[Federal Register: July 11, 2005 (Volume 70, Number 131)]
[Proposed Rules]
[Page 39672-39689]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy05-14]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 36, 37, 38, 39 and 40
Technical and Clarifying Amendments to Rules for Exempt Markets,
Derivatives Transaction Execution Facilities and Designated Contract
Markets, and Procedural Changes for Derivatives Clearing Organization
Registration Applications
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: On August 10, 2001, the Commodity Futures Trading Commission
(``Commission'') published final rules implementing the provisions of
the Commodity Futures Modernization Act of 2000 (``CFMA'') relating to
trading facilities.\1\ The amendments proposed herein are intended to
clarify and codify acceptable practices under the rules for trading
facilities, based on the Commission's experience over the intervening
four years in applying those rules, including the adoption of several
amendments to the original rules over the same period. The proposed
amendments also would make various technical corrections and conforming
amendments to the rules.
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\1\ 66 FR 42256, August 10, 2001.
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In addition, the proposed amendments would revise the application
and review process for registration as a derivatives clearing
organization (``DCO'') by eliminating the presumption of automatic
fast-track review of applications and replacing it with the presumption
that all applications will be reviewed pursuant to the 180-day
timeframe and procedures specified in section 6(a) of the Commodity
Exchange Act (``CEA'' or ``Act''). In lieu of the current 60-day
automatic fast-track review, the Commission is proposing to permit
applicants to request expedited review
[[Page 39673]]
and to be registered as a DCO by affirmative Commission action not
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later than 90 days after the Commission receives the application.
DATES: Comments must be received by September 9, 2005.
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 ``Proposed Clarifying
Amendments for Exempt Markets, Derivatives Transaction Execution
Facilities and Designated Contract Markets, and Procedural Changes for
Derivatives Clearing Organization Registration Applications.''
FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special Counsel
(telephone 202-418-5041, e-mail [email protected]), Division of Market
Oversight, or Lois Gregory, Special Counsel (telephone 202-418-5521, e-
mail [email protected]), Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
The CFMA amended the Commodity Exchange Act (the ``Act'') to
profoundly alter federal regulation of commodity futures and option
markets. The new statutory framework created by the CFMA established
two categories of markets subject to Commission regulatory oversight,
designated contract markets (``DCMs'') and registered derivatives
transaction execution facilities (``DTEFs''), and two categories of
exempt markets, exempt boards of trade (``EBOTs'') and exempt
commercial markets (``ECMs''). The original rules applicable to these
trading facilities \2\ established administrative procedures necessary
to implement the CFMA, interpreted certain of the CFMA's provisions,
and provided guidance on compliance with various of the CFMA's
requirements. In addition, the Commission, under the general exemptive
authority of section 4(c) of the Act, in a limited number of instances
provided relief from, or greater flexibility than, the CFMA's
provisions.
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\2\ Id.
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In addition, over the four years during which these new rules for
trading facilities have been in effect, they have been amended several
times.\3\ The amendments proposed herein are intended to clarify and
codify acceptable practices under the Commission's rules for trading
facilities, as amended, based on the Commission's experience in
applying those rules over the last four years. The proposed amendments
also would make a number of technical and clarifying corrections and
conforming amendments to enhance the consistency and clarity of the
rules.
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\3\ See, for example: Regulation To Restrict Dual Trading in
Security Futures Products, 67 FR 11223 (March 15, 2002); Changes in
Divisional Structure and Delegations of Authority, 67 FR 62350
(October 7, 2002); Amendments to New Regulatory Framework for
Trading Facilities and Clearing Organizations, 67 FR 62873 (October
9, 2002); Exempt Commercial Markets, 69 FR 43285 (July 20, 2004);
Confidential Information and Commission Records and Information, 69
FR 67503 (November 18, 2004); and Application Procedures for
Registration as a Derivatives Transaction Execution Facility or
Designation as a Contract Market, 69 FR 67811 (November 22, 2004).
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It should also be noted that the Commission has provided
information that may be helpful to those subject to the rules for
trading facilities on its Web site at href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov. In
particular, the website includes charts setting out information that
may be helpful in: (1) Complying with the registration criteria as a
DTEF (see Appendix A to part 37); (2) complying with the designation
criteria as a DCM (see Appendix A to part 38); and (3) complying with
the requirements for designation of physical delivery futures contracts
(see Appendix A to part 40--Guideline No. 1). While these charts are
not intended to be used as mandatory checklists, they may provide
helpful guidance to those subject to the regulations governing trading
facilities.
In addition, the Commission is proposing to revise the application
and review procedures for registration as a DCO. Specifically, the
Commission is proposing to eliminate the presumption of automatic fast-
track review of applications and replace it with the presumption that
all applications will be reviewed pursuant to the 180-day timeframe and
procedures specified in section 6(a) of the Act. In lieu of the
automatic fast-track review (under which applicants were deemed to be
registered as DCOs 60 days after receipt of an application), the
Commission is proposing to permit applicants to request expedited
review and to be registered as a DCO by the Commission not later than
90 days after the date of receipt of the application. The Commission is
also proposing, among other things, to provide that review under the
expedited review procedures may be terminated if it appears that the
application is materially incomplete, raises novel or complex issues
that require additional time for review, or has undergone substantive
amendment or supplementation during the review period. The Commission
is proposing these amendments based upon its experience in processing
applications and in light of administrative practices that have been
implemented since the rules were first adopted. These amendments would
establish procedures substantially similar, where appropriate, to those
recently amended in parts 37 and 38 for processing applications for
registration of derivatives transaction execution facilities and
contract market designation, respectively.\4\
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\4\ 69 FR 67811, November 22, 2004.
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II. The Proposed Amendments
A. Part 36--Exempt Markets
Sections 36.2(b) and 36.3(a) would be amended by deleting the
reference to ``hard copy'' in the provisions requiring trading
facilities operating as EBOTs and ECMs, respectively, to notify the
Commission. In order to simplify and modernize the notification
process, the amended rules would require that such notifications may
only be filed electronically. Similar amendments are proposed in other
sections requiring notifications or filings with the Commission, so
that under the amended rules, all formal filings from ECMs, EBOTs,
DTEFs, DCMs and DCOs must be filed electronically.
Section 36.2(c)(2), relating to market data dissemination for
EBOTs, would be revised. Sections 2(h)(4)(D) and 5d(d) of the Act
include similar language requiring ECMs and EBOTs, respectively, to
daily disseminate certain basic trading information in the event either
market becomes a significant source of price discovery for the
underlying cash market for any commodity traded on the ECM or EBOT. The
previously noted amendments to the rules applicable to ECMs \5\
established clear procedures for ECMs to follow in complying with the
price discovery/price dissemination requirement, by: (1) Providing
criteria for making a price discovery determination; (2) requiring ECMs
that meet those criteria and thus are performing a price discovery
function to inform the Commission; (3) establishing procedures for the
Commission to make a formal price discovery determination; (4) setting
out the types of information
[[Page 39674]]
an ECM that serves a price discovery function must disseminate; and (5)
establishing procedures for modifying a price discovery determination.
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\5\ 69 FR 43285 (July 20, 2004).
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The proposed rules would amend Sec. 36.2(c)(2) to implement price
discovery/price dissemination rules for EBOTs that closely parallel the
price discovery/price dissemination rules currently applicable to ECMs.
The wording of the Act's price discovery/price dissemination provision
for EBOTs is substantially similar, although not identical, to the
provision applicable to ECMs. However, both provisions are identical in
their ultimate purpose. Furthermore, the regulatory provision
applicable to ECMs has recently gone through the public comment
process. Finally, parallel provisions would be easier for the industry
to apply, since the price discovery/price dissemination rules would be
essentially identical for both types of exempt markets.
The proposed rules would also add new Sec. Sec. 36.2(c)(3) and
36.3(c)(4) requiring EBOTs and ECMs, respectively, to annually file a
notice with the Commission, no later than the end of each calendar
year. The notice must include a statement that the entity continues to
operate under the exemption and a certification that the information in
its original notification of operation is still correct. Annual
notification of operation by the facility would allow the Commission to
track whether facilities that notified the Commission of their intent
to operate actually commenced operations and would allow the Commission
to eliminate inactive facilities from any listing of active EBOTs or
ECMs maintained on its Web site.
B. Part 37--Derivatives Transaction Execution Facilities
Section 37.1(a) would be amended to make clear that the provisions
of Part 37 apply not only to boards of trade operating as registered
DTEFs, but also to applicants for registration as DTEFs.
Section 37.2 would be revised to identify certain reserved
provisions of the Commission's regulations that specifically and
comprehensively reference DTEFs separately from other reserved
provisions that do not. The proposed revisions also would make clear
that all the references in Sec. 37.2 to reserved provisions of the
regulations applicable to DTEFs also include related definitions and
cross-referenced sections cited in those reserved provisions. Finally,
Sec. 1.60 would be added to the list of reserved provisions of the
regulations applicable to DTEFs under Sec. 37.2 to make clear that
DTEFs need to notify the Commission of any material legal proceeding to
which the DTEF is a party or to which its property or assets are
subject.
In Sec. 37.3, subparagraph (a)(5) would be renumbered as
subparagraph (b) and the remaining subparagraphs would be renumbered
accordingly.
Section 37.6, Compliance with Core Principles, would be revised to
harmonize DTEF core principle compliance with the previously noted new
application procedures for DCMs and DTEFs.\6\
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\6\ 69 FR 67811 (November 22, 2004).
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New Sec. 37.6(c)(2) would be added delegating to the Division of
Market Oversight (the ``Division'') the authority under Sec.
37.6(c)(1) to request additional information in reviewing a DTEF's
continued compliance with one or more core principles, or to enable the
Commission to satisfy its obligations under the Act. The delegation
provision notes that the Commission, at its election, may exercise the
delegated authority directly. A similar delegation would be made in new
Sec. 38.5(c) to allow the Division to request additional information
in reviewing a DCM's continued compliance with designation criteria and
core principles, or to enable the Commission to satisfy its obligations
under the Act. The foregoing delegated authority would also extend to
other requests by Commission staff to DTEFs or DCMs for additional
information: (1) Under new Sec. 40.2(b), regarding compliance with
respect to new products listed by certification; (2) under Sec.
40.3(a)(9), regarding voluntary submission of new products for
Commission review and approval; and (3) under new Sec. 40.6(a)(4),
regarding compliance with respect to self-certified rules. This
delegated authority would aid the staff in reviewing DTEF and DCM
compliance with the requirements of the Act or Commission regulations
or policies thereunder without involving the Commission in the
mechanics of day-to-day due diligence oversight.
In addition, the guidance in current Sec. 37.6(d) would be deleted
as duplicative of ``Appendix B to Part 37--Guidance on Compliance with
Core Principles'' and would be replaced with a reference to Appendix B.
Section 37.8(b), regarding special calls for information, would be
amended to make clear that the section applies not only to futures
commission merchants, but to foreign brokers (as defined in Sec.
15.00) as well.
The title of Appendix A to part 37 would be reworded to read,
``Appendix A to part 37--Guidance on Compliance with Registration
Criteria,'' to be consistent with the wording of the titles of the
other appendices to parts 37 and 38. The introductory paragraph of the
appendix also would be revised to make clear that registration criteria
guidance applies both to new registrants that register by application
and to DTEFs operated by DCMs, which would not need to file an
application, but could become registered by notification/certification.
The revised language also is consistent with the requirement that the
registration criteria must be met initially and on an ongoing basis,
rather than just upon application.
In Appendix B to part 37, subsection 1 of the appendix would be
revised to make clear that the guidance therein applies to all
registered DTEFs, whether they come in by notification under Sec.
37.5(a) or by application. Subsection 3 of the appendix would be
revised to make clear that, consistent with Sec. 37.6(b)(2), the
guidance therein applies to applicants for registration, rather than
registered DTEFs.
Core Principle 5 of Appendix B to part 37, ``Daily Publication of
Trading Information,'' would be revised in a manner consistent with the
price discovery/price dissemination provisions applicable to EBOTs and
ECMs, which are not as comprehensive as those applicable to DCMs. This
reflects the fact that DTEFs are subject to a different informational
standard than DCMs. DCMs are subject to a blanket requirement, under
Core Principle 8 of Appendix B to part 38, to publish daily trading
information for all actively traded contracts. DTEFs, however, are
subject to Core Principle 5 (section 5a(d)(5) of the Act), which
includes language similar to that applicable to EBOTs and ECMs (under
sections 5d(d) and 2(h)(4)(D) of the Act, respectively) requiring DTEFs
to make public certain daily trading information only if the Commission
determines that contracts traded on the facility perform a significant
price discovery function for transactions in the cash market for the
commodity underlying the contracts. The revised core principle
explanatory language would apply to DTEFs the same standards that would
apply to EBOTs and ECMs (see Sec. Sec. 36.2(b)(2) and 36.3(c)(2),
respectively) whereby a DTEF would perform a significant price
discovery function if: (1) Cash market bids, offers or transactions are
directly based on, or quoted at a differential to, the prices generated
on the market on a more than occasional basis; or (2) the market's
prices are routinely disseminated in a widely distributed industry
publication and are routinely consulted by industry participants in
pricing cash market transactions. If the
[[Page 39675]]
Commission has reason to believe that a DTEF may meet either of these
standards, or if the facility holds itself out to the public as
performing a price discovery function, the Commission will notify the
DTEF and provide it with an opportunity for a hearing through the
submission of written data, views and arguments. If, after considering
all relevant matters, the Commission finds that the DTEF meets the
price discovery standards, it will direct the DTEF to publish daily
trading information in accordance with the core principle. The
information could be published by providing it to a financial
information service or by placing it on the facility's website. The
information should be made available to the public without charge no
later than the business day following the day to which the information
pertains.
C. Part 38--Designated Contract Markets
In Sec. 38.1, language would be added to make clear that the
provisions of part 38 apply to applicants for designation as well as to
already designated contract markets, and redundant and inapplicable
references would be deleted.
In Sec. 38.2, language would be added to make clear that the
references therein to reserved provisions of the regulations applicable
to DCMs also include related definitions and cross-referenced sections
cited in those reserved provisions. Similar clarifying amendments,
reserving the applicability of related definitions and cross-referenced
sections, appear in other sections of the proposal. Also, Sec. 1.60
would be added to the list of reserved provisions of the regulations
applicable to DCMs under Sec. 38.2 to make clear that DCMs need to
notify the Commission of any material legal proceeding to which the DCM
is a party or to which its property or assets are subject.
In Sec. 38.5, subparagraph (b) would be amended to make clear that
DCMs are required to comply with both the designation criteria and the
core principles, initially and on an ongoing basis, and to conform its
language to Sec. 37.6(c)(1). As noted in the discussion of new Sec.
37.6(c)(2) above, new Sec. 38.5(c) would be added, delegating to the
Division of Market Oversight the authority under Sec. 38.5(b) to
request additional information in reviewing a DCM's continued
compliance with designation criteria or core principles, or to enable
the Commission to satisfy its obligations under the Act.
The title of Appendix A to part 38 would be revised to refer to
``Guidance on Compliance with Designation Criteria,'' and the
introductory paragraph of the appendix would be revised in conformity
with the revisions to the introductory paragraph of Appendix A to part
37, to make clear that the obligation to comply with the designation
criteria applies not just to applicants, but is ongoing.
Designation Criterion 7 under Appendix A to part 38 would be
updated to provide, consistent with the wording of other provisions
regarding designation criteria and core principles, that a DCM
``should'' (rather than ``may'') provide information to the public by
placing the information on its Web site.
In Appendix B to part 38, language would be added in subparagraph
(1) to harmonize part 38, Appendices A and B, with part 37, Appendices
A and B, consistent with the idea that the obligation to comply with
the core principles applies both initially and on an ongoing basis. In
subparagraph (2), a reference to ``selected'' requirements of the core
principles would be added to make clear that the enumerated acceptable
practices under each core principle are neither the complete nor the
exclusive requirements for meeting that core principle. With respect to
the completeness issue, the selected requirements in the acceptable
practices section of a particular core principle may not address all
the requirements necessary for compliance with the core principle. With
respect to the exclusivity issue, the acceptable practices that are
listed for a particular core principle requirement are for illustrative
purposes only and do not state the only means of satisfying the
particular requirement they address. There may be other ways of
complying with that requirement of the core principle that would also
be acceptable.
Under Core Principle 2 of Appendix B to part 38, a reference would
be added in subparagraph (a)(1) to clarify that a DCM could carry out
trade practice surveillance programs through delegation or
``contracting out.'' A delegation confers upon another the authority to
act in the delegating authority's name. A third party contractor would
not act in the DCM's name, but the DCM would be required to maintain
sufficient control over the contractor because it would remain the
DCM's responsibility to assure that the DCM's obligations under the Act
were met.\7\
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\7\ See the discussion in 66 FR 42256, at 42266 (August 10,
2001).
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Under Core Principle 6 of Appendix B, ``Emergency Authority,'' the
language now appearing under subparagraph (b), ``Acceptable
Practices,'' would be moved to subparagraph (a), ``Application
Guidance.'' This amendment would reflect that the language moved to
subparagraph (a) more accurately describes guidance on establishing
rules to exercise emergency authority in the first instance, rather
than acceptable practices in implementing such rules.
Under Core Principle 7 of Appendix B, guidance would be added in
subparagraph (b) as to what constitutes ``timely placement'' of
information on a DCM's Web site. In noting that the DCM's rulebook
should be ``available to the public,'' the intent of the subparagraph
is that the rulebook should be freely accessible to anyone who visits
the Web site without the need to register, log in, provide a user name
or obtain a password.
Core Principle 8 of Appendix B requires that a DCM shall make
public daily information on settlement prices, volume, open interest,
and opening and closing ranges for actively traded contracts. New
language would be added to subparagraph (b), Acceptable Practices,
whereby compliance with Sec. 16.01 of the Commission's regulations,
which is mandatory since Sec. 16.01 is one of the sections reserved
under Sec. 38.2, would constitute an acceptable practice under Core
Principle 8. All currently designated DCMs are in compliance with Sec.
16.01.
Under Core Principle 16 of Appendix B, paragraph (a) would be
revised to refer to a contract market's board (rather than the contract
market as a whole) in conformity with the language of the core
principle.
D. Part 39--Derivatives Clearing Organizations
The Commission adopted the application procedures specified in
Commission Regulation 39.3 \8\ for organizations applying to be
registered as DCOs in 2001 when it first implemented the CFMA.\9\ These
procedures presume that an application will be submitted and reviewed
pursuant to a fast-track procedure under which an organization is
deemed to be designated as a DCO 60 days after submitting its
application,\10\ unless notified otherwise during the review period.
DCO registration procedures are not subject to any statutory deadline
under section 6(a) of the Act, which only applies to DCMs and DTEFs.
[[Page 39676]]
However, the fast-track review period is substantially shorter than the
180-day review period specified in section 6(a) of the Act for DCMs and
DTEFs. The rules provide procedures for terminating the fast-track
review, including termination by the Commission if it appears that the
application's form or substance fails to meet the requirements of the
Commission's regulations.\11\
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\8\ 17 CFR 39.3.
\9\ See 66 FR 45604 (August 29, 2001). The CFMA, Appendix E of
Pub. L. 106-554, 114 Stat. 2763, substantially revised the Commodity
Exchange Act (Act or CEA), 7 U.S.C. 1 et seq.
\10\ 17 CFR 39.3(a).
\11\ 17 CFR 39.3(b).
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The application procedures also generally identify information
required to be included in applications for registration as a DCO \12\,
and identify where additional guidance for applicants can be found.\13\
The rules also provide procedures for the withdrawal of an application
for registration \14\ and specify the extent of the delegation of
authority from the Commission to the Director of the Division of
Clearing and Intermediary Oversight, with the concurrence of the
General Counsel, with respect to, among other things, the termination
of expedited review procedures.\15\
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\12\ 17 CFR 39.3(a).
\13\ 17 CFR 39.3(d).
\14\ 17 CFR 39.3(c).
\15\ 17 CFR 39.3(e).
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The Commission is proposing to modify the application procedures in
a number of respects. Most of these modifications mirror changes
recently made to parts 37 and 38 regarding, among other things, the
review and processing of applications for registration of DTEFs and
DCMs. With respect to the review period for applications generally, it
is proposing to establish, as it recently has under parts 37 and 38,
the presumption that all applications are submitted for review under
the 180-day timeframe specified in section 6(a) of the Act for DCMs and
DTEFs.\16\ An expedited 90-day review could be requested by the
applicant, in which case the Commission would register the applicant as
a DCO during or by the end of the 90-day period unless the Commission
terminated the expedited review for certain specifically identified
reasons. In comparison to the current rules, the Commission is
proposing to lengthen the expedited review periods for DCO applications
by 30 days. The Commission believes, based upon its experience in
processing DCO applications and in light of certain administrative
practices that have developed since these rules were first adopted,
that these potentially longer review periods are necessary to ensure a
comprehensive review of applications and to meet other public policy
objectives.
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\16\ Under the current rules, DCO applications are routinely
reviewed under the fast-track procedures unless the applicant
instructs the Commission in writing at the time of the 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. See 17 CFR 39.3(a)(8).
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The Commission has reviewed nine DCO applications since passage of
the CFMA. The applications themselves are large and contain technical
documents describing operations and operational outsourcing agreements.
The applications frequently need to be substantially amended or
supplemented in various ways and generate a series of questions by
Commission staff responsible for reviewing the applications. In
addition, a new Commission policy to promote transparency in Commission
operations, implemented in August of 2003, provides for the posting of
all such applications on the Commission's Web site for a period of at
least 15 days for public review and comment.\17\ This will lengthen the
review process. The proposed 90-day review period should provide the
Commission with sufficient time to review these substantial
applications and to respond to any public comments. The Commission
notes that the proposed 90-day review period, while longer than the
current fast-track review periods, would continue to be substantially
shorter than the 180-day review period set forth in section 6(a) for
DCMs and DTEFs.
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\17\ The Commission has recently proposed revisions to
Commission Regulation 40.8 to specify which portions of an
application for registration as a DTEF or designation as a DCO will
be made public. See 69 FR 44981 (July 28, 2004).
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The Commission also is proposing to modify its internal processing
procedures under which an applicant would be registered as a DCO. Under
the proposal, an applicant would no longer be deemed to be registered
based upon the passage of time (currently 60 days for DCOs). If the
applicant requested expedited review, the Commission would take
affirmative action to register or designate the applicant as a DCO,
subject to conditions if appropriate, not later than 90 days after
receipt of the application, unless the Commission terminated the
expedited review. Thus, registration as a DCO would involve affirmative
action by the Commission, which would normally be in the form of
issuance of a Commission order. It should be noted that it would be
possible, under the proposed procedures, for applicants who submit
applications that are complete and not amended or supplemented during
the review period to be designated as a DCO in less than 90 days.
With respect to the termination of expedited review, the rules
provide that fast-track review may be terminated because the
application's form or substance fails to meet the requirements of part
39 or upon written instruction of the applicant during the review
period. Based upon its experience in reviewing applications submitted
to date and in light of its new practice of posting all such
applications on the Commission's website for public review and comment,
the Commission is proposing to clarify and expand the rationale for
terminating expedited review. In addition to the reasons for
termination cited above, the Commission is proposing that the expedited
review period be terminated if the application is materially incomplete
or, as more fully described below, undergoes major amendment or
supplementation. The Commission is also proposing to provide for
termination of expedited review if an application raises novel or
complex issues that require additional time for review. This proposal
is responsive to the public interest that the Commission has witnessed
to date with respect to DCO applications and is substantially the same
as a proposal recently adopted for DCMs and DTEFs.
The Commission is further proposing to delete the provision of the
rules that would require the Commission, upon terminating fast-track
review, to commence a proceeding to deny a DCO application upon the
request of the applicant. This procedure has proved to be unnecessary
to date, and an analogous procedure is available under the statutory
review procedure.\18\ Finally, the Commission is proposing to amend the
expedited review procedures to expressly provide that expedited review
would be terminated if an applicant so requests in writing. The
Commission stresses that if expedited review were terminated for any of
the reasons cited above, the application would continue to be reviewed
pursuant to the 180-day procedure.
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\18\ 7 U.S.C. 8(a).
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To further enhance the application process, the Commission is
proposing to more completely identify the information required to be
provided by an applicant under both the 180-day and the expedited 90-
day review procedures. The proposal would make it clear that all
applicants would be required to submit for review an executed or
executable copy of any agreements or contracts entered into or to be
entered into by the applicant that enable the applicant to comply with
the core principles. Final, signed copies of such documents would be
required to be submitted prior to registration. The initial application
would be required to
[[Page 39677]]
include something more than a letter of intent or draft contract or
agreement, such as a final contract or agreement signed by at least one
of the parties. While the Commission understands that applicants may
prefer to defer the finalization of contracts in order to defer
associated costs until registration or designation, it must balance
that preference against the assurance that a contract or agreement will
actually be executed prior to registration.
With respect to the additional information that would be required
to be submitted as part of the application, the rule requires that
applicants demonstrate how they are able to satisfy each of the core
principles specified in section 5b of the Act. The proposal would amend
the rule to eliminate the proviso, ``to the extent it is not self-
evident from the applicant's rules.'' Based upon experience in
reviewing DCO applications, the Commission recognizes that this
additional information is necessary for Commission review of the
application when determining whether the applicant satisfies the core
principles. The proposal would eliminate the requirement that the
applicant support requests for confidential treatment of information
included in the application with reasonable justification. The
Commission believes that the procedures provided in Commission
Regulation 145.9, ``Petition for confidential treatment of information
submitted to the Commission,'' should be followed by all applicants.
Under the proposal, the items required to be included in an
application to be reviewed under the 180-day review procedures would be
identical to those required to be included in an application to be
reviewed under the expedited review procedures with the following
additional requirements for the expedited review procedure: (1) An
applicant must request expedited review; and (2) an application
submitted for expedited review must not be amended or supplemented by
the applicant, except as requested by the Commission or for correction
of typographical errors, renumbering or other nonsubstantive revisions.
The proposal provides that amending or supplementing an application in
a manner that is inconsistent with the above provision would result in
termination of the expedited review.
The Commission is also proposing to modify the delegation of
authority provisions applicable to applications for registration as a
DCO. Currently, the rules provide for the delegation of authority to
the Director of the Division of Clearing and Intermediary Oversight,
with the concurrence of the General Counsel: (1) To terminate the
review of both fast-track applications and those reviewed under the
180-day procedure; and (2) to register an applicant as a DCO subject to
conditions. The Commission is proposing to modify and standardize the
delegation of authority as it applies to DCO applicants. Thus, under
the proposal, the Commission would also delegate to the Director of the
Division of Clearing and Intermediary Oversight, with the concurrence
of the General Counsel, the authority to stay the running of the 180-
day review period for applications if they are materially incomplete,
as is provided under section 6(a) of the Act. Because one result of the
proposed amendments would be that registration as a DCO would involve
affirmative action on the part of the Commission, the proposal would
rescind the delegation of the authority to designate the applicant as a
DCO subject to conditions.
The Commission also is adding a provision for vacation of DCO
registration. Under this provision, a registered DCO may vacate its
registration under section 7 of the Act by filing a request with the
Commission at its Washington, DC headquarters. Vacation of registration
will not affect any action taken or to be taken by the Commission based
upon actions, activities or events occurring during the time that the
DCO was registered with the Commission. A similar provision with
respect to contract markets is already part of part 38.\19\
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\19\ 17 CFR 38.3(d).
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Finally, the Commission is proposing to make minor word changes and
deletions in order to clarify requirements and procedures.
The Commission continues to encourage applicants to consult with
Commission staff prior to formally submitting an application for DCO
registration to help ensure that an application, once submitted, will
be able to be reviewed in a timely manner. The Commission encourages
interested parties, particularly prior applicants, to comment upon
these proposals.
E. Part 40--Provisions Common to Contract Markets, Derivatives
Transaction Execution Facilities and Derivatives Clearing Organizations
In Sec. 40.1, the definitions therein would be redesignated as
numbered subparagraphs, beginning with subparagraph (a). In
redesignated subparagraphs 40.1(b)-(e), the definitions of dormant
contract/product, dormant contract market, dormant derivatives clearing
organization and dormant derivatives transaction execution facility,
respectively, the length of time during which no trading (or clearing)
has occurred before dormancy could be declared would be extended from
six to twelve calendar months. Also, in Sec. 40.1(b), in the proviso
granting a 36-month grace period after initial certification or
Commission approval before a contract/product can be considered
dormant, language would be added to make clear that, if the DCM or DTEF
itself becomes dormant prior to the running of the 36-month period, the
contract/product would likewise be considered dormant. Finally,
language would be added to Sec. 40.1(b) to allow a board of trade to
self-declare a contract/product to be dormant at any time after initial
certification or Commission approval.
Under new Sec. 40.1(f), a definition of ``dormant rule'' would be
added whereby a new rule or rule amendment that is not made effective
and implemented within twelve months of initial certification or
Commission approval would be considered dormant and would have to be
resubmitted, either by certification or for approval, before it could
be implemented.
Sections 40.2, 40.3, 40.5 and 40.6 would be revised for internal
consistency between sections. In addition, in Sec. 40.2, relating to
listing new products for trading by certification, new subparagraph
40.2(b) would make clear that a registered entity shall provide, if
requested by Commission staff, additional evidence, information or data
relating to whether the contract meets, initially or on a continuing
basis, any of the requirements of the Act or Commission regulations or
policies thereunder. Such evidence may be beneficial to the Commission
in conducting a due diligence assessment of the product and the
registered entity's compliance with these requirements, including the
obligation that the registered entity must have reason to believe the
certification is proper. This language is consistent with the
Commission's obligation to assure that the Act and Commission
regulations and policies thereunder are not being violated. Similar
language would be added in Sec. 40.3(a)(9) with respect to voluntary
submission of new products for approval, and in Sec. 40.6(a)(4) with
respect to self-certification of rules by DCMs and DTEFs. DCMs and
DTEFs should be aware that, in conducting routine due diligence reviews
of self-certified new product listings and new rules or rule amendments
under Sec. 40.2(b) and Sec. 40.6(a)(4), respectively, the staff gives
special consideration to
[[Page 39678]]
particular requirements. For DTEFs, the key requirements are: Sec.
5a(b)(2) of the Act (requirements for underlying commodities); Core
Principle 3 (monitoring trading to assure an orderly market); and Core
Principle 4 (disclosure of general information). For DCMs, the key
requirements are: Core Principle 3 (listing contracts that are not
readily susceptible to manipulation); Core Principle 4 (monitoring
trading to prevent manipulation, price distortion or disruptions of the
delivery or cash-settlement process); and Core Principle 5 (adopting
position limits or position accountability rules to reduce the threat
of market manipulation or distortion, especially in the delivery
month). To the extent that a DCM or DTEF includes with its initial
submission, data, research reports, trade interview reports, exchange
or third party analyses, or other background information demonstrating
compliance with these requirements, a DTEF or DCM can minimize the
prospect of requests for additional information under Sec. 40.2(b) or
Sec. 40.6(a)(4), respectively.
The proposed revisions to Sec. 40.3 would set forth with greater
particularity the information Commission staff needs to make a
determination on whether to approve a new product voluntarily submitted
for Commission review and approval.
Section 5c(c)(2)(B) of the Act and Sec. 40.4 of the regulations
require prior Commission approval of DCM rule amendments that, for a
delivery month having open interest, would materially change a term or
condition of a contract for future delivery of an enumerated
agricultural commodity, or an option on such a contract or
commodity.\20\ The proposal would add new subsection 40.4(b)(8) to
include fees or fee changes that are $1.00 or more per contract and are
established by an independent third party or are unrelated to delivery,
trading, clearing or dispute resolution to the types of rule changes
for which a materiality determination is not required. The proposal
would also make clear that the non-material changes described in Sec.
40.4(b), subparagraphs (1)-(8), would fall within the provisions of
revised Sec. 40.6(c) and would be subject to the weekly notification
procedures set out therein. Also, in Sec. 40.4(b)(9) under
subparagraph (i), the deadline for Commission review of ``non-material
agricultural rule changes'' would be changed from 10 calendar days to
10 business days to provide for a consistent review period for all
submissions and to allow for more time for review. Under subparagraph
(ii), the DCM would be required to provide an explanation of why the
DCM believes the proposed rule change is non-material. Similarly, in
Sec. 40.5(c)(1), the review period for rules that are voluntarily
submitted by DCMs or DTEFs for approval would be extended from 30 days
to 45 days, to be consistent with Sec. 40.3.
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\20\ The ``enumerated commodities'' are those agricultural
commodities listed in Sec. 1a(4) of the Act.
---------------------------------------------------------------------------
Under Sec. 40.6, current Sec. 40.6(a) sets out the conditions
under which a DCM or DCO may implement new rules by certifying them to
the Commission. Subparagraph 40.6(a)(1) provides that the certification
procedure does not apply to rules of a DCM that materially change a
term or condition of a futures or option contract on an enumerated
agricultural commodity in a delivery month with open interest.
Subparagraphs 40.6(a)(2) and (3) set out the filing requirements for
rule certifications and the information to be provided in such
certifications. Section 40.6(c) establishes an exception to the rule
certification requirements of Sec. Sec. 40.6 (a)(2) and (3) whereby
DCMs and DCOs may place certain rules and rule amendments into effect
without certification, provided that certain conditions are met. The
conditions are that: (1) The DCM or DCO provide to the Commission a
weekly summary of rule changes made effective pursuant to this
paragraph; and (2) the rule change governs such routine matters as
nonmaterial revisions, changes to delivery standards made by third
parties that do not affect deliverable supplies or the pricing basis
for the product, changes in the composition of an index (other than a
stock index) that do not affect the pricing basis of the index, routine
changes to option contract terms, and certain fee changes established
by independent third parties. The proposed rules would add a reference
to Sec. 40.6(a)(1) to the exception established in Sec. 40.6(c). The
effect would be to make clear that, while material rule changes
involving contract months with open interest in enumerated agricultural
commodities may not be certified to the Commission, the type of routine
changes described in Sec. 40.6(c)(2), as well as the partially
overlapping list of non-material changes in Sec. Sec. 40.4(b)(1)-(8),
would not constitute material changes within the meaning of the Act or
Commission regulations. Therefore, DCMs could inform the Commission of
such rule changes on a weekly basis under the provisions of Sec.
40.6(c). Also, new Sec. 40.6(c)(2)(vi) would add to the list of items
that could be reported weekly under Sec. 40.6(c)(1), changes in survey
lists of banks, brokers or dealers that provide market information to
an independent third party and that are incorporated by reference as
product terms. Finally, new Sec. 40.6(c)(3)(ii)(F) would add de
minimis changes to security indexes to the list of information the
Commission does not require to be certified or reported weekly by a DCM
or DCO.
Under Sec. 40.7, Delegations, new Sec. 40.7(a)(3) would delegate
to the Division the authority to notify a DCM that a rule change
submitted for a materiality determination under Sec. 40.4(b)(9) is
material and must be submitted for Commission approval. Finally, new
Sec. 40.7(b)(3) would increase the Division's delegated authority to
allow it, with the concurrence of the Office of the General Counsel, to
approve rules regarding speculative limits or position accountability.
III. Cost-Benefit Analysis
Section 15(a) 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 or order under the Act. By its
terms, Sec. 15(a) does not require the Commission to quantify the
costs and benefits of its action or to determine whether the benefits
of the action outweigh its costs. Rather, Sec. 15(a) simply requires
the Commission to ``consider the costs and benefits'' of the subject
rule or order.
Section 15(a) further specifies that the costs and benefits of the
proposed rule or order 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
futures markets; (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 or order is 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 amendments proposed herein are intended to clarify and codify
acceptable practices under the rules for trading facilities, based on
the Commission's experience over the past four years in applying those
rules, including the adoption of several amendments to the original
rules over the same period. The proposed amendments also would make
various
[[Page 39679]]
technical corrections and conforming amendments to the rules.
In addition, the proposed amendments would revise the application
and review process for registration as a DCO by eliminating the
presumption of automatic fast-track review of applications and
replacing it with the presumption that all applications will be
reviewed pursuant to the 180-day timeframe and procedures specified in
section 6(a) of the Act. In lieu of the current 60-day automatic fast-
track review, the Commission is proposing to permit applicants to
request expedited review and to be registered as a DCO not later than
90 days after the Commission receives the application.
The Commission has endeavored, in proposing these amendments, to
impose the minimum requirements necessary to enable the Commission to
perform its oversight functions, to carry out its mandate of assuring
the continued existence of competitive and efficient markets and to
protect the public interest in markets free of fraud and abuse.
After considering these factors, the Commission has determined to
propose the rules and rule amendments set forth below.
The Commission specifically invites public comment on its
application of the criteria contained in the Act for consideration.
Commenters are also invited to submit any quantifiable data that they
may have concerning the costs and benefits of the proposed rules with
their comment letter.
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 proposed herein
would affect exempt commercial markets, exempt boards of trade,
derivatives transaction execution facilities, designated contract
markets and designated clearing organizations. The Commission has
previously determined that the foregoing entities are not small
entities for purposes of the RFA.\21\ Accordingly, the Chairman, on
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)
that the proposed rules will not have a significant economic impact on
a substantial number of small entities.
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\21\ 47 FR 18618, 18619 (April 30, 1982) discussing contract
markets; 66 FR 42256, 42268 (August 10, 2001) discussing exempt
boards of trade, exempt commercial markets and derivatives
transaction execution facilities; 66 FR 45605, 45609 (August 29,
2001) discussing designated clearing organizations.
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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. 3504(h)), 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 36, Establishing
Procedures for Exempt Markets, OMB Control Number 3038-0054.
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: 1.
Annual reporting burden: 10.
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: 13.
Annual responses by each respondent: 1.
Total annual responses: 13.
Estimated average hours per response: 300.
Annual reporting burden: 3,900.
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 36
Commodity futures, Commodity Futures Trading Commission.
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 in
the Commodity Exchange Act and, in particular, sections 1a, 2, 3, 4,
4c, 4i, 5,
[[Page 39680]]
5a, 5b, 5c, 5d, 6 and 8a of the Act, the Commission hereby proposes to
amend Chapter I of Title 17 of the Code of Federal Regulations as
follows:
PART 36--EXEMPT MARKETS
1. The authority citation for part 36 continues to read as follows:
Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, as amended by the
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L.
106-554, 114 Stat. 2763 (2000).
1a. Section 36.2 is proposed to be amended by revising paragraphs
(b) and (c) to read as follows:
Sec. 36.2 Exempt boards of trade.
* * * * *
(b) Notification. Boards of trade operating under Section 5d of the
Act as exempt boards of trade shall so notify the Commission. This
notification shall be filed with the Secretary of the Commission at its
Washington, DC headquarters, in electronic form, shall be labeled as
``Notification of Operation as an Exempt Board of Trade,'' and shall
include:
(1) The name and address of the exempt board of trade; and
(2) The name and telephone number of a contact person.
(c) Additional requirements. (1) Prohibited representation. A board
of trade notifying the Commission that it meets the criteria of Section
5d of the Act and elects to operate as an exempt board of trade shall
not represent to any person that it is registered with, designated,
recognized, licensed or approved by the Commission.
(2) Market data dissemination. (i) Criteria for price discovery
determination. An exempt board of trade operating a market in reliance
on the exemption in Section 5d 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 when:
(A) Cash market bids, offers or transactions are directly based on,
or quoted at a differential to, the prices generated on the market on a
more than occasional basis; or
(B) The market's prices are routinely disseminated in a widely
distributed industry publication and are routinely consulted by
industry participants in pricing cash market transactions.
(ii) Notification. An exempt board of trade operating a market in
reliance on the exemption in Section 5d of the Act shall notify the
Commission when:
(A) It has reason to believe 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 more than occasional basis;
(B) It has reason to believe that the market's prices are routinely
disseminated in a widely distributed industry publication and are
routinely consulted by industry participants in pricing cash market
transactions; or
(C) The exempt board of trade holds out the market to the public as
performing a price discovery function for the cash market for the
commodity.
(iii) Price discovery determination. Following receipt of a notice
under paragraph (c)(2)(ii) of this section, or on its own initiative,
the Commission may notify an exempt board of trade operating a market
in reliance on the exemption in Section 5d of the Act that the facility
appears to meet the criteria for performing a significant price
discovery function under paragraph (c)(2)(i)(A) or (B) of this section.
Before making a final price discovery determination under this
paragraph, the Commission shall provide the exempt board of trade with
an opportunity for a hearing through the submission of written data,
views and arguments. Any such written data, views and arguments shall
be filed with the Secretary of the Commission in the form and manner
and within the time specified by the Commission. After consideration of
all relevant matters, the Commission shall issue an order containing
its determination whether the facility performs a significant price
discovery function under the criteria of paragraph (c)(2)(i)(A) or (B)
of this section.
(iv) Price dissemination. (A) An exempt board of trade that the
Commission has determined performs a significant price discovery
function under paragraph (c)(2)(iii) of this section shall disseminate
publicly, and on a daily basis, all of the following information with
respect to transactions executed in reliance on the exemption in
Section 5d of the Act:
(1) Contract terms and conditions, or a product description, and
trading conventions, mechanisms and practices;
(2) Trading volume by commodity and, if available, open interest;
and
(3) The opening and closing prices or price ranges, the daily high
and low prices, a volume-weighted average price that is representative
of trading on the board of trade, or such other daily price information
as proposed by the board of trade and approved by the Commission.
(B) The exempt board of trade shall make such information readily
available to the news media and the general public without charge no
later than the business day following the day to which the information
pertains.
(v) Modification of price discovery determination. An exempt board
of trade that the Commission has determined performs a significant
price discovery function under paragraph (c)(2)(iii) of this section
may petition the Commission at any time to modify or vacate that
determination. The petition shall contain an appropriate justification
for the request. The Commission, after notice and opportunity for a
hearing through the submission of written data, views and arguments,
shall by order grant, grant subject to conditions, or deny such
request.
(3) Annual Certification. A board of trade operating under Section
5d of the Act as an exempt board of trade shall file with the
Commission annually, no later than the end of each calendar year, a
notice that includes:
(i) A statement that it continues to operate under the exemption;
and
(ii) A certification that the information contained in the previous
Notification of Operation as an Exempt Board of Trade is still correct.
2. Section 36.3 is proposed to be amended by revising paragraph (a)
introductory text, revising paragraph (c)(2)(ii), and adding a new
paragraph (c)(4) to read as follows:
Sec. 36.3 Exempt commercial markets.
(a) Notification. An electronic trading facility relying upon the
exemption in Section 2(h)(3) of the Act shall notify the Commission of
its intention to do so. This notification, and subsequent notification
of any material changes in the information initially provided, shall be
filed with the Secretary of the Commission at its Washington, DC
headquarters, in electronic form, shall be labeled as ``Notification of
Operation as an Exempt Commercial Market,'' and shall include the
information and certifications specified in Section 2(h)(5)(A) of the
Act.
* * * * *
(c) * * *
(2) * * *
(ii) Notification. An electronic trading facility operating in
reliance on Section 2(h)(3) of the Act shall notify the Commission
when:
(A) It has reason to believe 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 more than occasional basis;
(B) It has reason to believe that the market's prices are routinely
disseminated in a widely distributed industry publication and are
routinely consulted by industry participants in pricing cash market
transactions; or
[[Page 39681]]
(C) The market holds itself out to the public as performing a price
discovery function for the cash market for the commodity.
* * * * *
(4) Annual Certification. An electronic trading facility operating
in reliance upon the exemption in Section 2(h)(3) of the Act shall file
with the Commission annually, no later than the end of each calendar
year, a notice that includes:
(i) A statement that it continues to operate under the exemption;
and
(ii) A certification that the information contained in the previous
Notification of Operation as an Exempt Commercial Market is still
correct.
PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES
3. The authority citation for part 37 continues 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.
3a. Section 37.1 is proposed to be amended by revising paragraph
(a) to read as follows:
Sec. 37.1 Scope and definition.
(a) Scope. The provisions of this part apply to any board of trade
operating as or applying to become registered as a derivatives
transaction execution facility under Sections 5a and 6 of the Act.
* * * * *
4. Section 37.2 is proposed to be 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:
(a) Section 15.05, part 40 and part 41 of this chapter, including
any related definitions and cross-referenced sections; and
(b) Sections 1.3, 1.31, 1.59(d), 1.60, 1.63(c), 33.10, and part 190
of this chapter and, as applicable to the market, Sec. Sec. 15.00 to
15.04 and parts 16 through 21 of this chapter, including any related
definitions and cross-referenced sections, which are applicable as
though they were set forth in this part 37 and included specific
reference to derivatives transaction execution facilities.
5. Section 37.3 is proposed to be amended as follows:
a. By redesignating paragraphs (b) and (c) as paragraphs (d) and
(e);
b. By redesignating paragraph (a)(5) as paragraph (b);
c. By redesignating paragraph (a)(6) introductory text as paragraph
(c);
d. By redesignating paragraph (a)(6)(i) and (ii) as paragraphs
(c)(1) and (2); and
e. By redesignating paragraphs (a)(6)(ii)(A) through (H) as
paragraphs (c)(2)(i) through (viii).
6. Section 37.6 is proposed to be revised 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(d) 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. Such demonstration may be included in an
application submitted pursuant to Sec. 37.5 of this part.
(i) The demonstration would include the following:
(A) The label, ``Demonstration of Compliance with Core Principles
for Operation'';
(B) A document that describes the manner in which the applicant
will comply with each core principle (such as a regulatory chart),
which could cite to documents previously submitted including documents
submitted pursuant to Sec. 37.5(b)(1)(ii)(A)-(E); and
(C) To the extent that any of the items in Sec. 37.5(b)(1)(ii)(A)-
(E) raise issues that are novel, or for which compliance with a core
principle is not self-evident, an explanation as to how that item and
the application satisfy the core principle.
(ii) 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) Delegation of authority. The Commission hereby delegates, until
it orders otherwise, the authority set forth in paragraph (c)(1) to the
Director of the Division of Market Oversight or such other employee or
employees as the Director may designate from time to time. The Director
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.
(3) Change of owners. Upon a change of ownership of an existing
registered derivatives transaction execution facility, the new owner
shall file electronically with the Secretary of the Commission at its
Washington, DC, 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.
(d) Guidance regarding compliance with core principles. Appendix B
to this part provides guidance to registered derivatives transaction
execution facilities on compliance with the core principles under
Section 5a(d) of the Act.
[[Page 39682]]
7. Section 37.7 is proposed to be amended by revising paragraph (b)
to read as follows:
Sec. 37.7 Additional requirements.
* * * * *
(b) Material modifications. Notwithstanding the provisions of
Section 5c(c) of the Act, registered derivatives transaction execution
facilities need not certify rules or rule amendments under Sec. 40.6
of this chapter, and must only notify the Commission prior to placing
into effect or amending such a rule, (as defined in Sec. 40.1 of this
chapter):
(1) By electronic notification to the Commission of the rule to be
placed into effect or to be changed, in a format approved by the
Secretary of the Commission, at the time traders or participants in the
market are notified, but (unless taken as an emergency action) in no
event later than the close of business on the business day preceding
implementation. The submission notification shall be labeled ``DTEF
Rule Notices'' and shall include the text of the rule or rule amendment
(with deletions and additions indicated). Provided, however, the
derivatives transaction execution facility need not notify the
Commission of rules or rule amendments for which no certification is
required under Sec. 40.6(c) of this chapter.
(2) The derivatives transaction execution facility must maintain
documentation regarding all changes to rules, terms and conditions or
trading protocols.
* * * * *
8. Section 37.8 is proposed to be amended by revising paragraph (b)
to read as follows:
Sec. 37.8 Information relating to transactions on derivatives
transaction execution facilities.
* * * * *
(b) Special calls for information from futures commission merchants
or foreign brokers. Upon special call by the Commission, each person
registered as a futures commission merchant or a foreign broker (as
defined in Sec. 15.00 of this chapter) that carries or has carried an
account for a customer on a derivatives transaction execution facility
shall provide information to the Commission concerning such accounts or
related positions carried for the customer on that or other facilities
or markets, in the form and manner and within the time specified by the
Commission in the special call.
* * * * *
9. Appendix A to Part 37--Application Guidance is proposed to be
amended by revising the heading of the appendix and the first paragraph
of the appendix to read as follows:
Appendix A to Part 37--Guidance on Compliance With Registration
Criteria
This appendix provides guidance on meeting the criteria for
registration under Sections 5a(c) and 6 of the Act and this Part,
both initially and on an ongoing basis. The guidance following each
registration criterion is illustrative only of the types of matters
an applicant may address, as applicable, and is not intended to be
used as a mandatory checklist. Addressing the issues and questions
set forth in this appendix would help the Commission in its
consideration of whether the application has met the criteria for
registration. To the extent that compliance with, or satisfaction
of, a criterion for registration is not self-explanatory from the
face of the derivatives transaction execution facility's rules, (as
defined in Sec. 40.1 of this chapter), the application should
include an explanation or other form of documentation demonstrating
that the applicant meets the registration criteria of Section 5a(c)
of the Act and Sec. 37.5.
* * * * *
10. Appendix B to Part 37--Guidance on Compliance With Core
Principles is proposed to be amended by revising paragraphs 1. and 3.
of the appendix to read as follows:
Appendix B to Part 37--Guidance on Compliance With Core Principles
1. This appendix provides guidance on complying with the core
principles in order to maintain registration under Section 5a(d) of
the Act and this Part. This guidance is illustrative only and is not
intended to be used as a mandatory checklist.
* * * * *
3. Alternatively, if an applicant for registration or for
reinstatement of registration under Sec. 37.6(b)(2) chooses to
provide the Commission with a demonstration of its compliance with
core principles, addressing the issues set forth in this appendix
would help the Commission in its consideration of such compliance.
To the extent that compliance with, or satisfaction of, the core
principles is not self-explanatory from the face of the derivatives
transaction execution facility's rules, (as defined in Sec. 40.1 of
this chapter) a submission under Sec. 37.6(b)(2) should include an
explanation or other form of documentation demonstrating that the
derivatives transaction execution facility complies with the core
principles.
* * * * *
11. Appendix B to part 37 is proposed to be further amended by
revising the second paragraph of Core Principle 5 to read as follows:
Appendix B to Part 37--Guidance on Compliance With Core Principles
* * * * *
Core Principle 5 of Section 5a(d)(5) of the Act: DAILY PUBLICATION OF
TRADING INFORMATION * * *
A board of trade operating as a registered derivatives
transaction execution facility should provide to the public
information regarding settlement prices, price range, trading
volume, open interest and other related market information for all
applicable contracts, as determined by the Commission. In making
such determination, the Commission will consider whether a contract
performs a significant price discovery function for transactions in
the cash market for the commodity underlying the contract. The
Commission will apply the same standards applicable to exempt boards
of trade and exempt commercial markets (see Sec. Sec. 36.2(b)(2)
and 36.3(c)(2), respectively) whereby a market performs a
significant price discovery function for transactions in the cash
market for an underlying commodity if: Cash market bids, offers or
transactions are directly based on, or quoted at a differential to,
the prices generated on the market on a more than occasional basis;
or the market's prices are routinely disseminated in a widely
distributed industry publication and are routinely consulted by
industry participants in pricing cash market transactions. In the
event the Commission has reason to believe that a derivatives
transaction execution facility may meet either of the foregoing
standards, or if the facility holds itself out to the public as
performing a price discovery function for the cash market for the
underlying commodity, the Commission shall notify the facility that
it appears to meet the criteria for performing a significant price
discovery function under Core Principle 5. Before making a final
price discovery determination under this core principle, the
Commission shall provide the facility with an opportunity for a
hearing through the submission of written data, views and arguments.
After consideration of all relevant matters, the Commission shall
issue an order containing its determination whether the requirement
of the core principle on publication of trading information under
Section 5a(d)(5) of the Act applies to a particular contract traded
on a facility. Provision of information for any applicable contract
could be through such means as providing the information to a
financial information service or by placing the information on a
facility's website. Such information shall be made available to the
public without charge no later than the business day following the
day to which the information pertains.
* * * * *
PART 38--DESIGNATED CONTRACT MARKETS
12. The authority citation for part 38 continues 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.
12a. Section 38.1 is proposed to be revised to read as follows:
[[Page 39683]]
Sec. 38.1 Scope.
The provisions of this part 38 shall apply to every board of trade
that has been designated or is applying to become designated as a
contract market under Sections 5 and 6 of the Act. Provided, however,
nothing in this provision affects the eligibility of designated
contract markets to operate under the provisions of parts 36 or 37 of
this chapter.
13. Section 38.2 is proposed to be revised to read as follows:
Sec. 38.2 Exemption.
Agreements, contracts, or transactions traded on a designated
contract market under Section 5 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
Sec. Sec. 1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.38, 1.52, 1.59(d), 1.60,
1.63(c), 1.67, 33.10, Part 9, Parts 15 through 21, Part 40, Part 41 and
Part 190 of this chapter, including any related definitions and cross-
referenced sections.
14. Section 38.5 is proposed to be amended by revising paragraph
(b), redesignating paragraph (c) as paragraph (d), and adding new
paragraph (c) as follows:
Sec. 38.5 Information relating to contract market compliance.
* * * * *
(b) Upon request by the Commission, a designated contract market
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 designated
contract market is in compliance with one or more designation criteria
or 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.
(c) Delegation of authority. The Commission hereby delegates, until
it orders otherwise, the authority set forth in paragraph (b) of this
section to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time. The Director 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.
(d) Upon a change of ownership of an existing designated contract
market, the new owner shall file electronically 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.
* * * * *
15. Appendix A to Part 38--Application Guidance is proposed to be
amended by revising the title of the appendix and the first paragraph
of the appendix to read as follows:
Appendix A to Part 38--Guidance on Compliance With Designation Criteria
This appendix provides guidance on meeting the criteria for
designation under Sections 5(b) and 6 of the Act and this Part, both
initially and on an ongoing basis. The guidance following each
designation criterion is illustrative only of the types of matters
an applicant may address, as applicable, and is not intended to be
used as a mandatory checklist. Addressing the issues and questions
set forth in this appendix would help the Commission in its
consideration of whether the application has met the criteria for
designation. To the extent that compliance with, or satisfaction of,
a criterion for designation is not self-explanatory from the face of
the contract market's rules (as defined in Sec. 40.1 of this
chapter), the application should include an explanation or other
form of documentation demonstrating that the applicant meets the
designation criteria of Section 5(b) of the Act.
* * * * *
16. Appendix A to Part 38 is proposed to be further amended by
revising the second paragraph of Designation Criterion 7 to read as
follows:
Appendix A to Part 38--Guidance on Compliance With Designation Criteria
* * * * *
Designation Criterion 7 of Section 5(b) of the Act: PUBLIC ACCESS * * *
A designated contract market should provide information to the
public by placing the information on its website.
* * * * *
17. Appendix B to Part 38--Guidance on, and Acceptable Practices
in, Compliance With Core Principles is proposed to be amended by
revising paragraphs 1. and 2. to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
1. This appendix provides guidance on complying with the core
principles, both initially and on an ongoing basis, to maintain
designation under Section 5(d) of the Act and this Part. The
guidance is provided in paragraph (a) following each core principle
and it can be used to demonstrate to the Commission core principle
compliance, under Sec. Sec. 38.3(a) and 38.5. The guidance for each
core principle is illustrative only of the types of matters a board
of trade may address, as applicable, and is not intended to be used
as a mandatory checklist. Addressing the issues and questions set
forth in this appendix would help the Commission in its
consideration of whether the board of trade is in compliance with
the core principles. To the extent that compliance with, or
satisfaction of, a core principle is not self-explanatory from the
face of the board of trade's rules (as defined in Sec. 40.1 of this
chapter), an application pursuant to Sec. 38.3, or a submission
pursuant to Sec. 38.5 should include an explanation or other form
of documentation demonstrating that the board of trade 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. Boards of trade 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.
* * * * *
18. Appendix B to Part 38 is proposed to be further amended by
revising paragraph (a)(1) of Core Principle 2 to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 2 of Section 5(d) of the Act: COMPLIANCE WITH RULES * *
*
(a) Application guidance. (1) A designated contract market
should have 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 the contract market's
members and by non-intermediated 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 contract market
itself or through delegation or contracting-out to a third party. If
the contract market 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 program,
and the contract market should retain appropriate supervisory
authority over the third party.
* * * * *
19. Appendix B to Part 38 is proposed to be further amended by
revising paragraphs (a) and (b) of Core Principle 6 to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
[[Page 39684]]
Core Principle 6 of Section 5(d) of the Act: EMERGENCY AUTHORITY * * *
(a) Application guidance. A designated contract market should
have clear procedures and guidelines for contract market decision-
making regarding emergency intervention in the market, including
procedures and guidelines to avoid conflicts of interest while
carrying out such decision-making. A contract market 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 a contract market's regulatory
emergency authority, explaining how conflicts of interest are
minimized, and documenting the contract market'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, when carried out pursuant to a
contract market's emergency authority. To address perceived market
threats, the contract market, among other things, should be able to
impose position limits in the delivery month, impose or modify price
limits, modify circuit breakers, call for additional margin either
from customers or clearing members, 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 market,
order the transfer of customer contracts and the margin for such
contracts from one member including non-intermediated market
participants of the contract market 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]
* * * * *
20. Appendix B to Part 38 is proposed to be further amended by
adding paragraph (b) to Core Principle 7 to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 7 of Section 5(d) of the Act: AVAILABILITY OF GENERAL
INFORMATION * * *
* * * * *
(b) Acceptable practices. In making information available to
market participants and the public, on its website, a designated
contract market should place information on the website no later
than the day a new product is listed, the day a new or amended rule
is implemented or the day previously disclosed information is
changed. For example, the timely provision of this information on a
contract market's website could be done through press releases,
newsletters or notices to members. Additionally, a contract market
should ensure that the rulebook posted on its website is available
to the public (i.e., can be accessed by visitors to the website
without the need to register, log in, provide a user name or obtain
a password) and is current to within one day of implementation of a
new or amended rule.
* * * * *
20. Appendix B to Part 38 is proposed to be further amended by
adding paragraph (b) of Core Principle 8 to read as follows:
Appendix B to Part 38--Guidance on, Acceptable Practices in, Compliance
With Core Principles
* * * * *
Core Principle 8 of Section 5(d) of the Act: DAILY PUBLICATION OF
TRADING INFORMATION * * *
* * * * *
(b) Acceptable Practices. The mandatory compliance with Section
16.01, ``Trading volume, open contracts, prices and critical
dates,'' required under the regulations, would constitute an
acceptable practice under Core Principle 8.
* * * * *
21. Appendix B to Part 38 is proposed to be further amended by
revising paragraph (a) of Core Principle 16 to read as follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 16 of Section 5(d) of the Act: COMPOSITION OF
BOARDS OF MUTUALLY OWNED CONTRACT MARKETS * * *
(a) Application guidance. The composition of a mutually-owned
contract market's governing board should fairly represent the
diversity of interests of the contract market's market participants.
* * * * *
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
22. The authority citation for part 39 continues to read as
follows:
Authority: 7 U.S.C. 7b as amended by Appendix E of Pub. L. 106-
554, 114 Stat. 2763A-365.
22a. Section 39.3 is proposed to be revised to read as follows:
Sec. 39.3 Procedures for registration.
(a) Application Procedures. (1) 180-day review procedures. An
organization desiring to be registered as a derivatives clearing
organization shall file electronically an application for registration
with the Secretary of the Commission at its Washington, DC,
headquarters. Except as provided under the 90-day review procedures
described in paragraph (a)(3) of this section, the Commission will
review the application for registration as a derivatives clearing
organization pursuant to the 180-day timeframe and procedures specified
in Section 6(a) of the Act. The Commission may approve or deny the
application or, if deemed appropriate, register the applicant as a
derivatives clearing organization subject to conditions.
(2) The following must be included:
(i) The application is labeled as being submitted pursuant to this
Part 39;
(ii) The applicant represents that it will operate in accordance
with the definition of derivatives clearing organization contained in
Section 1a(9) of the Act;
(iii) The application includes a copy of the applicant's rules;
(iv) The application demonstrates how the applicant is able to
satisfy each of the core principles specified in Section 5b(c)(2) of
the Act;
(v) The applicant submits agreements entered into or to be entered
into between or among the applicant, its operator or its participants,
and descriptions of system test procedures, tests conducted or test
results, that will enable the applicant to comply, or demonstrate the
applicant's ability to comply, with the core principles specified in
Section 5b(c)(2) of the Act; and
(vi) 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.
(3) Ninety-day review procedures. An organization desiring to be
registered as a derivatives clearing organization may request that its
application be reviewed on a 90-day basis and that the applicant be
registered as a derivatives clearing organization 90 days after the
date of receipt of the application for registration by the Secretary of
the Commission. The 90-day period shall begin on the first business day
(during the business hours defined in Sec. 40.1 of this chapter) that
the Commission is in receipt of the application. Unless the Commission
notifies the applicant during the 90-day period that the expedited
review has been terminated pursuant to Sec. 39.3(b), the Commission
will register the applicant as a derivatives clearing organization
during the 90-day period. If deemed appropriate by the Commission, the
registration may be subject to such conditions as the Commission may
stipulate.
(i) The application must include the items described in Sec. Sec.
39.3(a)(2)(i)-(vi); and
[[Page 39685]]
(ii) The applicant must not amend or supplement the application
except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period.
(b) Termination of 90-day review. (1) During the 90-day period for
review pursuant to paragraph (a)(3) of this section, the Commission
shall notify the applicant seeking registration that the Commission is
terminating review under this section and will review the proposal
under the 180-day time period and procedures of Section 6(a) of the
Act, if it appears to the Commission that the application:
(i) Is materially incomplete;
(ii) Fails in form or substance to meet the requirements of this
part;
(iii) Raises novel or complex issues that require additional time
for review; or
(iv) Is amended or supplemented in a manner that is inconsistent
with Sec. 39.3(a)(3)(ii).
(2) This termination notification shall identify the deficiencies
in the application that render it incomplete, the manner in which the
application fails to meet the requirements of this part, or the novel
or complex issues that require additional time for review. The
Commission shall also terminate review under this section if requested
in writing to do so by the applicant.
(c) Withdrawal of application for registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraphs (a)(1)-(2) or (a)(3) of this section by filing with the
Commission such a request. Withdrawal of an application for
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the application for registration was pending with the
Commission.
(d) Guidance for applicants and registrants. Appendix A to this
part provides guidance to applicants and registrants on how the core
principles specified in Section 5b(c)(2) of the Act may be satisfied.
(e) Reinstatement of dormant registration. Before listing or
relisting contracts for clearing, a dormant registered derivatives
clearing organization as defined in Sec. 40.1 of this chapter must
reinstate its registration under the procedures of paragraph (a)(1)-(2)
or (a)(3) 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.
(f) Request for vacation of registration. A registered derivatives
clearing organization may vacate its registration under Section 7 of
the Act by filing electronically such a request with the Commission at
its Washington, DC headquarters. Vacation of registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities or events occurring during the time that the
facility was designated by the Commission.
(g) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Clearing
and Intermediary Oversight or the Director's delegates, with the
concurrence of the General Counsel or the General Counsel's delegates,
the authority to notify an applicant seeking designation under Section
6(a) of the Act that the application is materially incomplete and the
running of the 180-day period is stayed or that the 90-day review under
paragraph (a)(3) of this section is terminated.
(2) The Director of the Division of Clearing and Intermediary
Oversight may submit to the Commission for its consideration any matter
which has been delegated in this paragraph.
(3) Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (g)(1)
of this section.
PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING
ORGANIZATIONS
23. The authority citation for part 40 continues 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.
23a. Section 40.1 is proposed to be revised to read as follows:
Sec. 40.1 Definitions.
As used in this part:
(a) 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.
(b) 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 twelve complete calendar months and in which
there is no open interest; provided, however, no contract or instrument
shall be considered to be dormant until the end of 36 complete calendar
months following initial exchange certification or Commission approval,
or until the designated contract market or derivatives transaction
execution facility on which it is traded becomes dormant.
Notwithstanding the above, a board of trade may, by certifying to the
Commission, self-declare a contract to be dormant at any time following
initial exchange certification or Commission approval.
(c) Dormant contract market means any designated contract market on
which no trading has occurred for a period of twelve 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 initial order of designation was issued.
(d) 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 twelve 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 initial order of registration was issued.
(e) Dormant derivatives transaction execution facility means any
derivatives transaction execution facility on which no trading has
occurred for a period of twelve 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 initial order of registration was issued.
(f) Dormant rule means any new rule or rule amendment which the
designated contract market, derivatives transaction execution facility
or derivatives clearing organization has not made effective and
implemented; provided, however, no new rule or rule amendment shall be
considered to be dormant until the end of twelve complete calendar
months following initial certification or Commission approval. Prior to
implementing a dormant rule, it should be resubmitted to the
Commission, either by certification or for approval.
(g) Emergency means any occurrence or circumstance which, in the
opinion
[[Page 39686]]
of the governing board of the contract market, derivatives transaction
execution facility or derivatives clearing organization, requires
immediate action and threatens or may threaten such things as the fair
and orderly trading in, or the liquidation of or delivery pursuant to,
any agreements, contracts or transactions on such a trading facility,
including: Any manipulative or attempted manipulative activity; any
actual, attempted, or threatened corner, squeeze, congestion, or undue
concentration of positions; any circumstances which may materially
affect the performance of agreements, contracts or transactions traded
on the trading facility, including failure of the payment system or the
bankruptcy or insolvency of any participant; any action taken by any
governmental body, or any other board of trade, market or facility
which may have a direct impact on trading on the trading facility; and
any other circumstance which may have a severe, adverse effect upon the
functioning of a designated contract market or derivatives transaction
execution facility.
(h) 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.
(i) Terms and conditions mean 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 cash
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:
(1) Quality and other standards that define the commodity or
instrument underlying the contract;
(2) Quantity standards or other provisions related to contract
size;
(3) Any applicable premiums or discounts for delivery of nonpar
products;
(4) Trading hours, trading months and the listing of contracts;
(5) The pricing basis and minimum price fluctuations;
(6) Any price limits, trading halts, or circuit breaker provisions,
and procedures for the establishment of daily settlement prices;
(7) Position limits, position accountability standards, and
position reporting requirements;
(8) Delivery points and locational price differentials;
(9) 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;
(10) If cash settled; all provisions related to the definition,
composition, calculation and revision of the cash settlement price or
index; and
(11) Payment or collection of commodity option premiums or margins.
24. Section 40.2 is proposed to be revised to read as follows:
Sec. 40.2 Listing products for trading by certification.
(a) A registered entity may list a new product for trading, list a
product for trading that has become dormant, or accept for clearing a
product that is not traded on a designated contract market or a
registered derivatives transaction execution facility, if the following
conditions have been met:
(1) The registered entity has filed its submission electronically
with the Secretary of the Commission and at the regional office having
local jurisdiction over the registered entity, in a format specified by
the Secretary of the Commission;
(2) The Commission has received the submission at its headquarters
by close of business on the business day preceding the product's
listing or acceptance for clearing, and:
(3) The submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions in Appendix D to this part;
(ii) A copy of the product's rules, including all rules related to
its terms and conditions, or the rules establishing the terms and
conditions of the listed product that make it acceptable for clearing;
(iii) The intended listing date; and
(iv) A certification by the registered entity that the product to
be listed complies with the Act and regulations thereunder.
(b) A registered entity shall provide, if requested by Commission
staff, additional evidence, information or data relating to whether the
contract meets, initially or on a continuing basis, any of the
requirements of the Act or Commission regulations 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.
(c) Stay. The Commission may stay the listing of a contract
pursuant to paragraph (a) of this section during the pendency of
Commission proceedings for filing a false certification or to alter or
amend the contract terms and conditions pursuant to Section 8a(7) of
the Act. The decision to stay the listing of a contract in such
circumstances shall not be delegable to any employee of the Commission.
25. Section 40.3 is proposed to be amended by revising paragraphs
(a), (c), and (e)(2) to read as follows:
Sec. 40.3 Voluntary submission of new products for Commission review
and approval.
(a) Request for approval. A designated contract market or
registered derivatives transaction execution facility may request under
Section 5c(c)(2) of the Act that the Commission approve new products. A
submission requesting approval shall:
(1) Be filed electronically with the Secretary of the Commission
and at the regional office of the Commission having local jurisdiction
over the submitting registered entity in a format specified by the
Secretary of the Commission;
(2) Include a copy of the submission cover sheet in accordance with
the instructions in Appendix D to this part;
(3) Include a copy of the rules that set forth the contract's terms
and conditions;
(4) Comply with the requirements of Appendix A to this Part--
Guideline No. 1. To demonstrate compliance, the submission shall
include:
(i) An explanation, if not self-evident from the rules, as to how
the specific terms and conditions satisfy the acceptable practices set
forth in Guideline No. 1, Appendix A to Part 40. This information may
be provided in narrative form or by completion of the applicable chart.
(ii) For physical delivery contracts, an explanation as to how the
terms and conditions as a whole will result in a deliverable supply
such that the contract will not be conducive to price manipulation or
distortion and that the deliverable supply reasonably can be expected
to be available to short traders and salable by long traders at its
market
[[Page 39687]]
value in normal cash marketing channels.
(iii) For cash settled contracts, an explanation as to how the cash
settlement of the contract is at a price reflecting the underlying cash
market, will not be subject to manipulation or distortion, and is based
on a cash price series that is reliable, acceptable, publicly available
and timely.
(iv)(A) A brief description of the cash market for the commodity,
instrument, index or interest that underlies the contract. The
description may include materials prepared by the designated contract
market or registered derivatives transaction execution facility,
existing studies by industry trade groups, academics, governmental
bodies or other entities, reports of consultants, or other materials,
which provide a description of the underlying cash market.
(B) The cash market description may, however, be confined only to
those aspects relevant to particular term(s) or condition(s) that
differ from an existing contract, where a contract based on the same,
or a closely related, commodity is already listed for trading and is
not dormant.
(5) Describe any agreements or contracts entered into with other
parties that enable the designated contract market or derivatives
transaction execution facility to carry out its responsibilities.
(6) Include the certifications required in Sec. 41.22 of this
chapter for product approval of a commodity that is a security future
or a security futures product as defined in Sections 1a(31) or 1a(32)
of the Act, respectively;
(7) Identify 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 support that request for confidential
treatment with reasonable justification;
(8) Include the filing fee required under Appendix B to this part;
and
(9) Include, if requested by Commission staff, additional evidence,
information or data relating to whether the contract meets, initially
or on a continuing basis, any of the specific requirements of the Act,
or any other requirement for designation under the Act or Commission
regulations or policies thereunder.
* * * * *
(c) Extension of time. The Commission may extend the forty-five day
review period in paragraph (b) of this section for:
(1) An additional forty-five days, if the product raises novel or
complex issues that require additional time for review or is of major
economic significance, in which case, the Commission would notify the
submitting registered entity within the initial forty-five day review
period and would briefly describe the nature of the specific issues for
which additional time for review would be required; or
(2) Such extended period as the submitting registered entity so
instructs the Commission in writing.
* * * * *
(e) Effect of non-approval.
(1) * * *
(2) Notification to a submitting registered entity under paragraph
(d) of this section of the Commission's refusal to approve a product
shall be presumptive evidence that the entity may not truthfully
certify under Sec. 40.2 that the same, or substantially the same,
product does not violate the Act or regulations thereunder.
26. Section 40.4 is proposed to be revised to read as follows:
Sec. 40.4 Amendments to terms or conditions of enumerated
agricultural contracts.
(a) Designated contract markets must submit for Commission approval
under the procedures of Sec. 40.5, prior to its implementation, any
rule or rule amendment that, for a delivery month having open interest,
would materially change a term or condition as defined in Sec.
40.1(i), of a contract for future delivery in an agricultural commodity
enumerated in Section 1a(4) of the Act, or of an option on such a
contract or commodity.
(b) The following rules or rule amendments are not material changes
and, except as provided in paragraph (b)(9) of this section, may be
reported to the Commission pursuant to the provisions of Sec. 40.6(c):
(1) Changes in trading hours;
(2) Changes in lists of approved delivery facilities pursuant to
previously set standards or criteria;
(3) Changes to terms and conditions of options on futures other
than those relating to last trading day, expiration date, option strike
price delistings, and speculative position limits;
(4) Reductions in the minimum price fluctuation (or ``tick'');
(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 per contract;
(8) Fees or fee changes that are $1.00 or more per contract and are
established by an independent third party or are unrelated to delivery,
trading, clearing or dispute resolution; and
(9) Any other rule:
(i) The text of which has been submitted for review to the
Secretary of the Commission electronically in a format specified by the
Secretary of the Commission, at least ten business days prior to its
implementation and that has been labeled ``Non-Material Agricultural
Rule Change;''
(ii) For which the registered entity has provided an explanation as
to why it considers the rule ``non-material,'' and any other
information that may be beneficial to the Commission in analyzing the
merits of the entity's claim of non-materiality; and
(iii) With respect to which the Commission has not notified the
contract market during the review period that the rule appears to
require or does require prior approval under this section.
27. Section 40.5 is proposed to be amended by revising paragraph
(a), revising paragraph (c)(1) and revising paragraph (e)(2) to read as
follows:
Sec. 40.5 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. A registered entity may request
pursuant to Section 5c(c) of the Act that the Commission approve any
proposed rule or rule amendment. A submission requesting approval
shall:
(1) Be filed electronically with the Secretary of the Commission
and at the regional office of the Commission having local jurisdiction
over the registered entity in a format specified by the Secretary of
the Commission.
(2) Include a copy of the submission cover sheet in accordance with
the instructions in Appendix D to this part;
(3) Set forth the text of the proposed rule or rule amendment (in
the case of a rule amendment, deletions and additions must be
indicated);
(4) Describe the proposed effective date of a proposed rule and any
action taken or anticipated to be taken to adopt the proposed rule by
the registered entity or by its governing board or by any committee
thereof, and cite the rules of the entity that authorize the adoption
of the proposed rule;
(5) Explain the operation, purpose, and effect of the proposed
rule, including, as applicable, a description of the anticipated
benefits to market
[[Page 39688]]
participants or others, any potential anticompetitive effects on market
participants or others, how the rule fits into the registered entity's
framework of self-regulation, a demonstration that the submission
complies with the requirements of Appendix A to this part--Guideline
No. 1, and any other information which may be beneficial to the
Commission in analyzing the proposed rule. If a proposed rule affects,
directly or indirectly, the application of any other rule of the
submitting registered entity, set forth the pertinent text of any such
rule and describe the anticipated effect;
(6) Briefly describe any substantive opposing views expressed to
the registered entity by governing board or committee members, members
of the entity or market participants with respect to the proposed rule
that were not incorporated into the proposed rule;
(7) 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
regulation or the interpretation;
(8) 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; and
(9) Include a copy of the submission cover sheet in accordance with
the instructions in Appendix D to this part.
* * * * *
(c) Extensions of time. The Commission may extend the review period
in paragraph (b) of this section for:
(1) An additional forty-five days, if the proposed rule raises
novel or complex issues that require additional time for review or is
of major economic significance, in which case, the Commission would
notify the submitting registered entity within the initial forty-five
day review period and would briefly describe the nature of the specific
issues for which additional time for review would be required; or
* * * * *
(e) Effect of non-approval. (1) * * *
(2) Notification to a registered entity under paragraph (d) of this
section of the Commission's refusal to approve a proposed rule or rule
amendment of a registered entity shall be presumptive evidence that the
entity may not truthfully certify that the same, or substantially the
same, proposed rule or rule amendment does not violate the Act or
regulations thereunder.
* * * * *
28. Section 40.6 is proposed to be amended by revising paragraph
(a) introductory text, paragraphs (a)(2), (3), and (4), paragraph (c)
introductory text, and paragraphs (c)(1), (c)(2)(iii) and (c)(2)(v),
and by adding new paragraphs (c)(2)(vi) and (c)(3)(ii)(F) to read as
follows:
Sec. 40.6 Self-certification of rules by designated contract markets
and registered derivatives clearing organizations.
(a) Required certification. A designated contract market or a
registered derivatives clearing organization may implement any new rule
or rule amendment (other than a rule or rule amendment approved or
deemed approved by the Commission under Sec. 40.5) if the following
conditions have been met:
(1) * * *
(2) The designated contract market or registered derivatives
clearing organization has filed a submission electronically for the
rule or rule amendment with the Secretary of the Commission and at the
regional office having local jurisdiction over the submitting
registered entity in a format specified by the Secretary of the
Commission, and the Commission has received the submission at its
headquarters by close 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 24 hours after
implementation; and
(3) The rule submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions in Appendix D to this part (in the case of a rule or rule
amendment that responds to an emergency, ``Emergency Rule
Certification'' should be noted in the Description section of the
submission cover sheet);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of implementation;
(iv) A brief explanation of any substantive opposing views
expressed to the registered entity by governing board or committee
members, members of the entity or market participants, that were not
incorporated into the rule; and
(v) A certification by the registered entity that the rule complies
with the Act and regulations thereunder.
(4) The registered entity shall provide, if requested by Commission
staff, additional evidence, information or data that may be beneficial
to the Commission in conducting a due diligence assessment of the
certification filing and the entity's compliance with any of the
requirements of the Act or Commission regulations or policies
thereunder.
* * * * *
(c) Notification of rule amendments. Notwithstanding the rule
certification requirement of Section 5c(c)(1) of the Act, and
paragraphs (a)(1), (a)(2) and (a)(3) of this section, a designated
contract market or a registered derivatives clearing organization may
place the following rules or rule amendments into effect without
certification to the Commission if the following conditions are met:
(1) The designated contract market or registered derivatives
clearing organization provides to the Commission at least weekly a
summary notice of all rule changes made effective pursuant to this
paragraph during the preceding week. Such notice must be labeled
``Weekly Notification of Rule Changes'' and need not be filed for weeks
during which no such actions have been taken. One copy of each such
submission shall be furnished electronically in a format specified by
the Secretary of the Commission; and
(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 which was not
formed solely for the purpose of compiling an index for use in
connection with a futures or option product;
* * * * *
(v) Fees. Fees or fee changes that are $1.00 or more per contract
and are established by an independent third party or are unrelated to
delivery, trading, clearing or dispute resolution.
(vi) Survey lists. Changes to lists of banks, brokers, dealers, or
other entities
[[Page 39689]]
that provide price or cash market information to an independent third
party and that are incorporated by reference as product terms.
(3) * * *
(ii) * * *
(F) Securities Indexes. Routine changes to the composition,
computation or method of security selection of an index that is
referenced and defined in the product's rules, and which are made by an
independent third party.
29. Section 40.7 is proposed to be amended by adding paragraphs
(a)(3) and (b)(3) to read as follows:
Sec. 40.7 Delegations.
(a) Procedural matters * * *
(3) The Commission hereby delegates to the Director of the Division
of Market Oversight or to the Director's delegatee, with the
concurrence of the General Counsel or the General Counsel's delegatee,
the authority to notify a designated contract market that a rule change
submitted for materiality determination under Sec. 40.4(b)(9) is
material and must be submitted for the Commission's prior approval.
(b) Approval authority. * * *
(3) Establish or amend speculative limits or position
accountability provisions that are in compliance with the requirements
of the Act and Commission regulations;
* * * * *
30. Section 40.8 is proposed to be amended by revising paragraph
(b) to read as follows:
Sec. 40.8 Availability of public information.
* * * * *
(b) 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, or 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.
31. Appendix D to Part 40--Submission Cover Sheet and Instructions
is proposed to be amended by revising the first paragraph 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 designated contract
market, registered derivatives transaction execution facility, or
registered derivatives clearing organization 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:
* * * * *
Issued in Washington, DC, this first day of July, 2005, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 05-13467 Filed 7-8-05; 8:45 am]
BILLING CODE 6351-01-P