[Federal Register: April 26, 2002 (Volume 67, Number 81)]
[Proposed Rules]
[Page 20702-20709]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap02-25]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 20702]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37, 38, 39 and 40
RIN 3038-AB63
Amendments to New Regulatory Framework for Trading Facilities and
Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed Rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing a number of technical amendments to its rules implementing
the Commodity Futures Modernization Act of 2000 with respect to trading
facilities and clearing organizations. The Commission is proposing
additional categories of exchange rules or rule amendments that need
not be self-certified to the Commission; amendments to the definitions
of "rule" and "dormant contract;" the addition of new definitions
of "dormant contract market," "dormant derivatives transaction
execution facility," and "dormant derivatives clearing
organization"; and the addition of a procedure for listing or
relisting products for trading on a registered entity that has become
dormant.
DATES: Comments must be received by June 25, 2002.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521 or by e-mail to
[email protected]. Reference should be made to "Amendments to Trading
Facility Rules."
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5260. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
Background
The Commission, on August 10, 2001, promulgated rules implementing
those provisions of the Commodity Futures Modernization Act of 2000
(CFMA) relating to trading facilities.\1\ 66 FR 42256. These rules,
parts 36 through 40 of the Commission's rules, became effective on
October 9, 2001.
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\1\ The CFMA was intended, in part, "to promote innovation for
futures and derivatives," "to reduce systemic risk," and "to
transform the role of the Commission to oversight of the futures
markets." See section 2 of the CFMA.
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The CFMA profoundly altered federal regulation of commodity futures
and option markets. The new statutory framework established two
categories of markets subject to Commission regulatory oversight,
designated contract markets (contract markets) and registered
derivatives transaction execution facilities (DTFs), and two categories
of exempt markets, exempt boards of trade and, under section 2(h)(3) of
the Commodity Exchange Act (Act), exempt commercial markets. The
Commission's rules relating to trading facilities established
administrative procedures necessary to implement the CFMA, interpreted
certain of the CFMA's provisions and provided guidance on compliance
with various of its requirements. In addition, the Commission, under
its exemptive authority, in a limited number of instances, provided
relief from, or greater flexibility than, the CFMA's provisions. The
Commission is proposing a limited number of amendments responding to
initial issues that have arisen in administering its implementing
rules, or which are technical in nature. The Commission will consider
as appropriate additional amendments to the rules implementing the CFMA
related to trading facilities based upon further administrative
experience.
II. The Proposed Rules
A. Dormant Contract Markets and Products
The Commission has long required boards of trade, before relisting
a dormant contract for trading, to demonstrate that the contract
continues to meet the Act's requirements. See 17 CFR 5.2. This
requirement was based upon the premise that contracts that have been
dormant for a significant period of time may not have been updated to
reflect intervening changes in cash-market practices, and therefore may
no longer meet applicable statutory and regulatory requirements.
Accordingly, the relisting of a dormant contract was treated in some
respects similarly to the designation of a new contract.
Part 40 of the Commission's rules implementing the CFMA retains the
concept that the Act's requirements for listing a new product for
trading should also be applicable when relisting a dormant contract for
trading. Specifically, Commission rule 40.2 requires that, before
either listing a contract or relisting a dormant contract for trading,
registered entities certify that the product complies with the Act. The
Commission is proposing to amend its part 40 requirements relating to
dormant contracts in two ways.
First, the Commission is proposing to revise the exemptive period
in the definition of "dormant contract" in rule 40.1 from the time
following "initial listing" to the time following initial exchange
certification or Commission approval. The Commission originally used
"initial listing" to mark the beginning of the exemptive period based
upon its belief that registered entities routinely would certify
products to the Commission shortly before trading was imminent as
permitted by rule 40.2. However, many exchanges have continued their
prior practice of fulfilling regulatory requirements well in advance of
a product's anticipated listing date. In addition, some exchanges have
certified to the Commission, but have never listed for trading, a
number of new products. Accordingly, the Commission is proposing that
the exemptive period under the dormant contract definition begin
running from the time of certification or Commission approval. Second,
in light of the far greater rapidity with which markets innovate and
change today compared to when the dormant contract rule was first
promulgated and the lessened burden of a simple self-certification
compared to the previous requirement that dormant contracts be approved
by the Commission prior to relisting, and for
[[Page 20703]]
consistency with the operation of other rules, the Commission is
proposing to amend rule 40.1 to reduce the grace period during which a
new contract is exempt from being defined as dormant from 60 to 36
complete calendar months.
The Commission also is proposing to amend rule 40.2 so that it
would apply in instances where the registered entity itself has become
dormant. Prior to enactment of the CFMA, the term "designated contract
market" denoted the Commission-approved products traded on a board of
trade.\2\ Accordingly, prior to the CFMA, a board of trade's initial
application for designation as a contract market in a commodity
triggered review of both the general requirements for designation as a
contract market as well as those requirements that were product-
specific. If a board of trade determined to relist a contract for
trading after all of its contracts had become dormant, the Commission
would have reviewed both the terms and conditions of the product to be
relisted as well as whether the board of trade continued to meet the
general designation requirements. The Commission is proposing to amend
parts 37, 38, 39 and 40 of its rules to clarify that, when a registered
entity that has become dormant determines to list or relist an initial
product for trading (or in the case of a derivatives clearing
organization, to accept a product for clearing), it must demonstrate
that it continues to satisfy the criteria for designation or
registration.\3\ In making such a demonstration, a registered entity
may rely upon previously-submitted materials that still pertain to, and
accurately describe, current conditions.
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\2\ In contrast, the CFMA redefined the meaning of "designated
contract market" to refer to the approved or licensed facility on
which futures contracts and commodity options are traded.
\3\ The proposed definitions of "dormant contract market,"
"dormant derivatives transaction execution facility," and
"dormant derivatives clearing organization" provide for a 36-month
initial exemptive period that would begin when the Commission issues
an order, including conditional orders, designating a contract
market or registering a DTF or a derivatives clearing organization.
The Commission is also proposing two technical amendments
related to continuing goodstanding designation or registration
status. The first would make clear that the notification procedure
available to contract markets to operate as a DTF applies only to
active contract markets. Accordingly, before using this notification
procedure, dormant contract markets must reinstate their active
contract market status. Of course, they could also become a
registered DTF by application. The second would provide that, upon a
change of ownership of a contract market or DTF, the new owners must
certify that the facility continues to meet the respective
designation or registration requirements.
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B. Product Approval Procedures
Contract markets or DTFs may request that the Commission review and
approve new products and new rules or rule amendments. The Commission
is proposing to amend rules 40.3 and 40.5 to include a provision
similar to that for applications for contract market designation and
DTF registration, that the applicant or submitting entity identify with
particularity information in the submission that will be subject to a
request for confidential treatment and support that request for
confidential treatment with reasonable justification. See rules
38.3(a)(5) and 37.5(b)(5). Proposed rule 40.3 also provides that the
terms and conditions of products for which approval is voluntarily
requested will be made publicly available at the time of their
submission to the Commission to enable the Commission, by obtaining the
views of market participants and others, to ascertain whether the
proposed product would be readily susceptible to manipulation, or
otherwise violate the Act.\4\ Finally, the Commission is proposing a
new rule 40.8 to make clear that all other information required by the
core principles to be made public \5\ by a registered entity will be
treated as public information by the Commission at the time the
Commission issues an order of designation or registration, a registered
entity is deemed approved, or a rule or rule amendment is approved or
deemed approved by the Commission or can first be made effective by the
registered entity.
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\4\ Commission staff routinely conduct trade interviews when
reviewing novel instruments to ascertain the relative susceptibility
of a product to being manipulated. To be meaningful, these
interviews require the release of the proposed instrument's terms
and conditions. Generally, the Commission also intends to continue
its long-standing practice of requesting public comment on the terms
and conditions of new products under review for Commission approval
by publication of notices in the Federal Register. In instances
where notice in the Federal Register is impracticable or otherwise
unnecessary, notice of a submission for voluntary approval and of
the public availability of the proposed product's terms and
conditions will be through the Commission's internet web site (www/
cftc.gov).
The terms and conditions of products eligible for trading by
self-certification must be made publicly available by the contract
market (Core Principle 7) or the DTF (Core Principle 4), and will be
available from the Commission, at the time that the exchange legally
could commence trading--the beginning of the business day following
certification to the Commission.
\5\ This requirement is limited to information required to be
made public by a registered entity under a core principal, and does
not apply to additional materials that may be filed in support of an
application for designation or registration. For example, section
5(d)(7) of the Act requires contract markets to make publicly
available information concerning "the terms and conditions of the
contracts of the contract market and the mechanisms for executing
transactions on or through the facilities."
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C. Exchange Fees
The Commission is also proposing to amend rules 40.1, 40.4 and 40.6
explicitly to address the procedures applicable to the imposition or
amendment of exchange fees. Generally, the Commission is clarifying
that only fees related to delivery of an enumerated agricultural
commodity would be subject to the prior-approval requirements of the
Act, and that all other fees would be subject only to the certification
requirement. Fees or fee changes of any type of less than $1.00 are
proposed to be exempt from the certification requirement (or the prior-
approval requirement, if applicable) as de minimis. Specifically, the
Commission is proposing to amend the definition of "terms and
conditions" in rule 40.1 to reference explicitly delivery-related
fees. It is also proposing to amend rule 40.4 to make clear, however,
that the imposition or amendment of such delivery-related fees by less
than $1.00 per contract is not material for purposes of the prior-
approval requirement relating to amendments of the terms or conditions
of contracts on agricultural commodities.\6\ Moreover, the Commission
is proposing to amend rule 40.6 to provide that the imposition or
change of any fee by less than $1.00, including delivery-related fees,
need not be certified to the Commission.\7\
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\6\ Separately, the Commission is proposing to revise the list
of rule amendments that are not material changes to futures
contracts on the enumerated agricultural commodities to clarify that
rule changes not required to be certified to the Commission under
rule 40.6(c) are also not material.
\7\ Such a certification includes the exchange's determination
that the fee or fee change complies with the exchange's obligation
under Core Principle 18 that its actions avoid resulting in an
unreasonable restraint of trade or imposing any material
anticompetitive burden on trading.
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D. Definition of Rule
The Commission is also proposing to amend the definition of
"rule" in part 40.1\8\ to exclude from its meaning
[[Page 20704]]
exchange actions relating to the setting of margin levels, except with
respect to security futures products and contracts on stock indices.
Prior to the CFMA, section 5a(a)(12) of the Act required that all
changes to contract terms and conditions, with the exception of rules
relating to the setting of margin levels, be submitted to the
Commission for prior approval. The ability to adjust margin levels was
afforded this special status because of the recognized need for
exchanges to change margin levels rapidly, often changing margin levels
within a single trading session, in response to changing market
conditions. In section 113 of the CFMA, Congress removed the prior-
approval provision, providing instead that registered entities could
amend their rules by self-certification. However, there is no
indication that Congress intended thereby to affect the special status
accorded rules relating to the setting of margin levels.\9\
Accordingly, the Commission believes that specifically excluding the
setting of margin levels (except with respect to stock index products
and security futures products) from the definition of "rule" is
consistent with Congress" intent and with the public interest.\10\
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\8\ With respect in general to the definition of "rule,"
Commission staff in recent months has learned, through bulletins and
notices to the members of registered entities, of a number of rule
changes that were not appropriately submitted to the Commission for
review under Part 40. The Commission reminds registered entities
that the definition of "rule" under part 40.1 encompasses more
than just provisions labeled as "rules" in rulebooks, but
includes, among other things, resolutions, interpretations and
stated policies. In order to relieve any administrative burdens,
registered entities may submit rule changes to the Commission in the
form of member bulletins and notices, so long as those submissions
are labeled and, if necessary, certified in accordance with the
procedural requirements of part 40.
\9\ In this regard, Congress did not modify the Act's other
provisions relating to margins. See section 2(a)(C)(v).
\10\ The Commission is also proposing a number of technical
amendments. Appendix C to part 40 details the information that
foreign boards of trade should include in a request for no-action
relief to offer and sell to persons in the United States futures
contracts on broad-based foreign securities indices. The Commission
is proposing to amend that guidance to incorporate the changes made
by the CFMA to the criteria for designating such stock indexes. The
Commission is also proposing conforming changes to a number of
delegations in the rules and to several other provisions.
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III. Cost-Benefit Analysis
Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new regulation under the Act. Section 15 does
not require the Commission to quantify the costs and benefits of a new
regulation or to determine whether the benefits of the proposed
regulation outweigh its costs. Rather, section 15 simply requires the
Commission to "consider the costs and benefits" of its action, in
light of five broad areas of market and public concern: protection of
market participants and the public; efficiency, competitiveness, and
financial integrity of futures markets; price discovery; sound risk
management practices; and other public interest considerations.
Accordingly, the Commission could in its discretion give greater weight
to any one of the five enumerated areas of concern and could in its
discretion determine that, notwithstanding its costs, a particular rule
was necessary or appropriate to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the Act.
The proposed rules constitute a package of largely procedural
amendments to the rules it recently promulgated to implement the CFMA.
Many of the proposed amendments merely clarify or make explicit
existing requirements. Others reduce required submissions to the
Commission. Except for the proposal to require that dormant contract
markets reapply for designation prior to listing products for trading,
none of the proposed amendments imposes a significant obligation,
burden or cost on any person or registered entity. With regard to
dormant contract markets, the public interest in ensuring that a
dormant market meets the requirements of the Act when it lists or
relists an initial product for trading outweigh the burden of
reapplying for contract market designation. The cost of reapplying for
designation should be diminished to the extent that a contract market
has kept its rules, trading platform and other aspects of its
infrastructure up-to-date during the period it was dormant. On the
other hand, to the extent that a dormant contract market has not kept
its infrastructure up-to-date during the period of dormancy, the public
interest in a review of its reapplication increases.
After considering the five factors enumerated in the Act, the
Commission has determined to propose the revisions to its rules
discussed above. The Commission invites public comment on its
application of the cost-benefit provision. Commenters also are invited
to submit any data that they may have quantifying the costs and
benefits of the proposed rules with their comment letters.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires federal agencies, in promulgating rules, to consider the
impact of those rules on small entities. The rules adopted herein would
affect contract markets and other registered entities. The Commission
has previously established certain definitions of "small entities" to
be used by the Commission in evaluating the impact of its rules on
small entities in accordance with the RFA.\11\ In its previous
determinations, the Commission has concluded that contract markets,
DTFs and clearing organizations are not small entities for the purpose
of the RFA.\12\
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\11\ 47 FR 18618-21 (Apr. 30, 1982).
\12\ 47 FR 18618, 18619 (April 30, 1982) (discussing contract
markets); 66 FR 42256, 42268 (August 10, 2001) (discussing DTFs); 66
FR 45605, 45609 (August 29, 2001) (discussing DCOs).
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Accordingly, the Commission does not expect the rules, as proposed
herein, to have a significant economic impact on a substantial number
of small entities. Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed amendments will not have a significant economic impact on a
substantial number of small entities. The Commission invites the public
to comment on this finding and on its proposed determination that the
trading facilities covered by these rules would not be small entities
for purposes of the RFA.
B. Paperwork Reduction Act of 1995
This proposed rulemaking contains information-collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget (OMB) for its review.
Collection of Information: Rules Relating to Part 37, Establishing
Procedures for Entities to be Registered as Derivatives Transaction
Execution Facilities (DTFs), OMB Control Number 3038-0053. The proposed
rules will not change the burden previously approved by OMB.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 200.
Annual reporting burden: 2,000.
Collection of Information: Rules Relating to Part 38, Establishing
Procedures for Entities to Become Designated as Contract Markets, OMB
Control Number 3038-0052. The proposed rules will not change the burden
previously approved by OMB.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 300.
Annual reporting burden: 3,000.
[[Page 20705]]
Collection of Information: Rules Relating to Part 39, Establishing
Procedures for Entities to Become Registered as Derivatives Clearing
Organizations, OMB Control Number 3038-0051. The proposed rules will
not change the burden previously approved by OMB.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Reports annually by each respondent: 1.
Total annual responses: 10.
Estimated Average hours per response: 200.
Annual burden in fiscal year: 2,000.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 10202, New Executive Office Building, 725 17th Street, NW.,
Washington, DC 20503; Attention: Desk Officer for the Commodity Futures
Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the information
to be collected; and
Minimizing the burden of collecting information on those who are to
respond, including through the use of appropriate automated electronic,
mechanical, or other technological collection techniques or other forms
of information technology; e.g., permitting electronic submission of
responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington, DC 20581, (202) 418-5160.
List of Subjects
17 CFR Part 37
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 38
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 39
Commodity futures, Consumer protection.
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 Commodity Futures Modernization
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000), and
in particular, sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c, 5d, 6 and
8a thereof, the Commission hereby proposes to amend Chapter I of Title
17 of the Code of Federal Regulations as follows:
PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES
1. The authority citation for part 37 is revised to read as
follows:
Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and 12a, as amended by
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.
2. Section 37.2 is revised to read as follows:
Sec. 37.2 Exemption.
Contracts, agreements or transactions traded on a derivatives
transaction execution facility registered as such with the Commission
under section 5a of the Act, the facility and the facility's operator
are exempt from all Commission regulations for such activity, except
for the requirements of this part 37 and Secs. 1.3, 1.31, 1.59(d),
1.63(c), 15.05, 33.10, part 40, part 41 and part 190 of this chapter,
and as applicable to the market, parts 15 through 21 of this chapter,
which are applicable to a registered derivatives transaction execution
facility as though they were set forth in this section and included
specific reference to derivatives transaction execution facilities.
3. Section 37.5 is amended by revising paragraphs (a), (b), and
(f)(1) to read as follows:
Sec. 37.5 Procedures for registration.
(a) Notification by contract markets. (1) To operate as a
registered derivatives transaction execution facility pursuant to
section 5a of the Act, a board of trade, facility or entity that is
designated as a contract market, which is not a dormant contract market
as defined in Sec. 40.1 of this chapter, must:
(i) Comply with the core principles for operation under section
5a(d) of the Act and the provisions of this part 37; and
(ii) Notify the Commission of its intent to so operate by filing
with the Secretary of the Commission at its Washington, DC,
headquarters a copy of the facility's rules (which may be trading
protocols) or a list of the designated contract market's rules that
apply to operation of the derivatives transaction execution facility,
and a certification by the contract market that it meets:
(A) The requirements for trading of section 5a(b) of the Act; and
(B) The criteria for registration under section 5a(c) of the Act.
(2) Before using the notification procedure of paragraph (a) of
this section for registration as a derivatives transaction execution
facility, a dormant contract market as defined in Sec. 40.1 of this
chapter must reinstate its designation under Sec. 38.3(a)(2) of this
chapter.
(b) Registration by application.--(1) Initial registration. A board
of trade, facility or entity shall be deemed to be registered as a
derivatives transaction execution facility thirty days after receipt
(during the business hours defined in Sec. 40.1 of this chapter) by the
Secretary of the Commission at its Washington, DC, headquarters, of an
application for registration as a derivatives transaction execution
facility unless notified otherwise during that period, or, as
determined by Commission order, registered upon conditions, if:
(i) The application demonstrates that the applicant satisfies the
requirements for trading and the criteria for registration of sections
5a(b) and 5a(c) of the Act, respectively;
(ii) The submission is labeled "Application for DTF
Registration";
(iii) The submission includes:
(A) The derivatives transaction execution facility's rules, which
may be trading protocols;
(B) Any agreements entered into or to be entered into between or
among the facility, its operator or its participants, technical manuals
and other guides or instructions for users of such facility,
descriptions of any system test procedures, tests conducted or test
[[Page 20706]]
results, and descriptions of the trading mechanism or algorithm used or
to be used by such facility, to the extent such documentation was
otherwise prepared; and
(C) To the extent that compliance with the requirements for trading
or the criteria for recognition is not self-evident, a brief
explanation of how the rules or trading protocols satisfy each of the
conditions for registration;
(iv) The applicant does not amend or supplement the application for
recognition, except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period;
(v) The applicant identifies with particularity information in the
application that will be subject to a request for confidential
treatment and supports that request for confidential treatment with
reasonable justification; and
(vi) The applicant has not instructed the Commission in writing at
the time of submission of the application or during the review period
to review the application pursuant to the time provisions of and
procedures under section 6 of the Act.
(2) Reinstatement of dormant registration. Before listing products
for trading, a dormant derivatives transaction execution facility as
defined in Sec. 40.1 must reinstate its registration under the
procedures of paragraphs (a)(1) or (b)(1) of this section, as
applicable; provided however, that an application for reinstatement may
rely upon previously submitted materials that still pertain to, and
accurately describe, current conditions.
* * * * *
(f) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Trading
and Markets and separately to the Director of Economic Analysis or such
other employee or employees as the Directors may designate from time to
time, with the concurrence of the General Counsel or the General
Counsel's delegatee, authority to exercise the functions provided under
paragraph (d) of this section.
* * * * *
4. Section 37.6 is amended by revising paragraphs (a), (b), (b)(1),
(b)(2) and (b)(2)(i) introductory text, (b)(2)(iii), and (c) to read as
follows:
Sec. 37.6 Compliance with core principles.
(a) In general. To maintain registration as a derivatives
transaction execution facility upon commencing operations by listing
products for trading or otherwise, or for a dormant derivatives
transaction execution facility as defined in Sec. 40.1 of this chapter
that has been reinstated under Sec. 37.5(b)(2) upon recommencing
operations by relisting products for trading or otherwise, and on a
continuing basis thereafter, the derivatives transaction execution
facility must have the capacity to be, and be, in compliance with the
core principles of section 5a(d) of the Act.
(b) New and reinstated derivatives transaction execution
facilities.--(1) Certification of compliance. Unless an applicant for
registration or for reinstatement of registration has chosen to make a
voluntary demonstration under paragraph (b)(2) of this section, a newly
registered derivatives transaction execution facility at the time it
commences operations, or a dormant derivatives transaction execution
facility as defined in Sec. 40.1 of this chapter at the time that it
recommences operations, must certify to the Commission that it has the
capacity to, and will, operate in compliance with the core principles
under section 5a(d) of the Act.
(2) Voluntary demonstration of compliance. An applicant for
registration or for reinstatement of registration may choose to make a
voluntary demonstration of its capacity to operate in compliance with
the core principles as follows:
(i) At least thirty days prior to commencing or recommencing
operations, the applicant for registration or for reinstatement of
registration must file (during the business hours defined in Sec. 40.1
of this chapter) with the Secretary of the Commission at its
Washington, DC, headquarters, either separately or with the application
required by Sec. 37.5, a submission that includes:
* * * * *
(iii) If it appears that the applicant has failed to make the
requisite showing, the Commission will so notify the applicant at the
end of that period. Upon commencement or recommencement of operations
by the derivatives transaction execution facility, such a notice may be
considered by the Commission in a determination to issue a notice of
violation of core principles under section 5c(d) of the Act.
(c) Existing derivatives transaction execution facilities.--(1) In
general. Upon request by the Commission, a registered derivatives
transaction execution facility shall file with the Commission such
data, documents and other information as the Commission may specify in
its request that demonstrates that the registered derivatives
transaction execution facility is in compliance with one or more core
principles as specified in the request or that is requested by the
Commission to enable the Commission to satisfy its obligations under
the Act.
(2) Change of owners. Upon a change of ownership of an existing
registered derivatives transaction execution facility, the new owner
shall file with the Secretary of the Commission at its Washington,
D.C., headquarters, a certification that the derivatives transaction
execution facility meets the requirements for trading and the criteria
for registration of sections 5a(b) and 5a(c) of the Act, respectively.
* * * * *
PART 38--DESIGNATED CONTRACT MARKETS
5. The authority citation for Part 38 is revised to read as
follows:
Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, as amended by
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.
6. Section 38.2 is revised to read as follows:
Sec. 38.2 Exemption.
Agreements, contracts, or transactions traded on a designated
contract market under section 6 of the Act, the contract market and the
contract market's operator are exempt from all Commission regulations
for such activity, except for the requirements of this part 38 and
Secs. 1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.38, 1.52, 1.59(d), 1.63(c),
1.67, 33.10, part 9, parts 15 through 21, part 40, part 41 and part 190
of this chapter.
7. Section 38.3 is amended by revising paragraph (a) to read as
follows:
Sec. 38.3 Procedures for designation by application.
(a)(1) Initial Application. A board of trade or trading facility
shall be deemed to be designated as a contract market sixty days after
receipt (during the business hours defined in Sec. 40.1 of this
chapter) by the Secretary of the Commission at its Washington, DC,
headquarters, of an application for designation unless notified
otherwise during that period, or, as determined by Commission order,
designated upon conditions, if:
(i) The application demonstrates that the applicant satisfies the
criteria for designation of section 5(b) of the Act, the core
principles for operation under section 5(d) of the Act and the
provisions of this part 38;
[[Page 20707]]
(ii) The application is labeled as being submitted pursuant to this
part 38;
(iii) The application includes:
(A) A copy of the applicant's rules 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;
(B) 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 the nature of contingency or disaster
recovery plans;
(C) A copy of any documents pertaining to the applicant's legal
status and governance structure, including governance fitness
information;
(D) A copy of any agreements or contracts entered into or to be
entered into by the applicant, including partnership or limited
liability company, third-party regulatory service, member or user
agreements, that enable or empower the applicant to comply with a
designation criterion or core principal; and
(E) To the extent that any of the items in Sec. 38.3(a)(1)(iii)(A)-
(D) raise issues that are novel, or for which compliance with a
condition for designation is not self-evident, a brief explanation of
how that item and the application satisfies the conditions for
designation;
(iv) The applicant does not amend or supplement the designation
application, except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period;
(v) The applicant identifies with particularity information in the
application that will be subject to a request for confidential
treatment and supports that request for confidential treatment with
reasonable justification; and
(vi) The applicant has not instructed the Commission in writing at
the time of submission of the application or during the review period
to review the application pursuant to procedures under section 6 of the
Act.
(2) Reinstatement of dormant designation. Before listing or
relisting products for trading, a dormant designated contract market as
defined in Sec. 40.1 of this chapter must reinstate its designation
under the procedures of paragraph (a)(1) of this section; provided
however, that an application for reinstatement may rely upon previously
submitted materials that still pertain to, and accurately describe,
current conditions.
* * * * *
8. Section 38.4(a)(2) is revised to read as follows:
Sec. 38.4 Procedures for listing products and implementing contract
market rules.
(a) Request for Commission approval of rules and products. (1) * *
*
(2) Notwithstanding the forty-five day review period for voluntary
approval under Secs. 40.3(b) and 40.5(b) of this chapter, the operating
rules and the terms and conditions of products submitted for voluntary
Commission approval under Sec. 40.3 or Sec. 40.5 of this chapter that
have been submitted at the same time as an application for contract
market designation or an application under Sec. 38.3(a)(2) to reinstate
the designation of a dormant contract market as defined in Sec. 40.1 of
this chapter, or while one of the foregoing is pending, will be deemed
approved by the Commission no earlier than the facility is deemed to be
designated or reinstated.
* * * * *
9. Section 38.5 is amended by adding a new paragraph (c) to read as
follows:
Sec. 38.5 Information relating to contract market compliance.
* * * * *
(c) Upon a change of ownership of an existing designated contract
market, the new owner shall file with the Secretary of the Commission
at its Washington, DC, headquarters, a certification that the
designated contract market meets all of the requirements of sections
5(b) and 5(d) of the Act and the provisions of this part 38.
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
10. The authority citation for part 39 is revised to read as
follows:
Authority: 7 U.S.C. 7b as amended by Appendix E of Pub. L. 106-
554, 114 Stat. 2763A-365.
11. Section 39.4 is amended by revising the section heading, by
redesignating the text in paragraph (c) as paragraph (c)(2) and by
adding a new paragraph (c)(1) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
* * * * *
(c) Acceptance of new products for clearing. (1) A dormant
derivatives clearing organization within the meaning of Sec. 40.1 of
this chapter may not accept for clearing a new product until its
registration as a derivatives clearing organization is reinstated under
the procedures of Sec. 39.3 of this part; provided however, that an
application for reinstatement may rely upon previously submitted
materials that still pertain to, and accurately describe, current
conditions.
* * * * *
PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING
ORGANIZATIONS
12. 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 Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.
13. Section 40.1 is amended by revising the definitions of dormant
contract, rule, and paragraph (6) of terms or conditions and by adding
in alphabetic placement definitions of business hours, dormant contract
market, dormant derivatives clearing organization and dormant
derivatives transaction execution facility, to read as follows:
Sec. 40.1 Definitions.
* * * * *
Business hours means the hours between 8:15 a.m. and 4:45 p.m.,
eastern standard time or eastern daylight savings time, whichever is
currently in effect in Washington, DC, all days except Saturdays,
Sundays and legal public holidays.
Dormant contract market means any designated contract market on
which no trading has occurred for a period of six complete calendar
months; provided, however, no contract market shall be considered to be
dormant until the end of 36 complete calendar months following the day
that the order of designation was issued or that the contract market
was deemed to be designated.
Dormant derivatives clearing organization means any derivatives
clearing organization that has not accepted for clearing any agreement,
contract or transaction that is required or permitted to be cleared by
a derivatives clearing organization under sections 5b(a) and 5b(b) of
the Act, respectively, for a period of six complete calendar months;
provided, however, no derivatives clearing organization shall be
considered to be dormant until the end of 36 complete calendar months
following the day that the order of registration was issued or that the
derivatives clearing organization was deemed to be registered.
Dormant derivatives transaction execution facility means any
derivatives transaction execution facility on which no trading has
occurred for a period of
[[Page 20708]]
six complete calendar months; provided, however, no derivatives
transaction execution facility shall be considered to be dormant until
the end of 36 complete calendar months following the day that the order
of registration was issued or that the derivatives transaction
execution facility was deemed to be registered.
Dormant contract or dormant product means any commodity futures or
option contract or other agreement, contract, transaction or instrument
in which no trading has occurred in any future or option expiration for
a period of six complete calendar months; provided, however, no
contract or instrument shall be considered to be dormant until the end
of thirty-six complete calendar months following initial exchange
certification or Commission approval.
* * * * *
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
term and condition, trading protocol, agreement or instrument
corresponding thereto, in whatever form adopted, and any amendment or
addition thereto or repeal thereof, made or issued by a contract
market, derivatives transaction execution facility or derivatives
clearing organization or by the governing board thereof or any
committee thereof, except those provisions relating to the setting of
levels of margin for commodities other than those subject to the
provisions of section 2(a)(1)(C)(v) of the Act and security futures as
defined in section 1a(31) of the Act.
Terms and conditions means any definition of the trading unit or
the specific commodity underlying a contract for the future delivery of
a commodity or commodity option contract, specification of settlement
or delivery standards and procedures, and establishment of buyers' and
sellers' rights and obligations under the contract. Terms and
conditions include provisions relating to the following:
* * * * *
(6) Delivery standards and procedures, including fees related to
delivery or the delivery process, alternatives to delivery and
applicable penalties or sanctions for failure to perform;
* * * * *
14. Section 40.3 is amended by revising paragraph (a)(4) and adding
paragraph (a)(5) to read as follows:
Sec. 40.3 Voluntary submission of new products for Commission review
and approval.
(a) * * *
(4) The submission identifies with particularity information in the
submission, except for the product's terms and conditions which are
made publicly available at the time of submission, that will be subject
to a request for confidential treatment and supports that request for
confidential treatment with reasonable justification; and
(5) The submission includes the fee required under Appendix B to
this part.
* * * * *
15. Section 40.4 is amended by revising paragraphs (b)(5) and
(b)(6) and by adding paragraphs (b)(7) and (b)(8) to read as follows:
Sec. 40.4 Amendments to terms or conditions of enumerated agricultural
contracts.
* * * * *
(b) * * *
(5) Changes required to comply with a binding order of a court of
competent jurisdiction, or of a rule, regulation or order of the
Commission or of another Federal regulatory authority;
(6) Corrections of typographical errors, renumbering, periodic
routine updates to identifying information about approved entities and
other such nonsubstantive revisions of a product's terms and conditions
that have no effect on the economic characteristics of the product;
(7) Fees or fee changes of less than $1.00; and
(8) Any other rule, the text of which has been submitted to the
Secretary of the Commission at least ten days prior to its
implementation at its Washington, DC, headquarters and that has been
labeled "Non-material Agricultural Rule Change," and with respect to
which the Commission has not notified the contract market during that
period that the rule appears to require or does require prior approval
under this section.
16. Section 40.5 is amended by revising paragraphs (a)(1)(v) and
(a)(1)(vi) and by adding paragraph (a)(1)(vii) to read as follows:
Sec. 40.5 Voluntary submission of rules for Commission review and
approval.
(a) * * *
(1) * * *
(v) Note and briefly describe any substantive opposing views
expressed with respect to the proposed rule that were not incorporated
into the proposed rule prior to its submission to the Commission;
(vi) Identify any Commission regulation that the Commission may
need to amend, or sections of the Act or Commission regulations that
the Commission may need to interpret in order to approve the proposed
rule. To the extent that such an amendment or interpretation is
necessary to accommodate a proposed rule, the submission should include
a reasoned analysis supporting the amendment to the Commission's rule
or interpretation; and
(vii) Identify with particularity information in the submission
(except for a product's terms and conditions, which are made publicly
available at the time of submission) that will be subject to a request
for confidential treatment and support that request for confidential
treatment with reasonable justification.
* * * * *
17. Section 40.6 is amended by revising paragraphs (c)(2)(iii),
(c)(2)(iv), (c)(3)(ii)(B) and (c)(3)(ii)(C), and by adding paragraph
(c)(2)(v) to read as follows:
Sec. 40.6 Self-certification of rules by designated contract markets
and registered derivatives clearing organizations.
* * * * *
(c) * * *
(2) * * *
(iii) Index products. Routine changes in the composition,
computation, or method of selection of component entities of an index
(other than a stock index) referenced and defined in the product's
terms, that do not affect the pricing basis of the index, which are
made by an independent third party whose business relates to the
collection or dissemination of price information and that was not
formed solely for the purpose of compiling an index for use in
connection with a futures or option product;
(iv) Option contract terms. 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,
or
(v) Fees. Fees or fee changes of less than $1.00.
(3) * * *
(ii) * * *
(B) Administrative procedures. The organization and administrative
procedures of a contract market or a derivatives clearing
organization's governing bodies such as a Board of Directors, Officers
and Committees, but not voting requirements, Board of Directors or
Committee composition requirements or procedures, use or disclosure of
material non-public information gained through the performance of
official duties, or requirements relating to conflicts of interest;
(C) Administration. The routine, daily administration, direction
and control of employees, requirements relating to
[[Page 20709]]
gratuity and similar funds, but not guaranty, reserves, or similar
funds; declaration of holidays, and changes to facilities housing the
market, trading floor or trading area; or
* * * * *
19. Section 40.7(b)(1) is revised to read as follows:
Sec. 40.7 Delegations.
* * * * *
(b) * * *
(1) Relate to, but do not substantially change, the quantity,
quality, or other delivery specifications, procedures, or obligations
for delivery, cash settlement, or exercise under an agreement, contract
or transaction approved for trading by the Commission; daily settlement
prices; clearing position limits; requirements or procedures for
governance of a registered entity; procedures for transfer trades;
trading hours; minimum price fluctuations; and maximum price limit and
trading suspension provisions;
* * * * *
20. Part 40 is amended by adding a new Sec. 40.8 to read as
follows:
Sec. 40.8 Availability of public information.
Any information required to be made publicly available by a
registered entity under sections 5(d)(7), 5a(d)(4) and 5b(c)(2)(L) of
the Act, respectively, will be treated as public information by the
Commission at the time an order of designation or registration is
issued by the Commission, a registered entity is deemed to be
designated or registered, a rule or rule amendment of the registered
entity is approved or deemed to be approved by the Commission or can
first be made effective the day following its certification by the
registered entity.
17. Appendix C to part 40 is amended by revising paragraphs (5)(ii)
through (vii) to read as follows:
Appendix C--Information That a Foreign Board of Trade Should Submit
When Seeking No-Action Relief to Offer and Sell, to Persons Located
in the United States, a Futures Contract on a Broad-based Foreign
Securities Index Traded on That Board of Trade
* * * * *
(5) * * *
(ii) The total capitalization, number of stocks (including the
number of unaffiliated issuers if different from the number of
stocks), and weighting of the stocks by capitalization and, if
applicable, by price in the index as well as the combined weighting
of the five highest-weighted stocks in the index;
(iii) Procedures and criteria for selection of individual
securities for inclusion in, or removal from, the index, how often
the index is regularly reviewed, and any procedures for changes in
the index between regularly scheduled reviews;
(iv) Method of calculation of the cash-settlement price and the
timing of its public release;
(v) Average daily volume of trading by calendar month, measured
by share turnover and dollar value, in each of the underlying
securities for a six-month period of time and, separately, the
dollar value of the average daily trading volume of the securities
comprising the lowest weighted 25% of the index for the past six
calendar months, calculated pursuant to Sec. 41.11;
(vi) If applicable, average daily futures trading volume; and
(vii) A statement that the index is not a narrow-based security
index as defined in section 1a(25) of the Act.
Issued in Washington, DC, this 19th day of April, 2002, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-10031 Filed 4-25-02; 8:45 am]
BILLING CODE 6351-01-P
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