
agreement. Such aggregation rules should apply to cleared
transactions with respect to applicable speculative position limits.
An electronic trading facility will be permitted to set more
stringent aggregation policies. An electronic trading facility may
grant exemptions to its price discovery contracts' position limits
for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)
and may grant exemptions for reduced risk positions, such as
spreads, straddles and arbitrage positions.
(6) Implementation deadlines. An electronic trading facility
with a significant price discovery contract is required to comply
with Core Principle IV as set forth in section 2(h)(7)C) of the Act
within 90 calendar days of the date of the Commission's order
determining that the contract performs a significant price discovery
function if such contract is the electronic trading facility's first
significant price discovery contract, or within 30 days of the date
of the Commission's order if such contract is not the electronic
trading facility's first significant price discovery contract. For
the purpose of applying limits on speculative positions in newly-
determined significant price discovery contracts, the Commission
will permit a grace period following issuance of its order for
traders with cleared positions in such contracts to become compliant
with applicable position limit rules. Traders who hold cleared
positions on a net basis in the electronic trading facility's
significant price discovery contract must be at or below the
specified position limit level no later than 90 calendar days from
the date of the electronic trading facility's implementation of
position limit rules, unless a hedge exemption is granted by the
electronic trading facility. This grace period applies to both
initial and subsequent price discovery contracts. Electronic trading
facilities should notify traders of this requirement promptly upon
implementation of such rules.
(7) Enforcement provisions. The electronic trading facility
should have appropriate procedures in place to monitor its position
limit and accountability provisions and to address violations.
(i) An electronic trading facility with significant price
discovery contracts should use an automated means of detecting
traders' violations of speculative limits or exemptions,
particularly if the significant price discovery contracts have large
numbers of traders. An electronic trading facility should monitor
the continuing appropriateness of approved exemptions by
periodically reviewing each trader's basis for exemption or
requiring a reapplication. An automated system also should be used
to determine whether a trader has exceeded applicable non-spot
individual month position accountability levels and all-months-
combined position accountability levels.
(ii) An electronic trading facility should establish a program
for effective enforcement of position limits for significant price
discovery contracts. Electronic trading facilities should use a
large trader reporting system to monitor and enforce daily
compliance with position limit rules. The Commission notes that an
electronic trading facility may allow traders to periodically apply
to the electronic trading facility for an exemption and, if
appropriate, be granted a position level higher than the applicable
speculative limit. The electronic trading facility should establish
a program to monitor approved exemptions from the limits. The
position levels granted under such hedge exemptions generally should
be based upon the trader's commercial activity in related markets
including, but not limited to, positions held in related futures and
options contracts listed for trading on designated contract markets,
fungible agreements, contracts and transactions, as determined by
either a registered or unregistered derivatives clearing
organization. Electronic trading facilities may allow a brief grace
period where a qualifying trader may exceed speculative limits or an
existing exemption level pending the submission and approval of
appropriate justification. An electronic trading facility should
consider whether it wants to restrict exemptions during the last
several days of trading in a delivery month. Acceptable procedures
for obtaining and granting exemptions include a requirement that the
electronic trading facility approve a specific maximum higher level.
(iii) An acceptable speculative limit program should have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The electronic trading
facility policies should consider appropriate actions.
(8) Violation of Commission rules. A violation of position
limits for significant price discovery contracts that have been
self-certified by an electronic trading facility is also a violation
of section 4a(e) of the Act.
CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The
electronic trading facility shall adopt rules to provide for the
exercise of emergency authority, in consultation or cooperation with
the Commission, where necessary and appropriate, including the
authority to liquidate open positions in significant price discovery
contracts and to suspend or curtail trading in a significant price
discovery contract.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded should have clear
procedures and guidelines for decision-making regarding emergency
intervention in the market, including procedures and guidelines to
avoid conflicts of interest while carrying out such decision-making.
An electronic trading facility on which significant price discovery
contracts are executed or traded should also have the authority to
intervene as necessary to maintain markets with fair and orderly
trading as well as procedures for carrying out the intervention.
Procedures and guidelines should include notifying the Commission of
the exercise of the electronic trading facility's regulatory
emergency authority, explaining how conflicts of interest are
minimized, and documenting the electronic trading facility's
decision-making process and the reasons for using its emergency
action authority. Information on steps taken under such procedures
should be included in a submission of a certified rule and any
related submissions for rule approval pursuant to part 40 of this
chapter, when carried out pursuant to an electronic trading
facility's emergency authority. To address perceived market threats,
the electronic trading facility on which significant price discovery
contracts are executed or traded should, among other things, be able
to impose position limits in the delivery month, impose or modify
price limits, modify circuit breakers, call for additional margin
either from market participants or clearing members (for contracts
that are cleared through a clearinghouse), order the liquidation or
transfer of open positions, order the fixing of a settlement price,
order a reduction in positions, extend or shorten the expiration
date or the trading hours, suspend or curtail trading on the
electronic trading facility, order the transfer of contracts and the
margin for such contracts from one market participant to another, or
alter the delivery terms or conditions or, if applicable, should
provide for such actions through its agreements with its third-party
provider of clearing services.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF
TRADING INFORMATION. The electronic trading facility shall make
public daily information on price, trading volume, and other trading
data to the extent appropriate for significant price discovery
contracts.
(a) Guidance. An electronic trading facility, with respect to
significant price discovery contracts, should provide to the public
information regarding settlement prices, price range, volume, open
interest, and other related market information for all applicable
contracts as determined by the Commission on a fair, equitable and
timely basis. Provision of information for any applicable contract
can be through such means as provision of the information to a
financial information service or by timely placement of the
information on the electronic trading facility's public Web site.
(b) Acceptable practices. Compliance with Sec. 16.01 of this
chapter, which is mandatory, is an acceptable practice that
satisfies the requirements of Core Principle VI.
CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES.
The electronic trading facility shall monitor and enforce compliance
with the rules of the electronic trading facility, including the
terms and conditions of any contracts to be traded and any
limitations on access to the electronic trading facility.
[[Page 12202]]
(a) Guidance--(1) An electronic trading facility on which
significant price discovery contracts are executed or traded should
have appropriate arrangements and resources for effective trade
practice surveillance programs, with the authority to collect
information and documents on both a routine and non-routine basis,
including the examination of books and records kept by its market
participants. The arrangements and resources should facilitate the
direct supervision of the market and the analysis of data collected.
Trade practice surveillance programs may be carried out by the
electronic trading facility itself or through delegation or
contracting-out to a third party. If the electronic trading facility
on which significant price discovery contracts are executed or
traded delegates or contracts-out the trade practice surveillance
responsibility to a third party, such third party should have the
capacity and authority to carry out such programs, and the
electronic trading facility should retain appropriate supervisory
authority over the third party.
(2) An electronic trading facility on which significant price
discovery contracts are executed or traded should have arrangements,
resources and authority for effective rule enforcement. The
Commission believes that this should include the authority and
ability to discipline and limit or suspend the activities of a
market participant as well as the authority and ability to terminate
the activities of a market participant pursuant to clear and fair
standards. The electronic trading facility can satisfy this
criterion for market participants by expelling or denying such
person's future access upon a determination that such a person has
violated the electronic trading facility's rules.
(b) Acceptable practices. An acceptable trade practice
surveillance program generally would include:
(1) Maintenance of data reflecting the details of each
transaction executed on the electronic trading facility;
(2) Electronic analysis of this data routinely to detect
potential trading violations;
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to the electronic trading
facility's attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend the activities of a market
participant pursuant to clear and fair standards that are available
to market participants. See, e.g., 17 CFR part 8.
CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF
INTEREST. The electronic trading facility on which significant price
discovery contracts are executed or traded shall establish and
enforce rules to minimize conflicts of interest in the decision-
making process of the electronic trading facility and establish a
process for resolving such conflicts of interest.
(a) Guidance.
(1) The means to address conflicts of interest in the decision-
making of an electronic trading facility on which significant price
discovery contracts are executed or traded should include methods to
ascertain the presence of conflicts of interest and to make
decisions in the event of such a conflict. In addition, the
Commission believes that the electronic trading facility on which
significant price discovery contracts are executed or traded should
provide for appropriate limitations on the use or disclosure of
material non-public information gained through the performance of
official duties by board members, committee members and electronic
trading facility employees or gained through an ownership interest
in the electronic trading facility or its parent organization(s).
(2) All electronic trading facilities on which significant price
discovery contracts are traded bear special responsibility to
regulate effectively, impartially, and with due consideration of the
public interest, as provided in section 3 of the Act. Under Core
Principle VIII, they are also required to minimize conflicts of
interest in their decision-making processes. To comply with this
core principle, electronic trading facilities on which significant
price discovery contracts are traded should be particularly vigilant
for such conflicts between and among any of their self-regulatory
responsibilities, their commercial interests, and the several
interests of their management, members, owners, market participants,
other industry participants and other constituencies.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST
CONSIDERATIONS. Unless necessary or appropriate to achieve the
purposes of this Act, the electronic trading facility, with respect
to any significant price discovery contracts, shall endeavor to
avoid adopting any rules or taking any actions that result in any
unreasonable restraints of trade or imposing any material
anticompetitive burden on trading on the electronic trading
facility.
(a) Guidance. An electronic trading facility, with respect to a
significant price discovery contract, may at any time request that
the Commission consider under the provisions of section 15(b) of the
Act any of the electronic trading facility's rules, which may be
trading protocols or policies, operational rules, or terms or
conditions of any significant price discovery contract. The
Commission intends to apply section 15(b) of the Act to its
consideration of issues under this core principle in a manner
consistent with that previously applied to contract markets.
(b) Acceptable practices. [Reserved]
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
33. The authority citation for part 40 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).
0
34. Revise the heading of part 40 as set forth above.
Sec. 40.1 [Amended]
0
35. Section 40.1 is amended as follows:
0
A. The term ``registered entity'' is removed and the term ``designated
contract market, derivatives transaction execution facility or
derivatives clearing organization'' is added in its place in paragraphs
(b)(2), (b)(3), and (f)(2); and
0
B. The term ``contract market, derivatives transaction execution
facility or derivatives clearing organization'' is removed and the term
``registered entity'' is added in its place in paragraph (h).
0
36. Section 40.2 is amended as follows:
0
A. The term ``registered entity'' is removed and ``designated contract
market, derivatives transaction execution facility or derivatives
clearing organization'' is added in its place in paragraph (a)
introductory text;
0
B. The term ``registered entity'' is removed and ``designated contract
market or derivatives transaction execution facility'' is added in its
place in paragraphs (a)(1) and (a)(3)(iv); and
0
C. Paragraph (b) is revised to read as follows:
Sec. 40.2 Listing and accepting products for trading or clearing by
certification.
* * * * *
(b) A registered entity shall provide, if requested by Commission
staff, additional evidence, information or data relating to whether any
contract meets, initially or on a continuing basis, any of the
requirements of the Act or Commission rules or policies thereunder
which may be beneficial to the Commission in conducting a due diligence
assessment of the product and the entity's compliance with these
requirements.
* * * * *
Sec. 40.3 [Amended]
0
37. Section 40.3 is amended by removing the term ``registered entity''
and adding in its place the term ``designated contract market or
registered derivatives transaction execution facility'' in paragraphs
(a)(1), (c)(1), (c)(2), and (e)(2).
Sec. 40.6 [Amended]
0
38. Section 40.4 is amended by removing the term ``registered entity''
and adding in its place the term ``designated contract market'' in
paragraph (b)(9)(ii).
0
39. Section 40.6 is amended by revising paragraphs (a)(2),
(c)(3)(ii)(G), and (c)(3)(ii)(H) to read as follows:
Sec. 40.6 Self-certification of rules.
(a) * * *
[[Page 12203]]
(2) The registered entity has filed its submission electronically
in a format specified by the Secretary of the Commission with the
Secretary of the Commission at [email protected], the relevant
branch chief at the regional office having local jurisdiction over the
registered entity, and, for filings submitted by a designated contract
market, registered derivatives transaction execution facility, or
electronic trading facility on which significant price discovery
contracts are traded or executed, the Division of Market Oversight at
[email protected], and the Commission has received the submission
at its headquarters by the open of business on the business day
preceding implementation of the rule; provided, however, rules or rule
amendments implemented under procedures of the governing board to
respond to an emergency as defined in Sec. 40.1, shall, if
practicable, be filed with the Commission prior to the implementation
or, if not practicable, be filed with the Commission at the earliest
possible time after implementation, but in no event more than twenty-
four hours after implementation; and
* * * * *
(c) * * *
(3) * * *
(ii) * * *
(G) Option contract terms. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, changes to option contract rules relating to the strike price
listing procedures, strike price intervals, and the listing of strike
prices on a discretionary basis.
(H) Trading Months. For registered entities that are in compliance
with the daily reporting requirements of Sec. 16.01 of this chapter,
the initial listing of trading months which are within the currently
established cycle of trading months.
* * * * *
Sec. 40.7 [Amended]
0
40. Section 40.7 is amended by removing the term ``designated contract
market, registered derivatives transaction execution facility or
registered derivatives clearing organization'' and adding in its place
the term ``registered entity'' in paragraph (b).
0
41. Section 40.8 is amended by revising paragraph (a), redesignating
paragraph (b) as paragraph (c), and adding new paragraph (b) to read as
follows:
Sec. 40.8 Availability of public information.
(a) The following sections of all applications to become a
designated contract market, derivatives execution transaction facility
or designated clearing organization will be public: transmittal letter,
proposed rules, the applicant's regulatory compliance chart, documents
establishing the applicant's legal status, documents setting forth the
applicant's governance structure, and any other part of the application
not covered by a request for confidential treatment.
(b) The following submissions required by Sec. 36.3(c)(4) of this
chapter by an electronic trading facility on which significant price
discovery contracts are traded or executed will be public: rulebook,
the facility's regulatory compliance chart, documents establishing the
facility's legal status, documents setting forth the facility's
governance structure, and any other parts of the submissions not
covered by a request for confidential treatment.
* * * * *
0
42. Appendix D to part 40 is revised to read as follows:
Appendix D to Part 40--Submission Cover Sheet and Instructions
A properly completed submission cover sheet must accompany all
rule submissions submitted electronically by a registered entity to
the Secretary of the Commodity Futures Trading Commission, at
[email protected] in a format specified by the Secretary of the
Commission.
Each submission should include the following:
1. Identifier Code (optional)--If applicable, the exchange or
clearing organization Identifier Code at the top of the cover sheet.
Such codes are commonly generated by the exchanges or clearing
organizations to provide an identifier that is unique to each filing
(e.g., NYMEX Submission 03-116).
2. Date--The date of the filing.
3. Organization--The name of the organization filing the
submission (e.g., CBOT).
4. Filing as a--Check the appropriate box for a designated
contract market (DCM), derivatives clearing organization (DCO),
derivatives transaction execution facility (DTEF), or electronic
trading facility with a significant price discovery contract (ECM-
SPDC).
5. Type of Filing--Indicate whether the filing is a rule
amendment or new product and the applicable category under that
heading.
6. Rule Numbers--For rule filings only, identify rule number(s)
being adopted or modified in the case of rule amendment filings.
7. Description--For rule or rule amendment filings only, enter a
brief description of the new rule or rule amendment. This narrative
should describe the substance of the submission with enough
specificity to characterize all essential aspects of the filing.
8. Other Requirements--Comply with all filing requirements for
the underlying proposed rule or rule amendment. The filing of the
submission cover sheet does not obviate the responsibility to comply
with any applicable filing requirement (e.g., rules submitted for
Commission approval under Sec. 40.5 must be accompanied by an
explanation of the purpose and effect of the proposed rule along
with a description of any substantive opposing views). Rules
submitted for Commission approval under Sec. 40.5 must be
accompanied by an explanation of the purpose and effect of the
proposed rule along with a description of any substantive opposing
views).
Issued in Washington, DC, this 16th day of March, 2009, by the
Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E9-6044 Filed 3-20-09; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 23, 2009