Federal Register, Volume 77 Issue 213 (Friday, November 2, 2012)[Federal Register Volume 77, Number 213 (Friday, November 2, 2012)]
[Rules and Regulations]
[Pages 66287-66350]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25764]
[[Page 66287]]
Vol. 77
Friday,
No. 213
November 2, 2012
Part III
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Parts 1, 4, 5, et al.
Adaptation of Regulations to Incorporate Swaps; Final Rule
Federal Register / Vol. 77 , No. 213 / Friday, November 2, 2012 /
Rules and Regulations
[[Page 66288]]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 38, 41, 140,
145, 155, and 166
RIN Number 3038-AD53
Adaptation of Regulations To Incorporate Swaps
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'' or ``DFA'') established a comprehensive new
statutory framework for swaps and security-based swaps. The Dodd-Frank
Act repeals some sections of the Commodity Exchange Act (``CEA'' or
``Act''), amends others, and adds a number of new provisions. The DFA
also requires the Commodity Futures Trading Commission (``CFTC'' or
``Commission'') to promulgate a number of rules to implement the new
framework. The Commission has proposed and finalized numerous rules to
satisfy its obligations under the DFA. This rulemaking makes a number
of conforming amendments to integrate the CFTC's regulations more fully
with the new framework created by the Dodd-Frank Act.
DATES: Effective January 2, 2013.
FOR FURTHER INFORMATION CONTACT: Peter A. Kals, Special Counsel, 202-
418-5466, [email protected], Division of Clearing and Risk; Elizabeth
Miller, Attorney-Advisor, 202-418-5450, [email protected], Division of
Swap Dealer and Intermediary Oversight; David E. Aron, Counsel, 202-
418-6621, [email protected], Office of General Counsel; Alexis Hall-Bugg,
Attorney-Advisor, 202-418-6711, [email protected], Division of Market
Oversight; Katherine Driscoll, Senior Trial Attorney, 202-418-5544,
[email protected], Division of Enforcement, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street NW., Washington,
DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amended Regulations
A. Part 1
1. Regulation 1.3: Definitions
a. General Changes
b. Various Amended and New Definitions (Regulation 1.3)
c. Regulation 1.3(t): Open Contract
d. Regulation 1.3(ll): Physical
e. Regulation 1.3(ss): Foreign Board of Trade
f. Regulation 1.3(yy): Commodity Interest
g. Regulation 1.3(z): Bona Fide Hedging Transactions and
Positions
h. Lack of a Definition of ``End-User'' in Regulation 1.3
2. Regulation 1.4: Use of Electronic Signatures
3. Regulation 1.31: Books and Records; Keeping and Inspection
4. Regulations 1.33: Monthly and Confirmation Statements
5. Regulation 1.35: Records of Cash Commodity, Futures and
Option Transactions
6. Regulation 1.37: Customer's or Option Customer's Name,
Address, and Occupation Recorded; Record of Guarantor or Controller
of Account
7. Regulation 1.39: Simultaneous Buying and Selling Orders of
Different Principals; Execution of, for and Between Principals
8. Regulation 1.40: Crop, Market Information Letters, Reports;
Copies Required
9. Regulation 1.59: Activities of Self-Regulatory Employees,
Governing Board Members, Committee Members and Consultants
10. Regulation 1.63: Service on Self-Regulatory Organization
Governing Boards or Committees by Persons With Disciplinary
Histories
11. Regulation 1.67: Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
12. Regulation 1.68: Customer Election Not To Have Funds,
Carried by a Futures Commission Merchant for Trading on a Registered
Derivatives Trading Execution Facility, Separately Accounted for and
Segregated
13. Regulations 1.44, 1.53, and 1.62--Deletion of Regulations
Inapplicable to Designated Contract Markets
14. Technical Changes to Part 1 in Order to Accommodate Recently
Finalized Part 22 and Corresponding Changes to Part 22
B. Part 7
C. Part 8
D. Parts 15, 18, 21, and 36
E. Parts 41, 140 and 145
F. Parts 155 and 156
G. Other General Changes to CFTC Regulations
1. Removal of References to DTEFs
2. Other Conforming Changes
III. Administrative Compliance
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Consideration of Costs and Benefits
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\1\ Title VII of the Dodd-Frank Act \2\ (``Title VII'') amended the
CEA \3\ to establish a comprehensive new regulatory framework for swaps
and security-based swaps. The legislation was enacted, among other
reasons, to reduce risk, increase transparency, and promote market
integrity within the financial system by, among other things: (1)
Providing for the registration and comprehensive regulation of swap
dealers (``SDs''), security-based swap dealers, major swap participants
(``MSPs''), and major security-based swap participants; (2) imposing
clearing and trade execution requirements on swaps and security-based
swaps, subject to certain exceptions; (3) creating rigorous
recordkeeping and real-time reporting regimes; and (4) enhancing the
rulemaking and enforcement authorities of the Commissions with respect
to, among others, all registered entities and intermediaries subject to
the Commission's oversight.
---------------------------------------------------------------------------
\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq. (2006).
---------------------------------------------------------------------------
To apply its regulatory regime to the swap activity of
intermediaries, the Commission must make a number of changes to its
regulations to conform them to the Dodd-Frank Act. On June 7, 2011, the
Commission published in the Federal Register a proposal to make such
changes (``the Proposal'').\4\ There was a 60-day period for the public
to comment on the Proposal, which ended on August 8, 2011. The
Commission received 39 comment letters from a variety of institutions,
including designated contract markets (``DCMs''), agricultural trade
associations, and agricultural cooperatives.\5\ The Commission has
determined to adopt the proposed rules primarily in the form proposed
with certain modifications, discussed below, to address the comments
the Commission received. With respect to certain of the proposed
changes to regulation 1.35 \6\ (regarding recording of oral
communications and the scope of written communications) and related
amendments to regulation 1.31, the Commission has determined to address
those changes in a final rule in a separate release.
---------------------------------------------------------------------------
\4\ Adaptation of Regulations to Incorporate Swaps, 76 FR 33066
(June 7, 2011) (``Proposing Release'').
\5\ Comment letters are available in the comment file on
www.cftc.gov.
\6\ All Commission regulations are in Chapter I of Title 17 of
the CFR.
---------------------------------------------------------------------------
The Commission is mindful of, and continues to consider, the
comments received on the Proposal's amendments to regulation 1.35
(records of commodity interest and cash commodity transactions). Those
comments were submitted by various groups, including DCMs,
representatives of the FCM and IB communities, energy
[[Page 66289]]
end-users, and agricultural trade associations and cooperatives.\7\
These commenters focused primarily on: the proposed oral communications
recordkeeping requirement, in general; the proposed requirement that
all members of a DCM or SEF, including unregistered commercial end-
users and non-intermediaries, keep records of the oral communications
that lead to the execution of a cash commodity transaction; and the
proposed requirement that each record be maintained in a separately
identifiable electronic file identifiable by transaction and
counterparty. Many of the comments were directed specifically toward
narrowing the scope of the proposed changes to regulation 1.35
regarding recording of oral communications and written communications
(and related amendments to regulation 1.31).
---------------------------------------------------------------------------
\7\ Commenters on this issue include: American Cotton Shippers
Association; Agribusiness Association of Iowa; Agribusiness
Association of Ohio; Agribusiness Council of Indiana; Trade
Association of American Cotton Cooperatives; Commodity Markets
Council; Falmouth Farm Supply; American Feed Industry Association;
Grain and Feed Association of Illinois; Minnesota Grain and Feed
Association; National Grain and Feed Association; Oklahoma Grain and
Feed Association; Rocky Mountain Agribusiness Association; South
Dakota Grain and Feed Association; Land O'Lakes; National Council of
Farmer Cooperatives; American Gas Association; National Gas Supply
Association; Fertilizer Institute; American Petroleum Institute;
Electric Power Supply Association; National Rural Electric
Cooperative Association; American Public Power Association; Large
Public Power Council; Edison Electric Institute; Working Group of
Commercial Energy Firms; IntercontinentalExchange Inc.; Kansas City
Board of Trade; Minneapolis Grain Exchange; CME Group; Futures
Industry Association; Barclays Capital; Henderson & Lyman; National
Introducing Brokers Association; and National Futures Association.
---------------------------------------------------------------------------
The amendments adopted by this rulemaking primarily affect part 1
of the Commission's regulations, but also affect parts 4, 5, 7, 8, 15,
16, 18, 21, 22, 36, 41, 140, 145, 155, and 166. This rulemaking
contains amendments of three different types: ministerial,
accommodating, and substantive. Many of the amendments are purely
ministerial--for instance, several changes update definitions to
conform them to the CEA as amended by the Dodd-Frank Act; add to the
Commission's regulations new terms created by the Dodd-Frank Act;
remove all regulations and references pertaining to derivatives
transaction execution facilities (``DTEFs''), a category of trading
facility added to the CEA by section 111 of the Commodity Futures
Modernization Act of 2000 (``CFMA''),\8\ which the DFA eliminated;
correct various statutory cross-references to the CEA in the
regulations; and remove regulations in whole or in part that were
rendered moot by the CFMA.
---------------------------------------------------------------------------
\8\ Public Law 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------
The accommodating amendments are essential to the implementation of
the DFA in that they propose to add swaps, swap markets, and swap
entities to numerous definitions and regulations, but are more than
ministerial because they require some judgment in drafting.
Accommodating amendments include, among other things, amending numerous
definitions in regulation 1.3 to reference or include swaps; creating
new definitions as necessary in regulation 1.3; amending recordkeeping
requirements to include information on swap transactions; adding
references to swaps and swap execution facilities (``SEFs'') in various
part 1 regulations; and amending parts 15, 18, 21, and 36 to implement
the DFA's grandfathering and phase-out of exempt boards of trade and
exempt commercial markets.
The substantive amendments are changes that align requirements or
procedures across futures and swap markets. They consist of amendments
to regulation 1.31 that harmonize some of the current part 1
recordkeeping requirements with some of those applicable to SDs and
MSPs under part 23 regulations \9\ and amend procedures pertaining to
the post-execution allocation of bunched orders (regulation 1.35(a)).
Under the amendments to the bunched orders provisions, ``eligible
account managers'' can allocate such orders post-execution similarly to
how they currently do so with futures.
---------------------------------------------------------------------------
\9\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (adopting for SDs
and MSPs reporting and recordkeeping standards now found in 17 CFR
23.201-23.203).
---------------------------------------------------------------------------
To aid the public in understanding the numerous changes to
different parts of the CFTC's regulations adopted by this release, the
Commission will also publish on its Web site a ``redline'' of the
affected regulations which will clearly reflect the additions and
deletions.\10\
---------------------------------------------------------------------------
\10\ The redline does not, in and of itself, have any legal
authority.
---------------------------------------------------------------------------
II. Comments Received and Amended Regulations
A. General Comments
Several commenters argued that the Proposal was premature because
many other rules remained to be proposed and finalized,\11\ and
subsequent final rulemakings may dictate which conforming amendments
will be necessary. A joint letter by certain Electric Utility Trade
Associations (``the ETA'') contended that the incomplete nature of the
swap regulatory regime renders it unable to ``effectively comment,''
because it lacks a full understanding of the entire swap regulatory
landscape. In the ETA's view, the ``premature'' nature of the Proposal
rises to the level of a violation of the Administrative Procedures Act
(``APA'').\12\ The ETA commented further that because the Proposal
updated certain regulations by treating swaps equivalently to futures,
the Proposal ``represents a fundamental misunderstanding'' of the
executing electric industry swap market, and, consequently, should be
withdrawn. The ETA also noted that, ``[f]rom time to time, the
Commission's staff has declined to consider whether nonfinancial
commodity and related swap markets are indeed different in any
meaningful way from other markets,'' and that the ETA ``continues to
urge the Commission to engage in a considered analysis of such
differences and the implications of such differences for its rulemaking
process.'' The CME Group (``CME'') argued that the Commission should
have waited to propose the voice and electronic recordkeeping
requirements in regulation 1.35(a) until SEFs register, the Dodd-Frank
Act clearing and exchange trading requirements take effect, and Dodd-
Frank Act recordkeeping and reporting requirements take effect. The
Electric Power Supply Association (``EPSA'') commented that final rules
defining swap, SD, and MSP must be published prior to proposing a rule
conforming the Commission's regulations to the Dodd-Frank Act and
related regulations. Therefore, EPSA argued, the Proposal should be
withdrawn. Mr. Chris Barnard generally supported the Proposal,
commenting that the proposed changes were either common sense or
required by the DFA.
---------------------------------------------------------------------------
\11\ A joint letter by the American Gas Association, Commodity
Markets Council, National Gas Supply Association, and the Fertilizer
Institute (``AGA et al.''); Commodity Markets Council (``CMC'');
Electric Power Supply Association; certain Electric Utility Trade
Associations; and the Working Group of Commercial Energy Firms
(``Working Group'').
\12\ See ETA Letter (claiming that ``[t]he [Proposal] cannot
fairly apprise interested persons of the nature of the Commission's
rulemaking, nor can it provide notice of `the terms of substance of
the proposed rule or a description of the subjects and issues
involved,' as required by the [APA], when the proposed rules purport
to adapt to a moving target.'').
---------------------------------------------------------------------------
The Commission believes it was appropriate to have published the
Proposal when it did. The purpose of this rulemaking is to conform the
Commission's regulations to the CEA as
[[Page 66290]]
revised by the DFA where necessary (to avoid conflicting statutory and
regulatory definitions of the same term, for example) or desirable
(e.g., to make retention periods for records of all swap transactions
consistent with those recently adopted for the records of swap
transactions of SDs). The Commission viewed many of these changes to be
non-controversial. For example, the DFA amended the definition of FCM
in section 1a of the CEA to permit FCMs to execute and clear swaps for
customers in addition to futures. Accordingly, the Proposal updated
regulation 1.3's definition of FCM, as well as recordkeeping
requirements in regulations 1.31, 1.33, and 1.35, so that an FCM's
duties with respect to swaps would mirror its duties with respect to
futures. Because IBs and FCMs can execute or clear cleared swaps
analogously to futures, the Commission believes that certain of the
requirements in regulations 1.31, 1.33, and 1.35, which describe
recordkeeping requirements for FCMs and IBs, can and should apply
equivalently to an FCM's futures and cleared swaps business. In
response to the ETA's comment that the Proposal inappropriately equated
swaps with futures, the Commission notes that part 23 of the
Commission's regulations addresses issues unique to the swap market by
describing recordkeeping and other ``business conduct'' requirements
for SDs and MSPs.
The Commission believes it is appropriate to make these conforming
changes at this time. In adopting this final rule, the Commission is
incorporating any changes necessitated by other final Dodd-Frank Act
rulemakings.
B. Part 1
1. Regulation 1.3: Definitions
a. General Changes
The Commission is revising regulation 1.3 so that its definitions,
which are used throughout the Commission's regulations, incorporate
relevant provisions of the DFA. For instance, amended regulation 1.3
updates current definitions to conform them to the Dodd-Frank Act's
amendments of the same terms in the CEA's definitions section,\13\ and
also includes definitions specifically added by the Dodd-Frank Act to
the CEA. This is the case for many of the definitions in proposed
regulation 1.3, including ``commodity pool operator,'' ``commodity
trading advisor,'' ``futures commission merchant,'' ``introducing
broker,'' ``floor broker,'' ``floor trader,'' ``swap data repository,''
and ``swap execution facility.'' For example, section 721(a)(5) of the
DFA amended the definition of ``commodity pool operator'' (``CPO'') in
CEA section 1a to add swaps to those contracts for which soliciting
funds for a collective investment renders a person a CPO. Consequently,
today's final rulemaking updates the definition of CPO in regulation
1.3 to match the DFA's new definition of that term. The Commission did
not receive comments about the Proposal's revised definitions of
``commodity pool operator,'' ``commodity trading advisor,'' ``futures
commission merchant,'' ``floor broker,'' ``floor trader,'' ``swap data
repository,'' and ``swap execution facility.'' The Commission is
adopting these definitions as proposed.
---------------------------------------------------------------------------
\13\ CEA section 1a, 7 U.S.C. 1a.
---------------------------------------------------------------------------
In response to the proposed conforming amendments to the definition
of ``introducing broker,'' Financial Services Roundtable (``FSR'')
commented that a small commercial lender facilitating a swap
transaction between a borrower and a third party, solely in connection
with the lender's loan origination or syndication, should not have to
register as an introducing broker (``IB''), but could possibly be
required to do so under the amended definition. FSR commented further
that such a result would be inconsistent with a 2004 staff no-action
letter,\14\ in which the Commission's Division of Clearing and
Intermediary Oversight explained that the purpose of registering and
regulating IBs is to protect the public from sales abuses--according to
FSR, such a concern does not exist in the situation FSR described.
Specifically, FSR recommended that the Commission further define the
term ``introducing broker'' to specifically exclude the lenders it
described, or in the alternative, that the Commission issue
interpretative guidance addressing this issue.
---------------------------------------------------------------------------
\14\ CFTC No-Action Letter No. 04-34 at 3 (Sept. 16, 2004).
---------------------------------------------------------------------------
The Commission declines to further define the term ``introducing
broker'' as FSR requested, and is adopting the term as proposed.
However, the Commission believes that in the situation described by
FSR, the small commercial lender would not be required to register as
an IB, as long as it did not receive compensation from the third party
with whom the lender arranges the borrower's swap. This analysis is
based solely on the facts as presented by FSR in its comment letter and
is consistent with previously issued staff no-action or interpretative
letters.\15\ Staff can issue further guidance, as appropriate, on a
case-by-case basis under regulation 140.99.\16\
---------------------------------------------------------------------------
\15\ FSR stated that the lenders it described receive
compensation ``in connection with lending and retaining risk and not
in connection with introducing a [swap provider].'' A key element of
both the previous and amended definitions of IB is that the person
engages in the described conduct ``for compensation or profit,
whether direct or indirect.'' 17 CFR 1.3(mm). This analysis is
consistent with past Commission guidance requiring an individual to
register as an IB based on referring customers to a commodity
trading advisor and receiving compensation in return. CFTC Interp.
Letter No. 86-27 (Introducing Broker Registration Requirements),
Comm. Fut. L. Rep. (CCH) ] 23,364, CFTC (Nov. 24, 1986). This letter
emphasized that ``the presence or absence or[sic] per-trade
compensation is not determinative of whether one falls within the
definition of an introducing broker. The Commission's final rule
expressly eliminated the form and manner of compensation as the
principal measure of whether registration as an introducing broker
would be required * * * [P]ursuant to the express terms of the
introducing broker definition in rule 1.3(mm), any compensation
(without regard to whether such compensation is per-trade or
otherwise) for the solicitation or acceptance of orders * * * brings
one within the definition.'' Id. (footnotes omitted). Therefore, if
the lenders FSR described receive compensation from the swap
providers for their customer referrals, then the lenders would fall
within the definition and be required to register as IBs.
\16\ Separately, the Commission notes that the activity of an
associated person ``AP'' of an SD may resemble the swap activity of
an IB. The definition of IB in regulation 1.3(mm), as amended by
today's final rule, excludes an AP, including an AP of an SD.
Pursuant to paragraph (6) of the definition of AP in regulation
1.3(aa), an AP of an SD could be an agent of the SD while not an
employee of the SD. This may be the case, for example, where an
employee of an affiliate of the SD is authorized to negotiate swap
transactions on behalf of the SD. Where such an agency relationship
is present, the Commission would not consider the employer of such
an AP of an SD to be an IB due to the activities of that AP of the
SD.
---------------------------------------------------------------------------
Additionally, the Proposal revised the definition of ``self-
regulatory organization'' (``SRO'') (regulation 1.3(ee)) to include
SEFs, a new category of regulated markets under the DFA, and
derivatives clearing organizations (``DCOs''). The Commission did not
receive any comments concerning its proposal to amend this definition.
Today's final rulemaking amends the definition of SRO by including
SEFs. However, it does not amend the definition of SRO to include DCOs.
Upon further reflection, the Commission has determined that the part 1
regulations applicable to SROs need not apply to DCOs in light of
recently finalized regulations in part 39 implementing the Act's Core
Principles for DCOs.\17\ For example, paragraph (6) of regulation
39.12(a) (``Participant and product eligibility'') requires a DCO to
have the ability to enforce compliance
[[Page 66291]]
with its participation requirements and to establish procedures for the
suspension and orderly removal of clearing members that no longer meet
the requirements. Moreover, the Commission is in the midst of other
rulemakings pertaining to the responsibilities of SROs and DCOs, e.g.,
proposed regulations regarding the governance of DCOs.\18\
---------------------------------------------------------------------------
\17\ DCO General Provisions and Core Principles, 76 FR 69334
(Nov. 8, 2011).
\18\ Requirements for DCOs, DCMs, and SEFs Regarding the
Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);
and Governance Requirements for DCOs, DCMs, and SEFs; Additional
Requirements Regarding the Mitigation of Conflicts of Interest, 76
FR 722 (Jan. 6, 2011).
---------------------------------------------------------------------------
b. Various Amended and New Definitions (Regulation 1.3)
The Commission is (1) simplifying or clarifying certain existing
regulation 1.3 definitions, and (2) adding several new definitions to
regulation 1.3, pursuant to amendments to the CEA by the Dodd-Frank
Act, existing regulations, and other amendments in the Proposal.
The term ``contract market,'' for instance, is not defined under
the CEA, and is currently defined under regulation 1.3(h) as ``a board
of trade designated by the Commission as a contract market under the
Commodity Exchange Act or in accordance with the provisions of part 33
of this chapter.'' In certain provisions throughout the Commission's
regulations, contract markets are also referred to as ``designated
contract markets.'' Because both terms are used interchangeably within
the regulations, the Commission has decided to revise the definition to
mean contract market and designated contract market (``DCM''). Proposed
regulation 1.3(h) contained one definition identified by the title
``Contract market; designated contract market.'' The proposed
definition also corrected an erroneous cross-reference to part 33 as
the regulations applicable to DCMs, which the Commission is correcting
by changing it to a reference to part 38 of the Commission's
regulations. No commenters addressed these changes. The Commission is
adopting the definition in regulation 1.3(h) as proposed with one
modification to reflect the fact that the Commission designates a board
of trade as a contract market ``under the Act and in accordance with
part 38'' as opposed to ``under the Act or in accordance with part
38.''
The Proposal contained a similar clarification regarding the
definition of ``customer.'' It simplified the definition of
``customer'' by combining two existing definitions, ``customer;
commodity customer'' in regulation 1.3(k) and ``option customer'' in
regulation 1.3(jj), and by adding swaps to the proposed definition.
Therefore, the proposed definition included swap customers, commodity
customers, and option customers, referring to them all with the single
term, ``customer.'' Furthermore, the Commission proposed to revise all
references to ``commodity customer'' and ``option customer'' throughout
the Commission's regulations, but particularly in part 1, to simply
refer to ``customer.'' \19\ The proposed revisions retained references
to requirements specific to certain contracts.\20\ Today's final
rulemaking revises the definition of ``customer'' (regulation 1.3(k)),
as proposed, and deletes the definition of ``option customer''
(regulation 1.3(jj)), as proposed. The Commission did not receive
comments about the proposed deletion of the term ``option customer.''
---------------------------------------------------------------------------
\19\ The Commission proposed to remove references to commodity
customers and option customers, replacing them with references to
simply ``customer,'' in the following regulations: 17 CFR 1.3, 1.20-
1.24, 1.26, 1.27, 1.30, 1.32-1.34, 1.35-1.37, 1.46, 1.57, 1.59,
155.3, 155.4, and 166.5.
\20\ For example, proposed regulation 1.33 (Monthly and
confirmation statements) required an FCM to document a customer's
positions in futures contracts differently from its option or swap
positions. Proposed regulation 1.33 preserved these distinctions,
even though it referred only to ``customers'' as opposed to
``commodity customers,'' ``option customers,'' and ``swap
customers.''
---------------------------------------------------------------------------
ETA commented that counterparties to electricity swap contracts are
not customers analogous to futures customers, and, therefore, by
expanding the ``customer'' concept to include entities that execute
swaps, the Commission would impose ``significant and inappropriate
obligations'' on swap counterparties. The Commission has decided to
finalize the definition of customer, as proposed. ETA is correct that
counterparties to bilaterally-executed swaps are principals, which is
unlike trading futures, where FCMs are agents of their customers.
However, FCMs will execute and clear swap transactions, as agents,
equivalently to the manner in which they currently execute and clear
futures transactions.
The Commission proposed to define the term ``confirmation'' to
reflect its differing use in various regulations depending on whether a
transaction is executed by an FCM, IB or CTA on the one hand, or by an
SD or MSP on the other hand. In the first case, the registrant is
acting as an agent. In the second, it is acting as a principal.\21\ No
commenters addressed the proposed definition of ``confirmation,'' and
the Commission has decided to adopt it as proposed.
---------------------------------------------------------------------------
\21\ A single entity could be registered in more than one
capacity, for example, as both an SD and a CTA. Which rules were
applicable would depend on the capacity in which such an entity was
performing a particular function.
---------------------------------------------------------------------------
The Commission proposed to add to regulation 1.3 a definition of
the term ``registered entity,'' currently provided in CEA section
1a(40), as revised by the Dodd-Frank Act. The proposed definition of
``registered entity'' is identical to its CEA counterpart and would
include DCOs, DCMs, SEFs, swap data repositories (``SDRs'') and certain
electronic trading facilities. To correspond with this new definition,
the Commission also proposed to replace the current ``Member of a
contract market'' definition with a new definition of ``Member,'' in
regulation 1.3(q), which would be nearly identical to the ``Member of a
registered entity'' definition provided in CEA section 1a(34), also as
revised by the Dodd-Frank Act.\22\ The proposed ``Member'' definition
was broadened to accommodate newly established SEFs, and it includes
those ``owning or holding membership in, or admitted to membership
representation on, the registered entity; or having trading privileges
on the registered entity.'' Additionally, for ease of reference,
proposed regulation 1.3 added several terms defined under the CEA,
using identical definitions, including ``electronic trading facility,''
``organized exchange,'' and ``trading facility.''
---------------------------------------------------------------------------
\22\ In accordance with the removal of DTEF references from many
other Commission regulations, the proposed ``Member'' definition
would not include DTEF references currently in the definition of
``Member of a registered entity'' found in CEA section 1a(34). See 7
U.S.C. 1a(34).
---------------------------------------------------------------------------
The ETA commented that the Commission should wait to define
``registered entity,'' ``organized exchange,'' ``electronic trading
facility,'' and ``trading facility'' until the Commission enters into
an MOU with FERC and publishes rules defining the scope of its
jurisdiction over nonfinancial energy commodity swaps. According to the
ETA, a SEF should not be deemed a registered entity. In addition, the
ETA does not believe SEF participants should fall within the
Commission's proposed definition of ``member,'' suggesting that it is
inappropriate or premature to require SEF participants to have the same
recordkeeping requirements as DCM members under regulation 1.35.
The Commission disagrees with the ETA's comment that it should wait
to define the terms ``registered entity,'' ``organized exchange,''
``electronic trading facility'' and ``trading facility'' until the
Commission enters into an MOU with FERC and publishes rules defining
the scope of its jurisdiction
[[Page 66292]]
over nonfinancial energy commodity swaps. As explained in the Proposal,
the definitions proposed for each of those terms are identical to their
statutory definitions under the CEA. The Commission may further define
these terms in the future if necessitated by an MOU with FERC or by
Commission rules defining the scope of its jurisdiction over
nonfinancial energy commodity swaps.
With respect to the ETA's assertion that SEFs should not be deemed
``registered entities,'' the Commission notes that SEFs are already
deemed ``registered entities'' under section 1a(40) of the CEA. Lastly,
the term ``member,'' as defined under the CEA, includes ``with respect
to a registered entity * * * an individual, association, partnership,
corporation or trust * * * having trading privileges on the registered
entity.'' \23\ Accordingly, the CEA considers participants on a SEF
``members'' by virtue of their having trading privileges on the SEF.
For the foregoing reasons, the Commission is adopting the definitions
of ``registered entity,'' ``organized exchange,'' ``electronic trading
facility,'' ``trading facility,'' and ``member'' as proposed.
---------------------------------------------------------------------------
\23\ CEA section 1a(34), 7 U.S.C. 1a(34).
---------------------------------------------------------------------------
The Commission also proposed to add a definition of the term
``order.'' This term had not previously been defined by Commission
regulations, although it is used in several of them, e.g., 17 CFR 1.35,
155.3, and 155.4. In light of this, and with the addition of new
categories of registrants (SDs and MSPs) who act as principals rather
than agents, clarification of this term is appropriate. No commenters
addressed the proposed definition, and the Commission is adopting it as
proposed.
Because proposed amendments to regulation 1.31 incorporated the
term ``prudential regulator,'' as added to the CEA by the Dodd-Frank
Act, the Commission proposed to define the term in regulation 1.3.\24\
The proposed definition of ``prudential regulator'' in regulation 1.3
is coextensive with the definition in section 1a(39) of the Act and
lists the various prudential regulators. No commenters addressed this
proposed definition, but the amendments to regulation 1.31 adopted
today no longer reference the term ``prudential regulator.''
Nonetheless, the Commission has determined to adopt the definition as
proposed, in anticipation of future rulemakings and regulations
possibly using the term ``prudential regulator.''
---------------------------------------------------------------------------
\24\ Proposing Release, 76 FR at 33068 and 33070. Pursuant to
proposed regulation 1.31, records of swap transactions must be
presented, upon request, to ``any applicable prudential regulator as
that term is defined in section 1a(39) of the Act.'' Id. at 33088.
---------------------------------------------------------------------------
The Commission also proposed to add the term ``registrant'' to
regulation 1.3 so that certain regulations in part 1 could refer to
various intermediaries (e.g., FCMs, IBs, CPOs), their employees
(associated persons), and other registrants (MSPs). Because the DFA
created a definition of and several Commission regulations refer to
``associated persons of swap dealers or major swap participants,'' the
Commission proposed to add that term to regulation 1.3 as well. No
commenters addressed these changes, but the Commission will only be
adopting the definition of ``registrant'' as proposed. Since the
Proposal's publication, a separate final rulemaking establishing the
registration process for SDs and MSPs amended the existing definition
of ``associated person'' found in regulation 1.3(aa) to incorporate
associated persons of SDs and MSPs in a manner consistent with CEA
section 1a, as amended by the Dodd-Frank Act.\25\ In light of that
rulemaking, the Commission is not adopting a separate definition of
``associated person of swap dealers and major swap participants'' in
regulation 1.3.
---------------------------------------------------------------------------
\25\ Registration of Swap Dealers and Major Swap Participants,
77 FR 2613, 2615 and 2625 (Jan. 19, 2012).
---------------------------------------------------------------------------
The Commission also proposed, and is hereby adopting, a definition
of the term ``retail forex customer'' in regulation 1.3 because it
appears in several regulations in part 1 and currently is only defined
in part 5. The definition is identical in all material respects to the
definition of this term as it currently appears in regulation
5.1(k).\26\ The Commission did not receive any comments to the
Proposal's addition of a definition of ``retail forex customer'' to
regulation 1.3.
---------------------------------------------------------------------------
\26\ 17 CFR 5.1(k) currently defines ``retail forex customer''
as ``a person, other than an eligible contract participant as
defined in section 1a(12) of the Act, acting on its own behalf and
trading in any account, agreement, contract or transaction described
in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.'' This final
rulemaking amends the definition in part 5 only to reflect the
renumbering of section 1a of the CEA by the Dodd-Frank Act, and adds
an identically amended definition to regulation 1.3. See infra Part
II.G.2.
---------------------------------------------------------------------------
The Commission is also finalizing the revised definition of
``strike price'' (regulation 1.3(kk)) as proposed so that this
definition encompasses swaps in addition to futures. The Commission
received no comments about this proposal.
c. Regulation 1.3(t): Open Contract
The Proposal changed the defined term from ``open contract'' to
``open position'' and added provisions for commodity option
transactions and swaps. CME commented that it is unclear whether the
proposed definition is intended to cover options on swaps. If so, then
the word ``commodity'' should be deleted from the phrase, ``commodity
option transaction.'' According to CME's comment letter to the
Proposal, the Commission should also clarify whether, or which, options
are covered by proposed paragraph (t)(3) (swaps). CME also argues that
proposed paragraph (t)(3) does not adequately characterize open
positions in cleared swaps. Proposed paragraph (t)(1)'s terminology,
CME believes, more appropriately characterizes cleared swaps because,
like futures, cleared swaps may be fulfilled by delivery or they may be
offset.
The Commission has decided to finalize the definition with a few
modifications. The final definition retains the original title of the
term, ``open contract.'' It also narrows its applicability from all
swaps to only Cleared Swaps, as regulation 22.1 defines that term.\27\
---------------------------------------------------------------------------
\27\ Regulation 22.1 was promulgated as part of Protection of
Cleared Swaps Customer Contracts and Collateral; Conforming
Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336
(Feb. 7, 2012).
---------------------------------------------------------------------------
The Commission notes that the option component of the definition
(paragraph (t)(2)) covers all options: i.e., options on futures;
options on swaps (``swaptions''); and options on commodities.\28\ In
response to CME's comment, the Commission notes that although, pursuant
to the Dodd-Frank Act, swaptions and options on commodities (other than
options on futures) are swaps, it is nevertheless appropriate for the
definition of ``open contract'' to describe them with language suitable
only to options and not to other swaps. In other words, the definition
of ``open contract'' merely describes types of contracts; it is not
intended to classify these contracts for regulatory purposes or to
elaborate on the definition of ``swap,'' which the Commission recently
published in final form.\29\
---------------------------------------------------------------------------
\28\ Section 4c of the CEA grants the Commission authority over
all three of these categories of options.
\29\ See Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13,
2012).
---------------------------------------------------------------------------
Because the only references in the regulations to the term ``open
contracts'' apply to cleared contracts, i.e. futures contracts and
Cleared Swaps, the final definition only includes Cleared Swaps in
paragraph (t)(3). The final rule also
[[Page 66293]]
modifies paragraph (t)(3) to reflect the fact that Cleared Swaps can be
fulfilled by delivery or by offset against other Cleared Swaps, as is
the case with futures. Thus, paragraph (t)(3) states in final form,
``swaps that have not been fulfilled by delivery; not offset; not
expired; and not been terminated.''
In the Proposal, pursuant to the revision of the definition of
``open contract'' in regulation 1.3(t), the Commission proposed to
change ``open contract'' to ``open position'' in regulations 1.33
(``Monthly and confirmation statements'') and 1.34 (``Monthly record,
`point balance' ''). The Commission did not receive comments about
these changes. In light of the fact that the Commission is retaining
the title ``open contract,'' in the final revisions to regulation
1.3(t), the Commission is preserving those references to ``open
contract'' in regulations 1.33 and 1.34.\30\
---------------------------------------------------------------------------
\30\ See infra section II.A.4. (discussing amendments to
regulation 1.33).
---------------------------------------------------------------------------
d. Regulation 1.3(ll): Physical
i. Proposal
As part of the Proposal, the Commission explained that current
regulation 1.3(ll) defines ``physical'' as ``any good, article,
service, right or interest upon which a commodity option may be traded
in accordance with the Act and these regulations.'' \31\ The Commission
noted that, other than the reference to options, the term ``physical''
was similar to the definition of ``commodity'' in regulation 1.3(e),
which includes, in relevant part ``all * * * goods and articles * * *
and all services, rights and interests in which contracts for future
delivery are presently or in the future dealt in.'' The quoted portions
of the ``physical'' and ``commodity'' definitions are effectively the
same, differing only in the potential overlying instrument with respect
to which the respective terms are defined. In addition, the Commission
noted that the introductory language in regulation 1.3 provides that
``[t]he following terms, as used in the rules and regulations of this
chapter, shall have the meaning hereby assigned to them, unless the
context otherwise requires.'' \32\
---------------------------------------------------------------------------
\31\ Proposing Release, 76 FR at 33068-69.
\32\ Id. at 33069.
---------------------------------------------------------------------------
In the Proposal, the Commission also traced the history of the term
``physical'' in its regulations, noting that the definition of
``physical'' was first added to its regulations ``to enable trading, on
DCMs, in options to buy or sell an underlying commodity'' and that the
definition had not been substantively amended.\33\ The Commission added
that, in 1982, when the Commission proposed to add the definition of
``physical'' to its regulations, ``cash-settled futures on non-physical
commodities had just been introduced in the form of the Chicago
Mercantile Exchange's Eurodollar futures'' and that, ``[i]n that
context * * * it made sense to name such options based on physical
commodities, which constituted the vast majority of commodities covered
by then-existing futures contracts.'' \34\ While options may have
primarily been written on physical commodities in 1982, the Commission
noted in the Proposal that ``[a]t present * * * options may be traded
on both physically deliverable and non-physically deliverable
commodities, such as interest rates and temperatures'' and that, given
that change, using the term ``physical'' to refer to an option on both
physically deliverable and non-physically deliverable commodities may
be confusing.\35\ The Commission added that the intended-to-be-
physically-settled element of the forward exclusion from the swap
definition ``would be meaningless if `physical' included non-
physical.'' \36\
---------------------------------------------------------------------------
\33\ Id. at 33069.
\34\ Id.
\35\ Id.
\36\ Id.
---------------------------------------------------------------------------
In light of (1) The overlapping definitions of ``commodity'' and
``physical'' in Commission regulation 1.3, (2) the fact that options
now are written on a wide range of non-physical commodities, and (3)
the Commission's desire that the term ``physical'' not be interpreted
to permit cash settled transactions to rely on the forward exclusion
from the swap definition (unless otherwise permitted by Commission
interpretations with respect to such exclusion, such as those discussed
in the Commission's rulemaking jointly (with the Securities and
Exchange Commission) further defining ``swap''), the Commission, in the
Proposal, requested comment on various possible approaches to the
definition of ``physical'' in regulation 1.3(ll). One possible approach
on which the Commission requested comment was whether it should
eliminate the definition, on the theory that its meaning is self-
evident, and rely on the ability of interested parties to interpret the
term ``physical.'' The Commission also requested comment on not
amending the definition in reliance upon the introductory language in
regulation 1.3, which applies the regulation 1.3(ll) definition of
``physical'' unless the context otherwise requires.
ii. Comments
Three commenters addressed the definition of physical in regulation
1.3(ll). The ETA commented that the proposed definition of ``physical''
should be withdrawn because addressing it in terms of swaps is
premature prior to the Commission publishing the further definition of
``swap,'' including, in particular, defining the term ``nonfinancial
commodity,'' which the ETA characterized as a key component of the
forward exclusion from the swap definition. The ETA stated that, in
proposing such a substantive rule, the Commission must explain how
defining ``physical'' would affect all of its regulations and requested
that the Commission re-propose any revised definition of ``physical''
with a ``comprehensive analysis of the way such word, whether used as
an adjective or an adverb, interrelates with the Dodd-Frank statutory
term `nonfinancial commodity,' as well as the concepts of `cash
market,' `physical market channels' and the `bona fide hedging
exemption'.''
The Environmental Markets Association (``EMA'') believes that the
``very broad'' definition of the word ``physical'' in current
Commission regulations ``certainly'' encompasses environmental
commodities, which the EMA states are subject to the forward exclusion
from the definition of swap. The EMA requested that the CFTC issue a
final rule clarifying that environmental commodities are not swaps even
though intangible, that they are nonfinancial commodities that can rely
on the forward exclusion, and that intangibility of a commodity does
not prevent it from being ``physically settled.'' The Coalition for
Emission Reduction Policy (``CERP'') similarly argued that
environmental and other intangible commodity transactions that result
in actual delivery of a commodity, intangible or not, as opposed to
transactions that settle in cash, can be subject to the forward
exclusion because such transactions can be physically settled. CERP
also claimed that the Commission's proposed interpretation of forward
contracts in nonfinancial commodities in the definition of ``swap''
supports its interpretation of ``physically settled'' in that forward
sales of environmental commodities are commercial merchandising
transactions because both buyer and seller ultimately need and intend
the transfer of ownership of the emission allowances or offset credits.
[[Page 66294]]
EMA also expressed that the Commission's request for comment with
regard to whether the definition of ``physical'' should rely on the
``common sense meaning'' of the word was unclear. In particular, EMA
argued that environmental commodities traded in the spot or forward
markets are physically delivered via a registry or an exchange of
paperwork and eventually consumed through retirement. Further,
according to EMA, environmental commodities are goods because Uniform
Commercial Code (``UCC'') section 2105(1) defines ``good'' as
``anything that can be moved other than money.''
iii. Final Rules
The Commission is removing from regulation 1.3(ll) the definition
of ``physical,'' which term will therefore have the meaning dictated by
the context of the individual Commission regulations in which it
appears. In addition, the Commission is adopting conforming changes to
other regulations to address the deletion of the definition. The
Commission is adopting these changes for ease of reference for market
participants and to reduce confusion in interpreting the Commission's
regulations, consistent with the spirit of Executive Order 13563, which
seeks, among other goals, to eliminate agency regulations that have
outlived their usefulness.\37\ As explained further below, these
modifications are not intended to alter the substantive provisions of
the Commission's regulations.
---------------------------------------------------------------------------
\37\ See Executive Order 13563 of January 18, 2011, Improving
Regulation and Regulatory Review, at section 6(a), 76 FR 3821, 3822
(Jan. 21, 2011) (stating ``To facilitate the periodic review of
existing significant regulations, agencies shall consider how best
to promote retrospective analysis of rules that may be outmoded,
ineffective, insufficient, or excessively burdensome, and to modify,
streamline, expand, or repeal them in accordance with what has been
learned.'').
---------------------------------------------------------------------------
When the Commission added the definition of ``physical'' to
regulation 1.3 in 1982, the intent was to distinguish between options
on futures contracts and other options subject to the Commission's
jurisdiction; the Commission termed such other options ``options on
physicals.'' The Commission added the ``physical'' definition because,
while the 1982 rulemaking including provisions applicable both to DCM-
listed options on futures and DCM-listed options on commodities, it
also contained regulations applicable solely to options on futures.
Thus, the purpose of the definition was ``principally to enable the
Commission to differentiate, where necessary, between references to
options on physicals and options on futures contracts.'' \38\ Although
the intent of Commission regulation 1.3(ll) was only to address the
distinction between options on futures and other options, the
Commission believes that the use of such a broad term to apply to a
narrow circumstance can create confusion because the definition is not
expressly so limited. While the introduction to regulation 1.3 says
that the definitions therein have the meanings set forth therein unless
the context otherwise requires, determining when regulation 1.3(ll)
applies as drafted and when the context dictates a different meaning
can be subjective and result in confusion.
---------------------------------------------------------------------------
\38\ Domestic Exchange-Traded Commodity Options; Expansion of
Pilot Program To Include Options on Physicals, 47 FR 56996, 56998
(Dec. 22, 1982).
---------------------------------------------------------------------------
The Commission did not intend, when it promulgated the definition
in regulation 1.3(ll), to apply it to circumstances such as the
definition of ``physically'' settled. Given the intent of the
definition of the term ``physical'' (to distinguish options on futures
from other options) and the introductory language in regulation 1.3
regarding contextual interpretations of the defined terms therein, in
regulations where it is not necessary to distinguish between different
types of options, the definition of ``physical'' in Commission
regulation 1.3(ll) is not useful and can be overbroad. For example, the
definition of ``physical'' is not useful with respect to the term
``physical safeguards'' in regulation 160.30, which pertains to
procedures to safeguard customer records and information. Because the
scope of the definition of ``physical'' essentially includes options on
any commodity, which would include non-physical commodities such as
temperatures and interest rates, effectively, the restriction that
``physical'' in regulation 1.3(ll) is limited to any goods, article,
service, right or interest upon which a commodity may be traded in
accordance with the CEA and the Commission's regulations is not much of
a restriction at all.
The Commission also notes that it recently promulgated final and
interim final rules amending parts 32 and 33 of the Commission's
regulations.\39\ While part 33 continues to address options on futures
contracts, the other options subject to the Commission's jurisdiction
that also were previously addressed in part 33 now are addressed in
part 32 rather than in part 33. Further, the Commission no longer
refers to such other options as ``options on physicals.'' Instead, the
Commission generally uses the term ``commodity option'' as a reference
to both options on futures and other CFTC-jurisdictional options. Where
the Commission distinguishes the regulatory treatment for options on
futures from the regulatory treatment of other options, it specifically
identifies options on futures as ``commodity option transactions on a
contract of sale of a commodity for future delivery.'' With these
recent amendments, the definition of ``physical'' in regulation 1.3(ll)
will not help to distinguish between options on futures and other
commodity options because the rules generally addressing the regulatory
treatment of other commodity options no longer use the term
``physical'' to refer to such transactions.
---------------------------------------------------------------------------
\39\ Commodity Options, 77 FR 25320 (Apr. 27, 2012).
---------------------------------------------------------------------------
In light of these considerations, the Commission believes that
deleting the definition of physical will reduce the potential for
confusion on the part of market participants, as the appropriate
definition of that term will be based on the context of the individual
rules in which the term is utilized. These amendments will also serve
the goals of Executive Order 13563 by amending the Commission's
regulations because they no longer are ``effective[] in achieving the
objectives for which they were adopted.'' \40\
---------------------------------------------------------------------------
\40\ Reducing Regulatory Burden; Retrospective Review Under E.O.
13563, 76 FR 38328 (June 30, 2011).
---------------------------------------------------------------------------
Further, various Commission regulations relating to options also
refer to a ``physical'' when discussing an option on a commodity. In
order to conform those regulations with the adapting changes discussed
above, the Commission is adopting a number of non-substantive changes
including, but not limited to, replacing certain references to
``physical'' with references to ``commodity.'' Where appropriate, the
Commission is also replacing references to ``underlying physical'' with
references to ``underlying commodity.''
For the reasons discussed above, these conforming amendments will
not result in substantive changes. Therefore, the Commission is
amending the following regulations as described above: Regulations
1.3(kk); 1.3(ll); 1.17(c)(1)(iii), (c)(5)(ii)(A), and (c)(5)(xiii)(C);
1.33; 1.34(b); 1.35(b)(2)(iii), (b)(3), (d) and (e); 1.39(a) and
(a)(3); 1.46(a)(1)(iii) and (iv); 4.23(a) and (b); 4.33(b)(1);
15.00(p)(1)(ii); 16.00(a); and 16.01(a)(1)(ii) and (iv), and (b)(1)(ii)
and (iv). The Commission is leaving unchanged other references to
``physical'' in its existing definitions because, given the context in
which the term is used in those rules, such
[[Page 66295]]
references are limited to physical commodities.
The Commission is replacing the word ``physical'' in regulations
1.17(c)(1)(iii) and 1.17(c)(5)(xi) with the word ``commodity,'' and is
replacing the word ``physical'' in regulation 1.17(c)(5)(ii)(A) with
the term ``physical commodity.'' In so doing, the Commission does not
intend to change the meaning of any of these paragraphs. Thus, final
regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) will continue to apply
to options that overly any commodity, not just a tangible commodity. By
contrast, final regulation 1.17(c)(5)(ii)(A) will continue to apply to
the options described therein, which cover tangible commodities only.
While some commenters requested that the Commission interpret
``physical'' for purposes of the term ``physically settled'' within the
forward exclusion for swaps, or generally address the definition of
``physical'' as it relates to other terms, the Commission declines to
do so for purposes of this release. The conforming amendments to the
definition of physical are non-substantive changes that are designed to
increase clarity for market participants. As noted above, rather than
have a definition of physical that applies unless the context
``otherwise requires,'' the Commission will apply the definition based
on the particular context of the applicable regulation. Because the
current definition already applies in this manner, the modifications
addressed herein do not amount to a substantive change in the
regulations.
e. Regulation 1.3(ss): Foreign Board of Trade
The Commission proposed to amend the definition of foreign board of
trade to mean ``any board of trade, exchange or market located outside
the United States, its territories or possessions, whether incorporated
or unincorporated where foreign futures, foreign options, or foreign
swap transactions are entered into.'' The Commission received no
comments regarding the proposed definition of ``foreign board of
trade'' and is modifying the proposed definition to make it consistent
with the definition provided in the final rulemaking for Registration
of Foreign Boards of Trade.\41\ Accordingly, new regulation 1.3(ss)
defines the term ``foreign board of trade'' as ``any board of trade,
exchange or market located outside the United States, its territories
or possessions, whether incorporated or unincorporated.''
---------------------------------------------------------------------------
\41\ Registration of Foreign Boards of Trade, 76 FR 80674 (Dec.
23, 2011).
---------------------------------------------------------------------------
f. Regulation 1.3(yy): Commodity Interest
The Commission proposed adding ``swap'' to the definition of
``commodity interest'' in regulation 1.3(yy).\42\ Currently, commodity
interest is defined as: ``(1) Any contract for the purchase or sale of
a commodity for future delivery; (2) Any contract, agreement or
transaction subject to Commission regulation under section 4c or 19 of
the Act; and (3) Any contract, agreement or transaction subject to
Commission jurisdiction under section 2(c)(2) of the Act.'' At the time
of the proposal, the term was cross-referenced by 33 other Commission
regulations and appendices to parts of Commission regulations.\43\
Generally, the term ``commodity interest'' is meant to encompass all
agreements, contracts and transactions within the Commission's
jurisdiction, though not all such agreements, contracts and
transactions are expressly set forth therein.\44\
---------------------------------------------------------------------------
\42\ Proposing Release, 76 FR at 33069.
\43\ See 17 CFR 1.12, 1.56, 1.59, 3.10, 3.12, 3.21, 4.6, 4.7,
4.10, 4.12-4.14, 4.22-4.25, 4.30-4.34, 4.36, 4.41, 30.3, 160.3-
160.5, and 166.1-166.3; 17 CFR pt. 3 app. B, 17 CFR pt. 4 app. A,
and 17 CFR pt. 190 app. B.
\44\ For example, the term ``contract for the purchase or sale
of a commodity for future delivery'' in current regulation
1.3(yy)(1) encompasses security futures products. Similarly, the
term ``swap'' would include mixed swaps (though mixed swaps are
swaps, they also are security-based swaps, so the Commission shares
authority over mixed swaps with the SEC). Of course, the impact of
the scope of proposed regulation 1.3(yy) is only as extensive as the
other regulations referencing it.
---------------------------------------------------------------------------
The Dodd-Frank Act added a definition of the term ``swap'' to the
CEA.\45\ DFA section 712(d)(1) requires the Commission to further
define the term ``swap'' jointly with the Securities and Exchange
Commission (``SEC''), and the Commission has recently adopted
regulations further defining the term ``swap,'' among other terms,
jointly with the SEC.\46\
---------------------------------------------------------------------------
\45\ DFA section 721(a)(21); codified at 7 U.S.C. 1a(47).
\46\ Further Definition of ``Swap,'' ``Security-Based Swap,''
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based
Swap Agreement Recordkeeping, 77 FR 48207 (August 13, 2012)
(adopting 17 CFR 1.3(xxx), which defines the term ``Swap'').
---------------------------------------------------------------------------
In their comment letter, the ETA objected to the Proposal's
addition of the term ``swap'' to the definition of commodity interest
because, as discussed on page 6, above, the ETA objected to the manner
in which the Proposal analogized swaps to futures. The Commission
believes it is appropriate to add ``swap'' to the definition of
commodity interest because the Dodd-Frank Act amended various
intermediary definitions in section 1a of the Act (the Dodd-Frank Act
updated the definitions of CPO, CTA, FCM, IB, Floor Trader and Floor
Broker) to include their use of swaps. For example, the Act's present
definition of FCM, as amended by the Dodd-Frank Act, authorizes this
intermediary to accept customer orders for ``swaps'' in addition to
accepting customer orders for ``the purchase or sale of any commodity
for future delivery.'' If the Commission did not update the definition
of ``commodity interest'' to include swaps, then various regulations
applicable to intermediaries using the term ``commodity interest''
would not apply to intermediaries' swap activities. The Commission has
reviewed all uses of the term ``commodity interest'' throughout the
regulations and believes they appropriately refer to both futures and
swaps.
Thus, the Commission has decided to finalize a revised definition
of ``commodity interest'' by adding paragraph (yy)(4) to include swaps.
The final version adopted today makes only minor changes to the
proposed paragraph. Whereas the proposed paragraph referenced ``any
swap as defined in the Act, the Commission's regulations, a Commission
order or interpretation, or a joint interpretation or order issued by
the Commission and the [SEC],'' amended regulation 1.3(yy)(4) now
states ``any swap as defined in the Act, by the Commission, or jointly
by the Commission and the Securities and Exchange Commission.'' The
Commission is making this change because, for the purposes of the
definition of ``commodity interest,'' it does not matter whether the
Commission defines a swap pursuant to an order, interpretation, or
joint interpretation.
g. Regulation 1.3(z): Bona Fide Hedging Transactions and Positions
The Proposal made technical amendments to this definition by
omitting references to regulations 1.47 and 1.48 because the proposed
rule on Position Limits deleted those regulations \47\ and omitting
references to ``option customers'' on account of this rulemaking's
deletion of that term. The Commission is not promulgating these
amendments in this rulemaking because the final rule on Position Limits
has already extensively revised regulation
[[Page 66296]]
1.3(z).\48\ Mr. Chris Barnard commented that the definition of ``bona
fide hedging transactions and positions'' should be amended to state
that such transactions ``are not held for a purpose that is in the
nature of speculation or trading'' and ``not held to hedge or mitigate
the risk of another position, unless that other position itself is held
for the purpose of reducing risk.'' Mr. Barnard commented further that
the determination of whether a transaction meets the definition should
be made at the time the transaction is entered into, considering the
circumstances existing at that time. The Commission has decided not to
amend regulation 1.3(z) pursuant to these comments, which address
substantive issues that are beyond the scope of this rulemaking.
---------------------------------------------------------------------------
\47\ Position Limits for Derivatives, 76 FR 4752 (Jan. 26,
2011).
\48\ Position Limits for Futures and Swaps, 76 FR 71626 (Nov.
18, 2011).
---------------------------------------------------------------------------
h. Lack of a Definition of ``End-User'' in Regulation 1.3
The ETA requested that the Commission, the SEC, and prudential
regulators agree on a definition of ``end-user'' because the DFA does
not define this term and regulators have used the term inconsistently.
The Proposal did not add a definition of ``end-user'' to regulation 1.3
because the DFA did not add a definition of that term to CEA section
1a. The Proposal's intention was to conform the Commission's
regulations to the DFA's revisions to the CEA.
The Commission has decided not to add a definition of ``end-user.''
The Commission has no reason to define ``end-user'' because the
Commission's regulations do not use this term, and even the recently
adopted Commission regulations implementing the CEA's end-user
exception to clearing do not define it.\49\ The issue of whether the
Commission's regulations should use the term ``end-user'' is beyond the
scope of this final rulemaking.
---------------------------------------------------------------------------
\49\ Recently adopted regulation 39.6 establishes the end-user
exception to clearing by defining which parties are eligible to opt
out of the clearing requirement pursuant to section 2(h)(7) of the
CEA, as amended by the DFA. See End-User Exception to the Clearing
Requirement for Swaps, 77 FR 42560 (July 19, 2012).
---------------------------------------------------------------------------
2. Regulation 1.4: Use of Electronic Signatures
The Commission proposed to revise regulation 1.4 to extend the
benefit of electronic signatures and other electronic actions to SDs
and MSPs. Section 731 of the Dodd-Frank Act amended the CEA by adding
new section 4s(i)(1), requiring SDs and MSPs to ``conform with such
standards as may be prescribed by the Commission by rule or regulation
that relate to timely and accurate confirmation, processing, netting,
documentation, and valuation of all swaps,'' \50\ and adding new
section 4s(i)(2), requiring the Commission to adopt rules ``governing
documentation standards for swap dealers and major swap participants.''
\51\
---------------------------------------------------------------------------
\50\ 7 U.S.C. 6s(i)(1).
\51\ 7 U.S.C. 6s(i)(2).
---------------------------------------------------------------------------
Pursuant to the foregoing authority, the Commission has adopted new
regulation 23.501(a)(1), which requires ``[e]ach swap dealer and major
swap participant entering into a swap transaction with a counterparty
that is a swap dealer or major swap participant [to] execute a
confirmation for the swap transaction,'' according to a specified
schedule.\52\ Also pursuant to the foregoing authority, the Commission
has adopted a new regulation 23.501(a)(2), which requires ``[e]ach swap
dealer and major swap participant entering into a swap transaction with
a counterparty that is not a swap dealer or a major swap participant
[to] send an acknowledgment of such swap transaction'' according to a
specified schedule.\53\ Regulation 23.500(a) defines such an
``acknowledgment'' as ``a written or electronic record of all of the
terms of a swap signed and sent by one counterparty to the other.''
\54\ In proposing the confirmation and acknowledgment rules, the
Commission explained that ``[w]hen one party acknowledges the terms of
a swap and its counterparty verifies it, the result is the issuance of
a confirmation.'' \55\
---------------------------------------------------------------------------
\52\ Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation
Requirements for Swap Dealers and Major Swap Participants, 77 FR
55904, 55961 (September 11, 2012).
\53\ Id.
\54\ Id.
\55\ Confirmation, Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap Dealers and Major Swap
Participants, 75 FR 81519, 81522 (Dec. 28, 2010).
---------------------------------------------------------------------------
Regulation 1.4 currently provides that an FCM, IB, CPO and CTA
receiving an electronically signed document is in compliance with
Commission regulations requiring signed documents, provided that such
entity generally accepts electronic signatures.\56\ The rationale for
allowing the existing entities listed in regulation 1.4 to use
electronic signatures (i.e., ``[a]s part of [the Commission's] ongoing
efforts to facilitate the use of electronic technology and media'')
\57\ applies equally to SDs and MSPs. No commenters addressed the
amendments to regulation 1.4, and the Commission is adopting them as
proposed. Therefore, the Commission is hereby adding SDs and MSPs to
the list of entities covered by regulation 1.4 and amending its
structure to account for the provisions of the Commission's
confirmation and acknowledgement obligations discussed above.\58\
---------------------------------------------------------------------------
\56\ 17 CFR 1.4. The regulation also requires that the
signatures in question comply with applicable Federal laws and
Commission regulations, and requires the relevant entity to employ
reasonable safeguards regarding the use of electronic signatures,
including safeguards against alteration of the record of the
electronic signature. Id.
\57\ Use of Electronic Signatures by Customers, Participants and
Clients of Registrants, 64 FR 47151 (Aug. 30, 1999).
\58\ This includes revision to the title of regulation 1.4 to
reflect these changes. Regulation 1.4, as amended by this release,
is entitled ``Use of electronic signatures, acknowledgments and
verifications.''
---------------------------------------------------------------------------
3. Regulation 1.31: Books and Records; Keeping and Inspection
a. Record Retention Period and Inspection
To conform the existing recordkeeping requirements under regulation
1.31 to the recordkeeping requirements under proposed regulation
23.203(b) for SDs and MSPs relating to their swap transactions, the
Commission proposed to amend regulation 1.31 to require that records of
a swap transaction or related cash or forward transaction, including
records of oral communications, be kept until the termination,
maturity, expiration, transfer, assignment, or novation date of the
transaction and for five years after such date.\59\
---------------------------------------------------------------------------
\59\ Certain proposed amendments to Sec. 1.35 (regarding
recording of communications), and related amendments to Sec. 1.31,
are not addressed in this final rule. The Commission intends to
address these amendments in a final rule in a separate Federal
Register release.
---------------------------------------------------------------------------
CME suggested that conversations should only have to be retained
for six months after the execution of a transaction. FIA commented that
the Commission failed to provide a justification for requiring that a
swap record be maintained for the life of the swap plus five years.
Encana requested clarification that regulation 1.31 does not apply to a
non-financial end-user who enters into swaps, but is not an FCM, IB, or
member of a DCM or SEF. Encana also made a general request that the
Commission specify in its final rules which recordkeeping and reporting
rules apply to non-financial end-users.
In contrast to other commenters, Mr. Chris Barnard asserted that
all records should be kept indefinitely and scanned after two years,
arguing that there is no technological or practical reason to limit the
record retention period. Mr. Barnard specifically commented that
records of voice communications also should be
[[Page 66297]]
kept indefinitely. To support the asserted usefulness of such records,
Mr. Barnard cited a 2009 IOSCO report stating that telephone records
could benefit enforcement investigations.\60\
---------------------------------------------------------------------------
\60\ http://www.iosco.org/news/pdf/IOSCONEWS137.pdf.
---------------------------------------------------------------------------
The Commission also proposed to amend regulation 1.31 to conform to
the proposed regulation 23.203(b)(2) requirement for SDs and MSPs and
their swap transactions by proposing to require that all records kept
pursuant to the Act or the Commission's regulations be made available
for inspection to any applicable prudential regulator, as that term is
defined in section 1a(39) of the Act, or, in connection with security-
based swap agreements described in section 1a(47)(A)(v) of the Act, the
SEC. By contrast, existing regulation 1.31, which pertains to ``all
books and records required to be kept by the Act or by these
regulations,'' requires that records be kept for five years and be made
available only to the Commission and the Department of Justice.\61\ The
Commission did not receive comment on this proposed revision.
---------------------------------------------------------------------------
\61\ 17 CFR 1.31(a) (emphasis added).
---------------------------------------------------------------------------
b. Final Rule
The Commission has determined to adopt the proposed revision to
regulation 1.31 regarding record retention periods with two
modifications. First, in final regulation 1.31, the retention period
for records of oral communications leading to the execution of a swap
or related cash or forward transaction, as required of SDs and MSPs
under regulation 23.202(a)(1) and (b)1), respectively, will be one year
(rather than five years after the termination, maturity, expiration,
transfer, assignment, or novation date of the transaction, as
proposed). This modification is consistent with the final provision for
an SD's or MSP's oral communications under new regulation 23.203(b)(2)
in the Reporting, Recordkeeping, and Daily Trading Record Requirements
final rulemaking.\62\ The Commission believes that this retention
period for SDs and MSPs with respect to records of oral communications
leading to the execution of a swap or related cash or forward
transaction will enable it to adequately execute its enforcement
responsibilities under the Act and these regulations while minimizing
the storage costs imposed on these affected entities.\63\
---------------------------------------------------------------------------
\62\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, 20204 (Apr. 3, 2012) (``Provided,
however, that records of oral communications communicated by
telephone, voicemail, mobile device, or other digital or electronic
media pursuant to Sec. 23.202(a)(1) and (b)(1) shall be kept for a
period of one year.'').
\63\ As noted above, the proposed amendments to regulation 1.35
that would require the recording of certain oral communications by
certain entities in addition to SDs and MSPs will be the subject of
a separate final release. The Commission will consider any related
amendments to regulation 1.31 at that same time.
---------------------------------------------------------------------------
With respect to Encana's request for clarification concerning the
applicability of regulation 1.31 to commercial end-users, regulation
1.31 applies to all records required to be kept by the Act or the
Commission's regulations, for example, records required to be kept
under regulations 1.35, 18.05 and 23.202. If these rules require end-
users to keep records (e.g., regulation 18.05, Maintenance of Books and
Records), then those records must be kept in accordance with regulation
1.31.
In response to CME's comment that although the Commission suggests
that the retention period for swaps applies only to SDs and MSPs, as
addressed in proposed regulation 23.203(b), the proposed amendment to
regulation 1.31 is ambiguous in that it could be read to apply to all
entities, the Commission clarifies that the final provision in
regulation 1.31 regarding the retention period for records of swap
transactions is triggered by the type of record and not the entity that
is required to keep the record. Therefore, although regulation
23.203(b) only applies to SDs and MSPs with regard to their swap
transactions, the final corresponding provision in regulation 1.31
applies to anyone who is required by the Act or by these regulations to
keep records of, among other things, swap transactions.\64\
---------------------------------------------------------------------------
\64\ Until such time as the Commission adopts amendments to
regulation 1.35 regarding the recording of oral communications, only
SDs and MSPs are required, pursuant to regulation 23.202, to record
certain oral communications relating to swap transactions and
related cash and forward transactions. However, regulation 1.35, as
amended herein, requires certain other entities, in addition to SDs
and MSPs, to keep certain records of all transactions relating to
their business of dealing in, among other things, swap transactions.
As noted in text, regulation 1.31 as amended herein, applies to
these records.
---------------------------------------------------------------------------
Second, the Commission also has determined not to adopt the
proposed revisions to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B),
(b)(3)(i), (b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i) regarding the
parties to whom documents must be made available for inspection. The
proposed revisions were intended to require only SDs and MSPs to make
the records that the CEA or the Commission's regulations require them
to maintain available for inspection to, in addition to the Commission
and DOJ, any applicable prudential regulator (and, in the case of
security-based swap agreement records, to the SEC). However, as
drafted, the proposed regulation text would have applied to all persons
covered by regulation 1.31, not just to SDs and MSPs. The Commission's
final swap recordkeeping rules require SDs and MSPs to make the records
that the CEA or the Commission's regulations require them to maintain
available for inspection to, in addition to the Commission and DOJ, any
applicable prudential regulator or, in the case of security-based swap
agreements, to the SEC, capturing the intent of the proposed revisions
to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B), (b)(3)(i),
(b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i).\65\ Therefore, those
proposed revisions have become superfluous. Consequently, the final
rule provides that, instead of having to make records available for
inspection to the Commission, the Department of Justice, any applicable
prudential regulator or, in the case of security-based swap agreements,
to the Securities and Exchange Commission, persons covered by
regulation 1.31 will continue to be required to make records available
for inspection only to the Commission and the Department of Justice.
---------------------------------------------------------------------------
\65\ 17 CFR 23.203(b).
---------------------------------------------------------------------------
c. Format of Retained Records
The Commission also proposed revising regulation 1.31(a)(1),
(a)(2), and (b) to require that: all books and records required to be
kept by the Act or by the Commission's regulations be kept in their
original form (for paper records) or native file format (for electronic
records); and production of such records be made in a form specified by
the Commission.
CME believes that the native file format requirement should not
require the retention of raw, unprocessed data generated or transmitted
by an electronic trading or clearing system. Otherwise, CME argued,
DCOs and DCMs would have to change the way they retain records. CME
stated that its recommendation is not intended to alter the type or
format of data that DCOs and DCMs currently capture and store for both
business and regulatory purposes. Rather, it asked the Commission to
clarify that the ``native file format'' provision does not impose a new
or additional recordkeeping requirement on DCOs and DCMs as it relates
to their electronic trading or clearing systems.
[[Page 66298]]
CME also asked for clarification as to which proposed revisions to
regulation 1.31 apply only to swaps. MGEX sought clarification that
proposed regulation 1.31 does not require a firm to keep both paper and
electronic records concerning the same communications.
CME commented that the original form requirement is confusing and
superfluous in light of current regulation 1.31(b), which permits the
storage of paper records on microfilm, microfiche, or a similar medium,
and that it is not clear what the Commission means by ``native file
format.'' Similarly, NFA requested clarification that regulation
1.31(b) would continue to permit firms to retain paper records on
micrographic or electronic storage media in lieu of maintaining paper
records in their original format. NFA commented that the proposed
revisions fail to provide a reason for requiring that electronic
records be kept in their native file format.
FIA and NFA believe that existing regulation 1.31 complies with
Federal Rule of Civil Procedure 34. Therefore, they asserted, there is
no reason for the Commission to require that records be kept in their
original form for paper records and native file format for electronic
records. FIA and NFA further asserted that there is no reason for the
Commission to depart from a rule that was designed, in 1999, to
harmonize with the SEC's recordkeeping rules. Similarly, ACSA commented
that requiring paper records to be maintained in their original form
for five years and be readily accessible for the first two would
conflict with SEC rules. FIA commented that firms currently rely on
regulation 1.31(b) to transfer electronic records from their original
format to new forms of electronic media. CME similarly commented that
electronic files often must be migrated, upgraded or converted in order
to meet ever-evolving technology standards. Therefore, CME argued that,
because some swaps could exist for 30 to 50 years, the technology used
to generate or store electronic records related to such swap
transactions may become outdated or obsolete in a much shorter period
of time. Therefore, CME recommended that the Commission eliminate the
requirement to retain swap records in their native file format for the
life of the swap.
CME argued that the Commission should re-propose other rules
referencing regulation 1.31 (e.g., DCO Core Principles, DCM Core
Principles, SEF Core Principles, and SD and MSP Recordkeeping) because
the proposed revisions to the form a record must take under regulation
1.31 substantially change the requirements proposed by those
rulemakings. In contrast to other comments, the Working Group, in
response to the proposed regulation 23.203(b) requiring SDs and MSPs to
maintain records in accordance with existing regulation 1.31, asserted
that, to be made workable for purposes of complying with the
Commission's proposed requirements under regulation 23.203(b),
regulation 1.31 should be revised to reflect current technologies and
industry practices relating to digitized data storage.\66\
---------------------------------------------------------------------------
\66\ See Letter of Working Group of Commercial Energy Firms,
dated February 7, 2011, in response to Notice of Proposed Rulemaking
for Reporting, Recordkeeping, and Daily Trading Requirements for
Swap Dealers and Major Swap Participants (75 FR 76666, Dec. 9,
2010). The Commission addressed the Working Group's comment in the
final rule for SD and MSP recordkeeping requirements stating,
``[t]he Commission believes that The Working Group's concerns about
Sec. 1.31 have been addressed by a subsequent rule proposal to
amend Sec. 1.31 to reflect current technologies and industry
practices related to digitized data storage. If these amendments are
finalized, the Commission believes that Sec. 1.31 will be
compatible with electronic records in a trading system and other
records that do not originate from a written document.'' See Swap
Dealer and Major Swap Participant Recordkeeping, Reporting, and
Duties Rules; Futures Commission Merchant and Introducing Broker
Conflicts of Interest Rules; and Chief Compliance Officer Rules for
Swap Dealers, Major Swap Participants, and Futures Commission
Merchants, 77 FR 20128, 20134 (Apr. 3, 2012).
---------------------------------------------------------------------------
Having considered these comments, the Commission is adopting the
revisions to regulation 1.31 regarding the form in which records must
be kept as proposed. In 1999, as commenters highlighted, the Commission
adopted amendments to the recordkeeping obligations established in
regulation 1.31 by, among other things, allowing most categories of
records to be stored on either micrographic or electronic storage media
for the full five-year maintenance period.\67\ The Commission reasserts
one of its intentions in undertaking the 1999 update, which was to
``provide recordkeepers with opportunities to reduce costs and improve
both the efficiency and security of their recordkeeping systems.''
Thus, the Commission clarifies that recordkeepers will be in compliance
with the new requirement to keep paper records in their original form
if they continue to store paper records ``on either `micrographic
media' * * * or `electronic storage media' for the required time
period,'' as provided under regulation 1.31(b). However, one of the
Commission's other stated goals in amending regulation 1.31 in 1999 was
to further the Commission's need for access to complete and accurate
records when necessary in a format that the Commission can process,
i.e., a usable format.\68\ Thus, the Commission is now making clear
that paper records are not usable by the Commission as a substitute for
the underlying financial data used to create that paper. Therefore, it
is necessary that electronic records be maintained in their native file
format and not reduced to paper.
---------------------------------------------------------------------------
\67\ See 64 FR 28735 (May 27, 1999).
\68\ In 1999, the Commission stated that, ``[t]he requirement
that recordkeepers provide documents to the Commission in one of the
many identified formats arises out of practical limitations on the
Commission's ability to process data stored in the full range of
available formats and coding structures on the full range of storage
media available to recordkeepers.'' 64 FR 28735, 28740 (May 27,
1999).
---------------------------------------------------------------------------
Accordingly, for records that include data stored in a database,
the ``native file format'' is the format in which the data is
maintained in that database, not a format reduced to paper or imaged
format, which is essentially the equivalent of paper. This is true
regardless of the imaged format, such as portable document format
(``PDF''), whether machine-readable through optical character
recognition (``OCR'') or any other process. Thus, the underlying
financial data from which an FCM creates PDF versions of customer
account statements must be kept in its ``native file format'' because,
if and when the Commission requests those financial records, it will
not be sufficient for the recordkeeper to produce the paper and/or PDF
statements. Where the data is used to generate a paper document
(including, but not limited to a PDF), such as a customer account
statement, the paper document must be maintained in its original form,
while the data must be maintained in its native file format.
Specifically regarding records of swap transactions, the Commission
has decided to keep the requirement that these records be maintained in
their native file format for the life of the swap plus five years. In
response to CME's specific concerns about the need to migrate, update
or convert electronic files over the potentially long life of a swap to
meet evolving technology standards, the Commission confirms that
maintaining data in native file format (i.e., the format in which it
was originally created or maintained) does not prohibit a recordkeeper
from migrating that data from an obsolete or legacy system or database
to a new system or database, where it will then be maintained in the
native file format of the new system or database. If due to the
proprietary nature of the system, it is impossible or impracticable to
provide the Commission with the data in its native file format because,
for
[[Page 66299]]
example, the native file format would not be accessible by the
Commission, as it may not otherwise have that proprietary system, or
the system does not readily export the requested data in native file
format, then a recordkeeper may provide the data in a commonly
accessible, non-proprietary format.
In the proposed changes to regulation 1.31, the Commission proposed
to amend regulation 1.31(b)(3)(i) by replacing ``approved machine-
readable media as defined in regulation 15.00(l)'' with ``compatible
data processing media as defined in regulation 15.00(d).'' The proposed
change was intended to update this paragraph of regulation 1.31 to
reflect that regulation 15.00(l) no longer exists and, when it existed,
was a definition of ``compatible data processing media'' and not
``machine-readable media.'' \69\ Having received no comments on this
proposed ministerial change, the Commission has determined to adopt the
changes to regulation 1.31(b)(3)(i) as proposed.
---------------------------------------------------------------------------
\69\ Under current Sec. 15.00(d), ``Compatible data processing
media'' means ``data processing media approved by the Commission or
its designee.'' This term has existed under Sec. 15.00 since as
early as 1986. See 17 CFR 15.01 (1986). At that time, the definition
included a list of what the Commission considered to be compatible
data processing media, but deleted those references to specific
media in 1997 in response to comments suggesting that a regulatory
definition was impractical given the fast pace of evolving
technology. See 64 FR 28735, 28739 (May 27, 1999) (citing 62 FR
24026, 24028 (May 2, 1997)).
---------------------------------------------------------------------------
In response to CME's request for clarification of the scope of
``native file format,'' the Commission confirms that the definition of
``native file format'' excludes raw, unprocessed data generated or
transmitted by an electronic trading or clearing system.
4. Regulation 1.33: Monthly and Confirmation Statements
Regulation 1.33 requires FCMs to maintain certain records and to
regularly furnish monthly and confirmation statements to customers
regarding commodity futures and option transactions they have entered
into on behalf of customers. The DFA amended the definition of FCM in
section 1a of the CEA to authorize an FCM to solicit or accept orders
for swaps in addition to commodity futures and option transactions.\70\
Therefore, the Commission proposed adding requirements for monthly and
confirmation statements applicable to swaps. The Commission did not
receive comments concerning these amendments and is adopting these
provisions mostly as proposed.
---------------------------------------------------------------------------
\70\ DFA section 721(a)(13). Today's rulemaking similarly
incorporates those changes into the corresponding definition of
``futures commission merchant'' in regulation 1.3.
---------------------------------------------------------------------------
The Commission has decided to replace a reference to ``open
positions'' in the existing paragraph (a) introductory text with ``open
contracts.'' This amendment makes the regulation 1.33(a) introductory
text consistent with the Commission's revised definition of ``open
contracts'' in regulation 1.3(t).
In finalizing paragraphs (a)(3) and (b)(2), the Commission is
replacing proposed references to ``swaps'' with ``Cleared Swaps,'' as
regulation 22.1 defines that term. Since the publication of the
Proposal, the Commission has finalized part 22 concerning the
segregation of ``Cleared Swaps Customer Collateral.'' \71\ Because an
FCM will only clear those swaps that are ``Cleared Swaps,'' regulation
1.33 should only refer to ``Cleared Swaps.'' For the same reason, the
Commission is using the terms ``Cleared Swaps Customer'' and ``Cleared
Swaps Customer Collateral,'' as now defined in regulation 1.3. These
corrections are being made in conjunction with technical corrections
described below, in section II.A.14 (Technical corrections to parts 1
and 22).
---------------------------------------------------------------------------
\71\ Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336 (Feb. 7, 2012). See infra pt. II.A.14
(discussing technical changes to parts 1 and 22).
---------------------------------------------------------------------------
Finally, in paragraph (a)(3) of regulation 1.33, the Commission is
replacing the phrase ``caused to be executed by'' with ``carried by.''
The reason is that an FCM might not provide a trade execution function
for every swap that it clears.
5. Regulation 1.35: Records of Cash Commodity, Futures and Option
Transactions \72\
---------------------------------------------------------------------------
\72\ The Commission proposed to amend regulation 1.35(a) so that
FCMs, RFEDs, IBs, and members of a DCM or SEF would be required to
record all oral and written communications provided or received
concerning quotes, solicitations, bids, offers, instructions,
trading, and prices, that lead to the execution of transactions in a
commodity interest or cash commodity, however communicated. The
proposed amendments to regulation 1.35(a) also included a
requirement that each transaction record be maintained in a separate
electronic file identifiably by transaction and counterparty. As
noted above, the Commission will consider these proposed amendments
to regulation 1.35(a) in a separate release.
---------------------------------------------------------------------------
As part of the ministerial amendments contained in this release,
the Commission is renumbering portions of regulation 1.35 so that
paragraphs currently numbered 1.35(a-1) and 1.35(a-2) will be
renumbered 1.35(b) and 1.35(c), respectively. As a result, paragraphs
currently numbered 1.35(b), (c), (d) and (e) have been renumbered as
1.35(d), (e), (f) and (g), respectively.
Because amended regulation 1.35 extends recordkeeping obligations
to swaps, the Commission has created special language for swaps, where
appropriate. In regulation 1.35(d)(2) (formerly (b)(2)) (records of
futures, commodity options, and retail forex exchange transactions for
each account), the Commission has added paragraph (iv), as proposed.
The Commission did not receive comments about this amendment and is
adopting it as proposed. Amended regulation 1.35(d)(2)(iv) requires
FCMs, IBs, and any clearing members clearing swaps executed on a DCM or
SEF to maintain records describing the date, price, quantity, market,
commodity, and, if cleared, DCO of each swap.
a. Bunched Orders
The Commission recognizes that investment managers currently
execute bunched swap orders on behalf of clients and allocate the
trades to individual clients post-execution. The Commission believes
that the bunched order procedures currently applicable to futures can
be adapted for use in swap trading. Therefore, the Commission proposed
amending regulation 1.35(a-1)(5) (redesignated as (b)(5) pursuant to
this rulemaking), addressing post-execution allocation of bunched
orders.\73\ The Commission received one comment letter concerning this
topic. The Swaps and Derivatives Market Association (``SDMA'') strongly
supported the proposed amendment on the grounds that it would promote
operational and execution efficiency in both the cleared and uncleared
swaps markets. Specifically, SDMA noted that industry precedent
supports the proposed post-execution time limits (for cleared swaps, no
later than a time sufficiently before the end of the calendar day the
order is executed to ensure that clearing records identify the ultimate
customer for each trade; for uncleared swaps, no later than the end of
the day the swap was executed). SDMA also noted that regulation 1.35(a-
1)(5)'s bunched order provisions for futures provide an appropriate
model for swaps and that FCMs generally have sufficient risk control
capability (technologically speaking) to allocate swap orders post-
execution.
---------------------------------------------------------------------------
\73\ In the Proposal, the Commission requested comment as to
whether it would be appropriate to add FCMs and IBs to the list of
eligible account managers. Proposing Release, 76 FR at 33073.
---------------------------------------------------------------------------
In its final rulemaking concerning Customer Clearing Documentation,
Time of Acceptance for Clearing, and Clearing Member Risk Management,
the Commission adopted the Proposal's
[[Page 66300]]
amendments to regulation 1.35(a-1)(5) concerning the post-execution
time limits referred to above.\74\
---------------------------------------------------------------------------
\74\ Customer Clearing Documentation, Time of Acceptance for
Clearing, and Clearing Member Risk Management, 77 FR 21278, 21306
(Apr. 9, 2012).
---------------------------------------------------------------------------
In this rulemaking, the Commission is adding FCMs and IBs to the
list of eligible account managers in regulation 1.35(a-1)(5)
(redesignated as (b)(5)), as proposed, in order to have a single
standard for all intermediaries that might have discretion over
customer accounts. Unlike other account managers, however, under
regulations 155.3 and 155.4, FCMs and IBs are prohibited from including
proprietary trades in a bunched order with customer trades.
Accordingly, as proposed, the Commission has added a cross-reference in
regulation 1.35(a-1)(5) (re-designated herein as (b)(5)) to those
regulations. The Commission did not receive comments to this segment of
the Proposal.
The Commission is further amending regulation 1.35(a-1)
(redesignated herein as (b)) in order to provide that specific customer
account identifiers need not be included in confirmations or
acknowledgments provided pursuant to regulation 23.501(a), if the
requirements of regulation 1.35(a-1)(5) (redesignated herein as (b)(5))
are met. This will enable account managers to bunch orders for trades
executed bilaterally with SDs or MSPs. This will require that, similar
to the current procedure for futures, the allocation be completed by
the end of the day of execution and provided to the counterparty. The
Commission is making this revision as proposed; it did not receive
comments to this revision.
Also as proposed, the Commission is deleting appendix C to part 1,
which predated regulation 1.35(a-1)(5) (re-designated herein as (b)(5))
and also addresses bunched orders. Appendix C consists of a Commission
Interpretation regarding certain account identification requirements
pertaining to the practice of combining orders for different accounts
into a single order book, referred to as bunched orders. The procedures
for bunched orders are set forth in regulation 1.35(a-1)(5) (re-
designated herein as (b)(5)). Accordingly, the procedures under
appendix C to part 1 are duplicative and no longer necessary. The
Commission received no comments concerning its proposal to delete
appendix C to part 1 and is hereby deleting that appendix.
b. Other Changes to Regulation 1.35
The Commission has deleted paragraphs (f)-(l) of regulation 1.35,
as proposed. To implement the CFMA, regulation 38.2 required DCMs to
comply with an enumerated list of Commission regulations, and exempted
them from all remaining Commission regulations that were no longer
applicable post-CFMA.\75\ The DCM Core Principles final rulemaking
substantially revised part 38, but did not revoke regulation 38.2.\76\
Instead, it updated the list of Commission regulations that are
applicable to DCMs. Unlike its predecessor, regulation 38.2, as revised
by the DCM Core Principles final rulemaking, only enumerates the
Commission regulations from which DCMs are exempt.
---------------------------------------------------------------------------
\75\ See 71 FR 1964 (Jan. 12, 2006).
\76\ Core Principles and Other Requirements for Designated
Contract Markets, 77 FR 36612 (June 19, 2012).
---------------------------------------------------------------------------
As part of the ministerial amendments contained in this rulemaking,
the Commission has eliminated from the Commission's regulations any
provisions that have been inapplicable to DCMs since the passage of the
CFMA, and that remain inapplicable after the passage of the DFA.
Paragraphs (f)-(l) of regulation 1.35 are among those provisions.
Pursuant to the deletion paragraph (j) of regulation 1.35, the
Commission has copied most of that provision into new subsection
(d)(7)(i) (formerly (b)(7)(i)). The Commission made these changes as
proposed; it did not receive any comments on these provisions.
Also as part of the ministerial amendments contained in this
rulemaking, the Commission proposed to eliminate regulations 1.35(a-
1)(3)(ii) and 1.35(a-2)(3). However, regulation 38.2, as revised by the
DCM Core Principles final rule, no longer exempts DCMs from these
provisions. Accordingly, these provisions will not be eliminated in
this rulemaking, and they are redesignated as regulations
1.35(b)(3)(ii) and 1.35(c)(3), respectively.
Regulation 1.35, as revised by this rulemaking, no longer agrees
with regulation 38.2. As this rulemaking eliminates the provisions of
regulation 1.35 that remain inapplicable to DCMs, the Commission is
revising regulation 38.2 to remove references to those provisions of
regulation 1.35 with which DCMs are not required to comply. The
Commission considers this revision to regulation 38.2 technical in
nature as it merely cleans up the discrepancy created by the revisions
to regulation 1.35.
Finally, the Commission has made a technical correction to
regulation 1.35(b)(3)(v) (redesignated herein as (d)(3)(v)) so that the
final sentence references ``commodity futures, retail forex, commodity
option, or swap books and records'' instead of ``commodity retail forex
or commodity option books and records.'' The Commission has made this
change as proposed; it did not receive any comments on this provision.
6. Regulation 1.37: Customer's or Option Customer's Name, Address, and
Occupation Recorded; Record of Guarantor or Controller of Account
Dodd-Frank Act section 723(a)(3) added a new section 2(h)(8) to the
CEA to require, among other things, that swaps subject to the clearing
requirement of CEA section 2(h)(1) be executed either on a DCM or on a
SEF. The DFA established SEFs as a new category of regulated markets
for the purpose of trading and executing swaps. Because SEFs are now
regulated markets under the CEA, many of the Commission's existing
regulatory provisions that currently are applicable to DCMs also will
become applicable to SEFs.
Accordingly, the Commission, as proposed, has amended paragraphs
(c) and (d) of regulation 1.37, pertaining to recording foreign
traders' and guarantors' names, addresses, and business information.
Currently, these provisions apply to DCMs and futures and options
contracts executed on those facilities. This revision amends the
provisions to also include SEFs and swap transactions. Additionally,
the Commission is amending the title and remaining text of regulation
1.37 to reflect the removal of the term ``option customer.'' \77\ The
Commission received no comments on these provisions.
---------------------------------------------------------------------------
\77\ See supra, section II.A.b. for a discussion of the deletion
of the defined term ``option customer'' (1.3(jj)).
---------------------------------------------------------------------------
7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different
Principals; Execution of, for and Between Principals
Like regulation 1.37, the Commission is amending regulation 1.39 to
apply it to SEFs and swaps. Regulation 1.39, which has applied to
members of contract markets, governs the simultaneous execution of buy
and sell orders of different principals for the same commodity for
future delivery by a member and permits the execution of such orders
between such principals on a contract market. The Commission is
amending this provision to include members of SEFs, and to include swap
transactions. The Commission is also amending paragraph (c) to
eliminate the reference to ``cross trades,'' as they are
[[Page 66301]]
no longer defined under section 4c(a) of the Act, as amended by the
DFA. The Commission received no comments and is making these revisions
as proposed, with a slight modification to further clarify that the
rule applies to SEFs in the same manner that it applies to DCMs.
8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies
Required
Regulation 1.40 requires FCMs, RFEDs, IBs and members of contract
markets to furnish to the Commission certain information they publish
or circulate concerning crop or market information affecting prices of
commodities. The Commission is amending regulation 1.40 to apply it to
trading on a SEF, to the extent that persons have trading privileges on
the SEF. Persons without trading privileges on a SEF will not be
subject to regulation 1.40. The amendments also update the forms of
communication covered by the regulation by replacing the word
``telegram'' with ``telecommunication.'' The Commission is making these
revisions as proposed; the Commission received no comments on these
provisions.
9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing
Board Members, Committee Members and Consultants
The Commission proposed to amend regulation 1.59 to include SEFs
and swaps. The Commission also proposed to amend regulation 1.59(b) to
correct certain cross-references to the Act and Commission regulations.
Regulation 1.59(c) has been revised to apply only to registered futures
associations, as the prohibitions contained therein applicable to the
other SROs already are addressed in proposed regulation 40.9.\78\ The
Commission is making these revisions as proposed; the Commission
received no comments.
---------------------------------------------------------------------------
\78\ Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18,
2010).
---------------------------------------------------------------------------
10. Regulation 1.63: Service on Self-Regulatory Organization Governing
Boards or Committees by Persons With Disciplinary Histories
The Commission proposed to amend regulation 1.63 to correct certain
cross-references to the Act and its regulations. The Commission also
proposed to amend paragraph (d) to incorporate the posting of notices
required under that paragraph on each SRO's Web site. The Commission
received no comments regarding the proposed amendments to regulation
1.63 and is adopting the amendments without modification.
11. Regulation 1.67: Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
Regulation 1.67 requires contract markets, upon taking any final
disciplinary action involving a member causing financial harm to a non-
member, to provide notice to the FCM that cleared the transaction. FCMs
and other registrants on SEFs should also be notified of any
disciplinary action involving transactions on a SEF they executed for
ECPs. Accordingly, the Commission proposed to amend regulation 1.67 to
include SEFs, registrants and ECPs on such facilities. The Commission
received no comments regarding proposed regulation 1.67 and is adopting
the rule without modification.
12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a
Futures Commission Merchant for Trading on a Registered Derivatives
Transaction Execution Facility, Separately Accounted for and Segregated
The Commission is hereby removing and reserving regulation 1.68.
Regulation 1.68 had permitted a customer of an FCM to allow the FCM to
not separately account for and segregate such customer's funds if,
among other things, such funds are being carried by the FCM to trade on
or through the facilities of a DTEF. No DTEF has ever registered with
the Commission. Furthermore, section 734 of the Dodd-Frank Act repealed
the DTEF provisions in the CEA, effective July 15, 2011. Therefore,
because the statutory provisions underpinning regulation 1.68 have been
repealed, the Commission is removing it from the Commission's
regulations.\79\
---------------------------------------------------------------------------
\79\ The Commission is also hereby deleting all other references
to DTEFs, except those already removed by other Commission
rulemakings, throughout its regulations. See infra Part II.G.
---------------------------------------------------------------------------
13. Regulations 1.44, 1.53, and 1.62--Deletion of Regulations
Inapplicable to Designated Contract Markets
The CFMA adopted core principles for DCMs.\80\ On August 10, 2001,
the Commission published final rules implementing provisions of the
CFMA, in which it concluded that the CFMA's framework effectively
constituted a broad exemption from many of the existing regulations
applicable to DCMs.\81\ Accordingly, the final rules included
regulation 38.2, which required DCMs to comply with an enumerated list
of Commission regulations, and exempted them from all remaining
Commission regulations no longer applicable post-CFMA. As part of the
ministerial amendments contained in the Proposal, the Commission
proposed to eliminate from the Commission's regulations any provisions
that have been inapplicable to DCMs since the CFMA was enacted and that
remain inapplicable after enactment of the DFA. Accordingly, the
Commission proposed to eliminate the following regulations: regulation
1.44 (Records and reports of warehouses, depositories, and other
similar entities; visitation of premises), regulation 1.53 (Enforcement
of contract market bylaws, rules, regulations, and resolutions), and
regulation 1.62 (Contract market requirement for floor broker and floor
trader registration). The Commission received no comments regarding the
proposed deletion of these provisions and is hereby deleting such
provisions as proposed.
---------------------------------------------------------------------------
\80\ Public Law 106-554, 114 Stat. 2763 (2000).
\81\ A New Regulatory Framework for Trading Facilities,
Intermediaries and Clearing Organizations, 66 FR 42256 (Aug. 10,
2001).
---------------------------------------------------------------------------
14. Technical Changes to Part 1 and Part 22 in Order To Accommodate
Recently Finalized Part 22
On February 7, 2012, the Commission finalized regulations in part
22 regarding the Protection of Cleared Swaps Customer Contracts and
Collateral (``Cleared Swaps Customer Final Rule'').\82\ The Cleared
Swaps Customer Final Rule took effect on April 9, 2012, although the
compliance date for the rule is November 8, 2012. The Cleared Swaps
Customer Final Rule established a segregation regime applicable to FCMs
and DCOs for ``Cleared Swaps Customer Collateral,'' as regulation 22.1
defines that term.\83\ The rulemaking process involved extensive public
comment, including through both an advanced notice of proposed
rulemaking and a notice of proposed rulemaking.
---------------------------------------------------------------------------
\82\ Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336 (Feb. 7, 2012) (``Cleared Swaps Customer
Final Rule'').
\83\ Part 22 capitalizes definitions, but part 1 does not.
Hence, in this rulemaking, terms defined in regulation 22.1 are
capitalized, and terms defined in regulation 1.3 are not.
---------------------------------------------------------------------------
The Cleared Swaps Customer Final Rule carefully established the
basic architecture for protecting Cleared Swaps Customer Collateral.
Both the Cleared Swaps Customer Final Rule and
[[Page 66302]]
the related proposed rule \84\ described how and to what extent the
part 22 regulations for cleared swaps parallel and deviate from the
part 1 regulations applicable to FCMs and DCOs relating to Customers'
Money, Securities, and Property for exchange-traded contracts (referred
to herein as the ``Part 1 Segregation Regulations''). In today's final
rulemaking, the Commission is making technical corrections to certain
of the Part 1 Segregation Regulations to make unambiguous that certain
parallel Part 1 Segregation Regulations do not apply to Cleared Swaps
Customer Collateral. These Part 1 Segregation Regulations only apply to
the segregation of customer funds used to margin, guarantee, or secure
contracts for future delivery on or subject to the rules of a contract
market, and all money accruing to such customers as a result of such
contracts (referred to herein as ``futures contracts''), as well as to
customer funds used to margin commodity option transactions on or
subject to the rules of a contract market or DCO (referred to herein as
``options on futures contracts'').\85\
---------------------------------------------------------------------------
\84\ Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 76 FR 33818 (June 9, 2011).
\85\ See generally Cleared Swaps Customer Final Rule, 77 FR at
6363 (``Sections 22.2 through 22.10 implement the basic architecture
of a system of segregation for swaps customer funds roughly
comparable to the system used for customer funds for futures
contracts under CEA sections 4d(a)(2) and 4d(b) and Commission
regulations 1.20 through 1.30 and 1.49.'').
---------------------------------------------------------------------------
For the reasons stated above, the Commission is hereby making the
following technical corrections:
In regulation 1.3, the Commission has added a definition of
``futures customer funds'' to reference only those funds used to margin
futures contracts or commodity option transactions on or subject to the
rules of a contract market, or DCO, as the case may be. This definition
matches the existing definition of customer funds (regulation 1.3(gg)).
The Commission is also adding a definition of ``Cleared Swaps Customer
Collateral,'' which cross-references regulation 22.1's definition of
this term. Regulation 1.3(gg)(``customer funds'') applies to both
``futures customer funds'' and ``Cleared Swaps Customer Collateral.''
The Proposal's definition in regulation 1.3(gg) had already applied to
customer funds used to margin both futures and swaps.
Relatedly, the Commission is adding a definition of ``futures
customer'' to regulation 1.3 and a definition of ``Cleared Swaps
Customer,'' which cross-references regulation 22.1's definition of that
term. As discussed above in section II.A.1.b. of this preamble, the
definition of ``customer'' in regulation 1.3(k) will be finalized as
proposed, to reference ``any person who uses a futures commission
merchant, introducing broker, commodity trading advisor, or commodity
pool operator as an agent in connection with trading in any commodity
interest.'' \86\ The definition of ``customer'' refers to both a
``futures customer'' and a ``Cleared Swaps Customer'' because, as
described in section II.A.1.f. of this preamble, this rulemaking is
adopting a revised definition of ``commodity interest'' (regulation
1.3(yy)), largely as proposed, to reference futures, swaps, and
contracts subject to Commission sections 2(c)(2), 4c or 19 of the Act.
---------------------------------------------------------------------------
\86\ As finalized, the definition of customer in regulation
1.3(k) preserves existing treatment of proprietary accounts.
---------------------------------------------------------------------------
The Proposal included an amendment to the definition of ``futures
account'' in regulation 1.3(vv) to reference a related futures
segregation provision of section 4 of the Act, as amended by the Dodd-
Frank Act, i.e., section 4d(a). The Proposal neglected to reference
subsection (b) of section 4d, so today's final definition of ``futures
account'' references sections 4d(a) and 4d(b) of the Act. The
Commission did not receive comments about its proposed revisions to
this definition. As a technical correction, the Commission is adding a
definition of ``Cleared Swaps Customer Account,'' which references
regulation 22.1's definition of that term. Relatedly, the Commission is
adding a definition of ``customer account'' in regulation 1.3 to
connote both a ``futures account'' and a ``Cleared Swaps Customer
Account,'' as regulation 1.3 defines each of those terms.
The Commission is making a technical correction to paragraph
(c)(5)(xiii)(C) of regulation 1.17 (``Minimum financial requirements
for futures commission merchants and introducing brokers'') to restrict
a provision pertaining to a foreign broker granted relief pursuant to
regulation 30.10 to ``the foreign futures or foreign options secured
amount, as Sec. 1.3(rr) of this part defines such term.'' This
provision has always referenced the foreign futures or foreign options
secured amount. Thus, because ``customer funds'' includes both
``futures customer funds'' and ``Cleared Swaps Customer Collateral,''
the Commission is making a technical correction to replace the term
``customer funds'' in paragraph (c)(5)(xiii)(C) of regulation 1.17 with
the term ``foreign futures or foreign options secured amount.''
The Commission is making technical corrections to regulation 1.20
(``Customer funds to be segregated and separately accounted for'') by:
changing the title to ``Futures customer funds to be segregated and
separately account for''; replacing references to ``customer funds''
and ``customers'' to ``futures customer funds'' and ``futures
customers''; and linking the regulation to those provisions of section
4d of the Act, as amended by the Dodd-Frank Act, pertaining to the
segregation of futures customer funds (i.e., sections 4d(a) and (b)).
The Commission is making technical corrections to regulation 1.21
(``Care of money and equities accruing to customers'') by changing the
title to ``Care of money and equities accruing to futures customer''
and replacing references to ``customer'' with references to ``futures
customer.'' The Cleared Swaps Customer Final Rule did not create a
parallel regulation in part 22 on the grounds that such parallels were
not necessary because: (1) Regulation 22.1 broadly includes
``accruals'' in the definition of Cleared Swaps Customer Collateral,
and (2) regulation 22.2(e) permits an FCM to commingle the Cleared
Swaps Customer Collateral of multiple Cleared Swaps Customers. Thus,
although revised regulation 1.21 is limited to futures customers and
there is no parallel regulation in part 22, part 22 captures the
substance of regulation 1.21 with respect to Cleared Swaps Customers
and Cleared Swaps Customer Collateral.
The Commission is making technical corrections to regulation 1.22
(``Use of customer funds restricted'') by changing the title to ``Use
of futures customer funds restricted'' and replacing references to
``customer funds'' and ``customer'' with references to ``futures
customer funds'' and ``futures customer.'' The Cleared Swaps Customer
Final Rule incorporated these requirements into part 22 with respect to
Cleared Swaps Customer Collateral and Cleared Swaps Customers.
The Commission is making technical corrections to regulation 1.23
(``Interest of futures commission merchant in funds; additions and
withdrawals'') by changing the title to ``Interest of futures
commission merchant in segregated futures customer funds; additions and
withdrawals;'' replacing references to ``customer funds'' and
``customer'' with references to ``futures customer funds'' and
``futures customer;'' and linking the regulation to sections 4d(a) and
(b) of the Act.\87\
---------------------------------------------------------------------------
\87\ The Cleared Swaps Customer Final Rule created analogous
requirements in part 22 with respect to Cleared Swaps Customer
Collateral and Cleared Swaps Customers. See 17 CFR 22.2(e)(3).
---------------------------------------------------------------------------
[[Page 66303]]
The Commission is making technical corrections to regulation 1.24
(``Segregated funds; exclusions therefrom'') by replacing a reference
to ``customers'' with ``futures customers.'' \88\
---------------------------------------------------------------------------
\88\ The Cleared Swaps Customer Final Rule created analogous
provisions in part 22 with respect to Cleared Swaps Customers. See
17 CFR 22.2(d)(3).
---------------------------------------------------------------------------
The Commission is making technical corrections to regulation 1.26
(``Deposit of instruments purchased with customer funds'') by: changing
the title to ``Deposit of instruments purchased with futures customer
funds''; replacing references to ``customer funds'' and ``customer''
with references to ``futures customer funds'' and ``futures customer;''
and linking the regulation to sections 4d(a) and (b) of the Act.\89\
---------------------------------------------------------------------------
\89\ The Cleared Swaps Customer Final Rule created analogous
requirements in regulation 22.5 17 CFR 22.5.
---------------------------------------------------------------------------
The Commission is making technical corrections to regulation 1.32
(``Segregated account; daily computation and record'') by replacing
references to ``customer funds,'' ``customer,'' and ``customer
account'' with references to ``futures customer funds,'' ``futures
customer,'' and ``futures customer account.'' \90\
---------------------------------------------------------------------------
\90\ The Cleared Swaps Customer Final Rule mirrored some of
regulation 1.32's requirements in part 22 with respect to Cleared
Swaps Customer Collateral and Cleared Swaps Customers. See 17 CFR
22.2(g).
---------------------------------------------------------------------------
The Commission is making a technical correction to regulations
1.21, 1.23, 1.24, 1.26, 1.29, 140.735-2a, and 140.735-3 by replacing
the term ``clearing organization'' or ``clearinghouse'' with
``derivatives clearing organization.'' Since Congress' enactment of the
CFMA in 2000,\91\ which added ``derivatives clearing organization'' as
a new defined term to section 1a of the Act, the intent of these
regulations has been to refer to ``derivatives clearing
organizations.''
---------------------------------------------------------------------------
\91\ Public Law 106-55, 114 Stat. 2763 (Effective December 21,
2000).
---------------------------------------------------------------------------
The Commission is making technical changes to subsection (1)(iii)
of regulation 1.33 (``Monthly and Confirmation statements'') to
specifically reference ``futures customer funds'' and the ``foreign
futures and foreign options secured amount.'' This subsection presently
refers to these classes of customer funds; the intention of this
technical amendment is to clarify that meaning.
Proposed amended regulation 1.33(a)(3) described what ``swap
positions'' information an FCM must provide in monthly statements to
its customers. The Commission did not receive comments on this proposal
and is publishing it as proposed, except for the following. In line
with the aforementioned technical corrections, today's final version of
regulation 1.33 replaces ``swap position'' with ``Cleared Swaps
Customer.'' Today's final rulemaking also makes a technical correction
to regulation 1.33 by combining subsections (a)(1)(iv), (a)(2)(v), and
proposed (a)(3)(iv) into a new paragraph (a)(4).
Unlike the aforementioned Part 1 Segregation Regulations,
Regulation 1.25 (``Investment of customer funds''), on the other hand,
now properly applies to both futures customer funds and Cleared Swaps
Customer Collateral. Thus, its title will continue to refer to
``customer funds,'' which, as defined by revised regulation 1.3(gg),
includes both futures customer funds and Cleared Swaps Customer
Collateral. However, the Commission is making technical corrections to
regulation 1.25 as part of today's final rulemaking by adding
references to regulation 22.5 (``Futures commission merchants and
derivatives clearing organizations: Written acknowledgment'') alongside
current references to regulation 1.26 (``Deposit of instruments
purchased with customer funds'') (to be amended herein as ``Deposit of
instruments purchased with futures customer funds''). The Commission
explains this reference to regulation 22.5 in a new provision at the
end of paragraph (d)(13) of regulation 1.25.
The foregoing technical corrections to the Part 1 Segregation
Regulations are designed to ensure that, when taken together with the
Cleared Swaps Customer Final Rule, they do not create redundant, and
potentially conflicting, duties for FCMs and DCOs. For similar reasons,
the Commission is making certain equivalent technical corrections to
part 22. As mentioned above, none of these technical changes alter the
meaning of any regulation of part 22. First, the Commission is deleting
the definition of ``Customer'' from regulation 22.1 (``Definitions'').
Because of the aforementioned addition of the definition of ``futures
customer'' in regulation 1.3, regulation 22.1's definition of
``Customer'' is no longer needed or correct. Consequently, in
regulation 22.2 (``Futures Commission Merchants: Treatment of Cleared
Swaps and Associated Cleared Swaps Customer Collateral''), the
Commission is replacing references to ``Customers'' with references to
``futures customers'' or ``foreign futures or foreign options
customers,'' as regulation 30.1(c) defines that term. For the same
reason, in regulation 22.3(b)(2)(iii) (``Derivatives clearing
organizations: Treatment of Cleared Swaps Customer Collateral'');
paragraphs (a) and (b) of regulation 22.5 (``Futures commission
merchants and derivatives clearing organizations: Written
acknowledgement''); and paragraph (a) of regulation 22.9
(``Denomination of Cleared Swaps Customer Collateral and location of
depositories''), the Commission is replacing references to funds
belonging to ``Customers'' with references to ``futures customer
funds.''
In addition, since, as described above, regulation 1.25
(``Investment of customer funds'') applies to both futures customer
funds and Cleared Swaps Customer Collateral, the Commission is making a
technical correction to paragraph (e)(1) of regulation 22.2 and
paragraph (d) of regulation 22.3 by omitting, ``which section shall
apply to such money, securities, or other property as if they comprised
customer funds or customer money subject to segregation pursuant to
section 4d(a) of the Act and the regulations thereunder.''
Similarly, the Commission is making a technical correction to
regulation 22.9 (``Denomination of Cleared Swaps Customer Collateral
and location of depositories'') by omitting a reference to Cleared
Swaps Customer Collateral. Regulation 22.9 cross-references regulation
1.49 (``Denomination of customer funds and location of depositories'').
Because the new revised definition of ``customer funds'' in regulation
1.3 references both futures customer funds and Cleared Swaps Customer
Collateral, regulation 1.49 references to both classes of funds.
Therefore, regulation 22.9 can reference regulation 1.49 without making
a specific reference to Cleared Swaps Customer Collateral, which the
Commission has always intended.
Moreover, as a result of the corrections to the definition
described above, the Commission is making (1) a technical correction to
regulation 22.10 (``Application of other regulatory provisions'') to
avoid confusion as to the applicability of regulations 1.27, 1.28,
1.29, and 1.30 to Cleared Swaps, Cleared Swaps Customers, and Cleared
Swaps Customer Collateral, and (2) technical corrections to regulations
22.13(a)(2) and 22.15 to incorporate the new ``Futures Customer'' and
``Foreign Futures or Foreign Options Customer'' terms.
The Commission is also making technical corrections to regulation
22.11, regulation 22.13(a)(1), the title of regulation 22.14,
regulation 22.14(a)(2), regulation 22.14(c)(2), regulation 22.15, and
the title of regulation of 22.16 by replacing references to
``Customer'' with
[[Page 66304]]
the correct term ``Cleared Swaps Customer.'' Since its publication,
regulation 22.11 has always intended to reference only Cleared Swaps
Customers.
In addition, the Commission is making technical corrections to
regulation 22.12 (``Information to be maintained regarding Cleared
Swaps Customer Collateral'') by replacing the term ``Cleared Swaps
Customer Funds,'' with the correct term, ``Cleared Swaps Customer
Collateral.''
The Commission notes that its regulations refer to ``customer
funds'' in the following regulations: 3.10, 3.21, 5.5, 39.15, 39.16,
and 170.5, as well as in Appendices to part 190. ``Customer funds''
also appears in the following regulations recently amended by the
Commission's final rulemaking concerning Core Principles and Other
Requirements for Designated Contract Markets: \92\ 1.52, 38.603,
38.604, and Appendix B to part 38. The Commission believes that these
provisions properly refer to ``customer funds'' as revised regulation
1.3(gg) now defines that term, i.e., to connote both ``futures customer
funds'' and ``Cleared Swaps Customer Collateral.''
---------------------------------------------------------------------------
\92\ 77 FR 3661 (June 19, 2012) (Effective date: August 20,
2012).
---------------------------------------------------------------------------
B. Part 7
The Commission proposed to rename part 7 of the Commission's
regulations ``Registered Entity Rules Altered or Supplemented by the
Commission,'' thus reflecting the language in section 8a(7) of the Act,
as amended by the Dodd-Frank Act, which provides the basis for part 7.
The Commission also proposed to make a similar change in regulation
7.1, replacing contract market rules with registered entity rules.
Finally, the Commission proposed to remove and reserve subparts B
(Chicago Mercantile Exchange Rules) and C (Board of Trade of the City
of Chicago Rules) and their associated sections. The Commission
received no comments regarding the proposed amendments to part 7 and is
adopting these amendments as proposed.
C. Part 8
The Commission proposed to remove part 8 of its regulations.
Regulation 38.2 enumerates the provisions with which DCMs are not
required to comply. The part 8 regulations are among those
provisions.\93\ In the DCM Core Principles final rules, the Commission
adopted regulations in ``Subpart N--Disciplinary Procedures'' of part
38 to amend the disciplinary procedure requirements applicable to
DCMs.\94\ Several of the regulations adopted in subpart N of part 38
are similar to the text of the disciplinary procedures found in part 8
of the Commission's regulations.\95\ The Commission proposed to remove
part 8 from its regulations to avoid any confusion that could result
from those regulations containing two sets of exchange disciplinary
procedures. The Commission received no comments regarding the proposed
deletion of part 8 and is therefore deleting those regulations as
proposed.
---------------------------------------------------------------------------
\93\ 17 CFR 38.2.
\94\ 77 FR at 36649. The DCM Core Principles final rules take
effect on August 20, 2012. Section 735 of the Dodd-Frank Act
eliminates all DCM designation criteria, including Designation
Criterion 6 (Disciplinary Procedures). Section 735 of the Dodd-Frank
Act creates a new Core Principle 13 (Disciplinary Procedures) that
is devoted exclusively to exchange disciplinary proceedings, and
captures disciplinary concepts inherent in both Designation
Criterion 6 and in current DCM Core Principle 2.
\95\ Paragraph (b)(4) of the acceptable practices for former
Core Principle 2 referenced part 8 of the Commission's regulations
as an example that DCMs could follow to comply with Core Principle
2. 17 CFR pt. 38, app. B, Acceptable Practices for Core Principle 2
at (b)(4). In its experience, the Commission has found that many
DCMs' disciplinary programs do in fact model their disciplinary
structures and processes on part 8.
---------------------------------------------------------------------------
D. Parts 15, 18, 21, and 36
The Commission also proposed to incorporate changes into parts 15,
18, 21, and 36 of its regulations to account for (1) the DFA's
elimination of two categories of exempt markets, exempt commercial
markets (``ECMs'') and electronic boards of trade (``EBOTs''); and (2)
the DFA's grandfather relief provisions for such entities.
Section 723 of the DFA repealed CEA section 2(h), thus eliminating
the ECM category. Section 734 of the DFA repealed CEA section 5d, thus
eliminating the EBOT category. Section 734 also repealed CEA section
5a, thus eliminating the DTEF category of regulated markets effective
July 15, 2011, as discussed above.
Both sections 723 and 734 of the Dodd-Frank Act contain grandfather
provisions allowing ECMs and EBOTs to petition the Commission to
continue to operate as ECMs and EBOTs. Pursuant to the grandfather
provisions, in September 2010, the Commission issued orders regarding
the treatment of such grandfather petitions (the ``Grandfather Relief
Orders'').\96\ Under the Grandfather Relief Orders, the Commission may,
subject to certain conditions, provide relief to ECMs and EBOTs for up
to one year from the general effective date of the DFA's amendments to
the CEA. On July 13, 2012, the Commission amended for the second time a
Commission order dated July 14, 2011, by, among other things, allowing
ECMs and EBOTs, as well as markets that rely on pre-DFA CEA section
2(d)(2), to rely only on the amended order (``Second Amended July 14
Order'') after July 16, 2012.\97\
---------------------------------------------------------------------------
\96\ 75 FR 56513 (Sept. 16, 2010).
\97\ 77 FR 41260 (July 13, 2012).
---------------------------------------------------------------------------
Pursuant to the DFA and the Grandfather Relief Orders, the
Commission proposed to remove from parts 15, 18, 21 and 36 \98\
references to CEA sections 2(h) and 5d and to replace those references,
where appropriate, with references to the Grandfather Relief Orders as
the authority under which ECMs and EBOTs can continue to operate. The
Commission also proposed to remove from parts 15, 18, 21, and 36 of its
regulations references to CEA sections 2(d), 2(g), and 5a, as well as
references to DTEFs. The Commission received no comments regarding the
amendments to parts 15, 18, 21, and 36. The Commission is revising
regulation 36.1 in order to account for the expiration of the
Grandfather Relief Orders on July 16, 2012, as well as reliance by ECMs
and EBOTs on the Second Amended July 14 Order. Otherwise, the
Commission is adopting the amendments to parts 15, 18, 21, and 36 as
proposed.
---------------------------------------------------------------------------
\98\ Part 36 provisions apply to ECMs and EBOTs. The Commission
is not deleting part 36 in its entirety because part 36 provisions
will continue to apply to ECMs and EBOTs that continue to operate
under the Grandfather Relief Orders.
---------------------------------------------------------------------------
E. Parts 41, 140, and 145
The Commission also proposed to incorporate changes into its
regulations to account for other new categories of registered entities
and to include new products now subject to Commission jurisdiction.
Section 733 of the Dodd-Frank Act added new section 5h to the CEA and
created SEFs. Section 728 of the Dodd-Frank Act added new section 21 to
the CEA and created SDRs. SEFs will allow for the trading of swap
transactions between ECPs, as that term is defined in CEA section
1a(18).\99\ In addition to the amendments contained in proposed part
37, the Commission proposed additional amendments throughout the
regulations to include SEFs and SDRs where necessary. The Commission
also proposed to delete from part 41 references to DTEFs as that term
was deleted from CEA section 5b by the Dodd-Frank Act, effective July
15, 2011.\100\ The Commission received
[[Page 66305]]
no comments to its deletion of the term DTEF from part 41 and is
adopting this change as proposed. In addition, as part of today's final
rulemaking, the Commission is making a technical change to part 41 so
that references to the definition of ``narrow-based security index'' is
cited as section 1a(35) of the Act instead of section 1a(25) of the
Act.
---------------------------------------------------------------------------
\99\ For a detailed discussion of the proposed rules as they
directly relate to SEFs, see 76 FR 1214 (Jan. 7, 2011).
\100\ Section 5b of the CEA provided for the registration of
DTEFs. Although secondary references to DTEFs remain in the CEA,
none of the those would enable an entity to commence operations as a
DTEF. The proposed deletions are in regulations 41.2, 41.12, 41.13,
41.21-41.25, 41.27, 41.43 and 41.49.
---------------------------------------------------------------------------
The proposed changes throughout parts 140 (Organization, Functions
and Procedures of the Commission) and 145 (Commission Records and
Information) reflect the need to incorporate SEFs and SDRs into the
Commission's regulations dealing with the rights and obligations of
other registered entities. The Commission proposed amending regulation
140.72 to provide the Commission with the authority to disclose
confidential information to SEFs and SDRs. This provision allows the
Commission, or specifically identified Commission personnel, to
disclose information necessary to effectuate the purposes of the CEA,
including such matters as transactions or market operations. The
Commission proposed amending regulation 140.96 to authorize the
Commission to publish in the Federal Register information pertaining to
the applications for registration of DCMs, SEFs and SDRs, as well as
new rules and rule amendments which present novel or complex issues
that require additional time to analyze, an inadequate explanation by
the submitting registered entity, or a potential inconsistency with the
Act, or regulations under the Act. The Proposal included an amendment
to regulation 140.99 to include SEFs and SDRs to the categories of
registered entities that may petition the Commission for exemptive
relief and no-action and interpretative letters.
The Commission proposed amending regulation 140.735-2 by adding
swap and retail forex transactions, as regulation 5.1(m) defines the
latter term, to those agreements, contracts or transactions Commission
staff may not trade. The Commission proposed amending regulation
140.735-3 to add SEFs and SDRs to the list of entities from which
Commission members and employees may not accept employment or
compensation.
The Commission received no comments about these proposed amendments
to part 140 and is adopting them as proposed, except for two technical
corrections to regulation 140.735-2. The Proposal added ``swap
transaction'' to the text of paragraph (c) but inadvertently omitted
updating a cross-reference to paragraph (b) that references ``swaps.''
Today's final rulemaking updates that cross-reference accordingly.
Similarly, the Proposal added ``swap transaction'' to one sentence of
paragraph (c)'s footnote three but, inadvertently, did not add ``swap
transaction'' to another sentence of that paragraph. Thus, today's
rulemaking makes a technical correction by adding ``swap transaction''
to that other sentence.
The Commission proposed amending regulation 145.9 to expand the
definition of ``submitter'' by adding SEFs and SDRs to the list of
registered entities to which a person's confidential information has
been submitted, and which, in turn, submit that information to the
Commission. This amendment allows individuals who have submitted
information to a SEF or SDR to request confidential treatment under
regulation 145.9. The Commission received no comments about this
proposed amendment and is adopting it as proposed.
Appendix A to Part 145 discusses those portions of Commission
records made available to the public. Section (b) discusses information
made available in the public reading area of the Commission's Office of
the Secretariat. The Proposal amended subsection (b)(13) by adding
``application form'' to the list of publicly available portions of
applications for becoming a registered entity. One month following the
publication of the Proposal, i.e. in July 2011, the Commission
published final amendments to Regulation 40.8(a) (``Availability of
public information'').\101\ Regulation 40.8(a) is consistent with
proposed (b)(13) of Appendix A except for the fact that Regulation
40.8(a) references a ``first page of the application cover sheet''
instead of an ``application form.'' Thus, as part of today's final
rulemaking, the Commission is making a technical correction by deleting
the proposed language, ``application form,'' and replacing it with
``first page of the application cover sheet'' so that it is consistent
with regulation 40.8(a.) \102\
---------------------------------------------------------------------------
\101\ Provisions Common to Registered Entities, 76 FR 44776,
44797 (July 27, 2011).
\102\ In November 2011, the Commission published a final version
of Regulation 39.3 (``Procedures for [DCO] registration''). To be
consistent with Regulation 40.8(a), subsection (a)(5) of Regulation
39.3 (``Public information'') references the ``first page of the
Form DCO cover sheet.'' See Derivatives Clearing Organization
General Provisions and Core Principles Regarding Rulemaking, 76 FR
69334, 69431(Nov. 8, 2011). Form DCO is the application for
registration to become a DCO. Thus, today's technical correction to
subsection (b)(13) of Appendix A is consistent with both Regulation
40.8(a) and Regulation 39.3(a)(5).
---------------------------------------------------------------------------
F. Parts 155 and 166
1. Regulation 155.2: Trading Standards for Floor Brokers
The Commission is removing the references to regulation 1.41 within
regulation 155.2 because the Commission removed and reserved regulation
1.41 in 2001 \103\ pursuant to the CFMA. The Commission is also
removing the related reference to former section 5a(a)(12)(A) of the
Act. The Commission did not receive any comments on these changes in
the Proposal and is finalizing them as proposed.
---------------------------------------------------------------------------
\103\ 66 FR 42256.
---------------------------------------------------------------------------
2. Regulation 155.3: Trading Standards for Futures Commission Merchants
and Regulation 155.4: Trading Standards for Introducing Brokers
The Commission is removing references to ``option customer'' in
these two regulations pursuant to this final rulemaking's deletion of
that term from regulation 1.3, described above. The Commission did not
receive comments about this change following publication of the
Proposal and is amending regulations 155.3 and 155.4 as proposed.
3. Regulation 166.2: Authorization To Trade
The Commission is revising this regulation by incorporating the
revised definition of ``commodity interest'' (regulation 1.3(yy)),
discussed above. The Commission believes that paragraph (a) of
regulation 166.2 should refer to futures, options, or swaps and that
paragraph (b) should refer only to futures or options. The Commission
did not receive comments about these changes and is adopting them as
proposed.
4. Regulation 166.5: Dispute Settlement Procedures
The Commission is revising this regulation by deleting a reference
to ``option customer'' because, as described above, today's rulemaking
deletes that term from regulation 1.3. The Commission is also making a
conforming, technical change to regulation 166.5, described in section
G.2., below.
G. Other General Changes to CFTC Regulations
1. Removal of References to DTEFs
The Commission is removing references to DTEFs and regulations
pertaining to DTEFs in parts 1, 5, 15, 36,
[[Page 66306]]
41, 140, and 155 because section 734 of the DFA abolished DTEFs,
effective July 15, 2011.\104\
---------------------------------------------------------------------------
\104\ This rulemaking is not deleting those DTEF references that
other rulemakings have deleted or will delete from the Commission's
regulations (e.g., some references in part 3 and all references in
part 40).
---------------------------------------------------------------------------
2. Other Conforming Changes
The Commission is also making changes to various parts of its
regulations to update cross-references to CEA provisions, now
renumbered after the passage of the DFA. An example of one such change
is amended regulation 166.5, in which the Commission has updated the
reference to the statutory definition of the term ``eligible contract
participant,'' to reflect the Dodd-Frank Act's renumbering of CEA
section 1a. Additionally, where typographical errors or other minor
inconsistencies were discovered while reviewing CFTC regulations, this
rulemaking includes instructions and amended regulations to correct
them.
III. Administrative Compliance
A. Paperwork Reduction Act
Sections 1.31, 1.33, 1.35, 1.37, and 1.39 of the Commission's
regulations are being amended to provide that records of swap
transactions be kept in a similar manner to records of futures
transactions. These amended provisions impose new information
recordkeeping requirements that constitute the collection of
information within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\105\ Under the PRA, an agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it has been approved by the Office of Management and Budget
(``OMB'') and displays a currently valid control number.\106\ This
rulemaking contains new collections of information for which the
Commission must seek a valid control number. The Commission therefore
has requested that OMB assign a control number for this collection of
information. The Commission has also submitted the proposed rulemaking,
this final rule release, and supporting documentation to OMB for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for
these new collections of information is ``Adaptation of Regulations to
Incorporate Swaps,'' OMB Control Number 3038-0090. Responses to these
information collections will be mandatory.
---------------------------------------------------------------------------
\105\ 44 U.S.C. 3501 et seq.
\106\ Id.
---------------------------------------------------------------------------
With respect to all of the Commission's collections, the Commission
will protect proprietary information according to the Freedom of
Information Act and 17 CFR part 145, ``Commission Records and
Information.'' In addition, section 8(a)(1) of the Act strictly
prohibits the Commission, unless specifically authorized by the Act,
from making public ``data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' The Commission also is
required to protect certain information contained in a government
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information To Be Provided by Reporting Entities/Persons
a. Amendments to Regulation 1.31 (Books and Records; Keeping and
Inspection)
Regulation 1.31 describes the manner in which ``all books and
records required to be kept by the Act'' must be maintained. Most of
the requirements of regulation 1.31 are applicable to FCMs, IBs, RFEDs,
CTAs, CPOs, and members of DCMs and SEFs in conjunction with other part
1 regulations, and the PRA burdens either have been or will be covered
by the OMB control numbers associated with the other part 1
regulations. Examples of these other part 1 regulations are regulation
1.33, which requires certain registrants to produce monthly
confirmation statements, and regulation 1.35, which requires the
maintenance of records of cash commodity, futures, and option
transactions (as finalized, Records of commodity interest and cash
commodity transactions). Regulation 1.31 is applicable to SDs and MSPs
by way of the part 23 regulations.\107\
---------------------------------------------------------------------------
\107\ Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules, 77 FR 20128 (Apr. 3, 2012).
---------------------------------------------------------------------------
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
Regulation 1.31 additionally contains discrete stand-alone
collections for which a control number must be sought. Subsection
(b)(3)(ii) requires persons keeping records using electronic storage
media to ``develop and maintain written operational procedures and
controls (an `audit system') designed to provide accountability over
[the entry of records into the electronic storage media].'' This
provision is already applicable to FCMs, RFEDs, IBs, CTAs, CPOs, and
members of DCMs, and would be applicable to SDs and MSPs pursuant to
the part 23 regulations. As members of SEFs will be newly subject to
the part 1 regulations, the Commission must estimate the burden of
subsection (b)(3)(ii) on these entities and seek OMB approval for this
new application of the subsection.
The Commission anticipates that members of SEFs may incur certain
one-time start-up costs in connection with establishing the audit
system. This will include drafting and adopting procedures and controls
and may include updates to existing recordkeeping systems. The
Commission estimates the burden hours associated with these one-time
start-up costs to be 100 hours per SEF member.
As there are not any SEFs operating at the present, in light of the
fact that the Commission has not yet finalized regulations concerning
SEF Core Principles, it is not possible for the Commission to estimate
with precision how many SEF members there will be or how many of those
SEF members will be FCMs, SDs, or MSPs that are being covered by
already pending existing information collections. Nonetheless, the
Commission has estimated that 35 SEFs will register with it after the
Dodd-Frank Act becomes effective, and now is estimating that there may
be on average 100 members of a SEF that will not fall under one of the
other collections. Accordingly, the aggregate new burden of subsection
(b)(3)(ii) is estimated to be 100 one-time burden hours to
approximately 3,500 SEF members.
The Commission expects that compliance and operations managers will
be employed in the establishment of the written procedures and controls
under subsection (b)(3)(ii). According to recent Bureau of Labor
Statistics, the mean hourly wage of an employee under occupation code
11-3031, ``Financial Managers,'' that is employed by the ``Securities
and Commodity Contracts Intermediation and Brokerage'' industry is
$80.90.\108\ Because members of SEFs may be large entities that may
engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour.
Accordingly, the burden associated with developing written procedures
and controls will total approximately $10,000 for each applicable
member of a SEF on a one-time basis.
---------------------------------------------------------------------------
\108\ Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2011).
---------------------------------------------------------------------------
ii. Representation to the Commission Prior to Initial Use of System
Members of SEFs will also have to comply with regulation 1.31(c),
which requires persons employing an
[[Page 66307]]
electronic storage system to provide a representation to the Commission
prior to the initial use of the system.\109\ The Commission estimates
the burden of drafting this representation in accordance with
regulation 1.31(c) and submitting it to the Commission to be one hour.
---------------------------------------------------------------------------
\109\ As with subsection (b)(3)(ii), regulation 1.31(c) is
already applicable or will be made applicable by other actions to
FCMs, IBs, DCM members, as well as SDs or MSPs pursuant to the part
23 regulations.
---------------------------------------------------------------------------
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, ``Financial
Managers,'' (which includes operations managers) that is employed by
the ``Securities and Commodity Contracts Intermediation and Brokerage''
industry is $80.90.\110\ Because members of SEFs may be large entities
that may engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour.
Accordingly, the burden associated with drafting and submitting the
representation prior to using an electronic storage system will be $100
($100 x 1 hour) per affected member of a SEF.
---------------------------------------------------------------------------
\110\ Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2011).
---------------------------------------------------------------------------
iii. Comments Received
The Commission did not receive any comments concerning the cost for
SEF members to comply with the recordkeeping requirements contained in
regulation 1.31.
b. Amendments to Regulation 1.33 (Monthly and Confirmation Statements)
The Commission is amending regulation 1.33 by requiring FCMs to
include in their monthly and confirmation statements sent to customers
certain specified information related to a customer's Cleared Swap
positions. The information required to be summarized in respect of swap
transactions will be analogous to information currently required to be
kept in respect of futures and commodity option transactions. The
Commission estimates the burden of complying with regulation 1.33 in
respect of swap transactions to be 1 hour for each Cleared Swap
confirmation and 1 hour for each monthly statement.
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, ``Financial
Managers,'' (which includes operations managers) that is employed by
the ``Securities and Commodity Contracts Intermediation and Brokerage''
industry is $80.90.\111\ Accordingly the burden associated with
complying with regulation 1.33 in respect of each Cleared Swap
confirmation will be $80.90 ($80.90 x 1 hour), and the burden will be
$80.90 ($80.90 x 1 hour) for each monthly statement regarding Cleared
Swaps.
---------------------------------------------------------------------------
\111\ Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2011).
---------------------------------------------------------------------------
i. Comments Received
The Commission did not receive any comments concerning the cost for
FCMs to comply with the recordkeeping requirements contained in
regulation 1.33 with respect to their swap transactions.
c. Amendments to Regulation 1.35 (Records of Commodity Interest and
Cash Commodity Transactions)
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
The amendments will require members of SEFs to comply with the
regulation 1.35 recordkeeping requirements that are currently followed
by FCMs, IBs, RFEDs, and members of DCMs. The Commission anticipates
that members of SEFs will spend approximately eight hours per trading
day (or 2,016 hours per year based on 252 trading days) compiling and
maintaining transaction records.
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, ``Financial
Managers,'' (which includes operations managers) that is employed by
the ``Securities and Commodity Contracts Intermediation and Brokerage''
industry is $80.90.\112\ Because members of SEFs may be large entities
that may engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour. Thus,
each SEF member will have a burden of $201,600 per year (2,016 hours x
$100/hour).
---------------------------------------------------------------------------
\112\ Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2011).
---------------------------------------------------------------------------
The amendments to regulation 1.35 will also require FCMs, RFEDs,
IBs, and members of DCMs to comply with the regulation 1.35
recordkeeping requirements for any swap transactions into which they
enter. Because the proposed recordkeeping requirements for swaps would
be equivalent to the recordkeeping requirements they must currently
follow in respect of futures and commodity option transactions, the
additional burden for any swap transaction would be the same for any
additional futures and commodity option transaction for which they keep
records pursuant to regulation 1.35 in its current form. The Commission
estimates that the recordkeeping burden associated with each swap
transaction would be 0.5 hours, for a total burden of $50 per
transaction.
ii. Comments Received
The Commission did not receive any comments concerning the excepted
cost of complying with the aforementioned revisions to regulation 1.35.
d. Amendments to Regulation 1.37 (Customer's Name, Address, and
Occupation Recorded; Record of Guarantor or Controller of Account)
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
The Commission is amending regulation 1.37(a) by requiring each
FCM, IB, and member of a DCM to keep the same kind of record (showing
the customer's name, address, occupation or business, and name of any
other person guaranteeing the account or exercising any trading control
over it) for any swap transactions it ``carries or introduces'' for
another person. The Commission estimates that it will take each of
these entities an average of 0.4 hours to gather the information and
file it or key it into the entity's customer recordkeeping programs.
The Commission also is amending regulation 1.37(b) by requiring
each FCM carrying an omnibus account for another FCM, a foreign broker,
a member of a DCM or any other person to maintain a daily record for
such account of the total open long contracts and the total open short
contracts in each swap. FCMs presently have an equivalent obligation
with respect to futures and commodity option transactions. These daily
records typically are maintained in electronic form. Therefore, once a
position is entered into the entity's systems, the daily record will be
automatically available. The Commission estimates that entering the
position into the system, commencing with the placement of an order and
ending with execution will take each of these entities an average of
0.4 hours.
The Commission additionally is amending regulation 1.37(c) by
requiring SEFs to comply with a provision that DCMs must currently
follow: Keep a record showing the true name, address, and principal
occupation or business of any foreign trader executing transactions on
the
[[Page 66308]]
facility or exchange. According to regulation 1.37(d), this provision
does not apply in respect of futures/options/swaps that foreign traders
execute through FCMs or IBs.
The Commission estimates that it would take a SEF a total of 0.4
hours to prepare each record in accordance with regulation 1.37(c).
According to the Bureau of Labor Statistics, the mean hourly wage of an
employee under occupation code 43-9021, ``Data Entry Keyer,'' is
$13.95.\113\ Because SEFs may be large entities employing persons at
wages higher than the average, the Commission conservatively estimates
the mean hourly wage to be $19.03 per hour. Thus, the burden associated
with preparing a record with regulation 1.37(c) would be $7.61 ($19.03/
hour x 0.4 hours).
---------------------------------------------------------------------------
\113\ Occupational Employment Statistics, National Industry-
Specific Occupational Employment and Wage Estimates, NAICS 523100--
Securities and Commodity Contracts Intermediation and Brokerage,
http://www.bls.gov/oes/current/oes439021.htm (May 2011).
---------------------------------------------------------------------------
ii. Comments Received
The Commission did not receive any comments concerning the
extension of regulation 1.37 to swap transactions executed by FCMs,
IBs, and other DCM members.
e. Amendments to Regulation 1.39 (Simultaneous Buying and Selling
Orders of Different Principals; Execution of, for and Between
Principals)
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
The Commission is amending regulation 1.39, which currently applies
to DCMs, by enabling members of SEFs to execute simultaneous buying and
selling orders of different principals pursuant to rules of the SEF if
certain conditions are met. Among those conditions, a SEF would have to
record these transactions in a manner that ``shows all transaction
details required to be captured by the Act, Commission rule, or
regulation.'' The Commission anticipates that the data to be captured
would already exist in the SEF's trading system. The Commission
estimates that it will take the SEF an average of 0.1 hours to capture
this data, and storage costs of less than $1 per record.
According to the recent Bureau of Labor Statistics, the mean hourly
wage of computer programmers under occupation code 15-1131 and computer
software developers under program codes 15-1132 are between $36.54 and
$44.27.\114\ Because SEFs may be large entities that may engage
employees with wages above the mean, the Commission has conservatively
chosen to use a mean hourly programming wage of $50 per hour for each
of the categories of persons who will have to establish the system for
maintaining oral records. Accordingly, the start-up burden associated
with the data capture requirements would be an average of $5.
---------------------------------------------------------------------------
\114\ Occupational Employment Statistics, Occupational
Employment and Wages: 15-1131, Computer Programmers, http://www.bls.gov/oes/current/oes151131.htm (May 2011); Occupational
Employment Statistics, Occupational Employment and Wages: 15-1132,
Computer Software Developers, http://www.bls.gov/oes/current/oes151132.htm (May 2011).
---------------------------------------------------------------------------
ii. Comments Received
The Commission did not receive any comments concerning the
extension of regulation 1.39 to transactions executed on a SEF.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\115\
The rules adopted by the Commission are for the most part technical
amendments to conform the affected parts to provisions of the Dodd-
Frank Act and, as such, are non-substantive and will not have a
significant economic impact on a substantial number of any types of
entities, whether or not they are small entities. In order to conform
the Commission's existing records regulations to its new recordkeeping
requirements for SDs and MSPs (Regulation 23.202 (``Daily Trading
Records'')),\116\ the Commission also is amending its regulation 1.35
records requirements (as finalized, Records of commodity interest and
cash commodity transactions) to require FCMs, IBs, RFEDs, and members
of DCMs to observe recordkeeping requirements for swaps that they
currently observe with respect to their futures and commodity option
transactions.
---------------------------------------------------------------------------
\115\ 5 U.S.C. 601 et seq.
\116\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (adopting for SDs
and MSPs reporting and recordkeeping standards now found in 17 CFR
23.201-23.203).
---------------------------------------------------------------------------
Additionally, the Commission is applying certain of those books and
records regulations to members of SEFs, mirroring obligations that
apply to members of DCMs.
Accordingly, the Commission is hereby determining that most of the
entities affected by this rulemaking will not be significantly
economically impacted by the conforming and technical rules being
adopted. As discussed below, the Commission is also determining that
most of the entities that will be subject to compliance with this
rulemaking are not small entities for the purposes of the RFA.
Therefore, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the
Commission, certifies by category of market participant below that the
final rules will not have a significant economic effect on a
substantial number of small entities.
1. FCMs, RFEDs, DCMs, ECPs, SEFs and Large Traders
The Commission has previously determined that registered FCMs,
RFEDs, DCMs, ECPs, SEFs and large traders are not small entities for
purposes of the RFA.\117\ The Commission has been informed, in the
context of other rulemakings, that there are some entities that are
both ECPs as defined in the CEA and also are small entities as defined
by the Small Business Administration (``SBA''). In particular, the SBA
has defined as small entities those entities that are engaged in the
generation, transmission, and/or distribution of electric energy for
sale and whose total electric output for the preceding year did not
exceed four million megawatt hours. As noted previously, however, this
rulemaking involves primarily technical conforming amendments that
alone do not impose significant economic impacts on any group of
entities, and that overlap with substantive rulemakings in which the
Commission has assessed or will assess the economic impact on small
entities to the extent required under the RFA. Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the final rules will not have a significant economic
impact on a substantial number of small entities with respect to these
entities.
---------------------------------------------------------------------------
\117\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders)
(``RFA Small Entities Definitions''); Opting Out of Segregation, 66
FR 20740, 20743, Apr. 25, 2001 (ECPs); Regulation of Off-Exchange
Retail Foreign Exchange Transactions and Intermediaries, 75 FR
55410, 55416, Sept. 19, 2010 (RFEDs) (``Retail Forex Final Rules'');
and Position Limits for Futures and Swaps; Final Rule and Interim
Final Rule, 76 FR 71626, 71680, Nov. 18, 2011 (SEFs).
---------------------------------------------------------------------------
[[Page 66309]]
2. IBs
As discussed above, most of the provisions of this rulemaking are
technical and conforming in nature, and overlap with substantive
rulemakings in which the Commission has conducted RFA analyses to the
extent such are required.
The Commission provided an initial regulatory flexibility analysis
for IBs in the its proposing release, as required by 5 U.S.C. 603,
because the oral recordkeeping requirement under regulation 1.35(a), as
proposed, may have had a significant economic impact on a significant
number of small IBs.\118\ As discussed above, the Commission has
decided not to adopt the proposed oral communications recordkeeping
requirement under regulation 1.35(a) as part of today's final rule.
Instead, the Commission intends to adopt that requirement in a future
final rulemaking.
---------------------------------------------------------------------------
\118\ See 76 FR 33066, 33079-80, June 7, 2011.
---------------------------------------------------------------------------
C. Consideration of Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following 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 considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
In July 2010, Congress passed the Dodd-Frank Act which, among other
things, establishes a comprehensive regime for the regulation of swaps.
The Dodd-Frank Act brings swaps under the Commission's jurisdiction and
obligates the Commission to adopt new regulations related to
registration and regulation of SDs and MSPs, trade execution and
clearing requirements, and swap data recordkeeping and real time
reporting. In section 721 of the Dodd-Frank Act, Congress added CEA
section 1a(47) to add a definition of the term ``swap.''
In response to Congress's act of placing swaps under the
Commission's authority, the Commission is exercising its discretion to
amend its regulations to ensure that SDs, MSPs, SEFs, and swaps are
subject to the Commission's comprehensive regulatory regime, and in
June 2011, proposed to amend parts 1, 5, 7, 8, 15, 18, 21, 36, 41, 140,
145, 155, and 166 to update its regulations accordingly.\119\
---------------------------------------------------------------------------
\119\ 76 FR 33066.
---------------------------------------------------------------------------
As described in the Background, above (section I. of this
preamble), some of the amendments contained in this release are
technical in nature; for example, they amend various definitions in
regulation 1.3 to track the DFA's amendments to the CEA's definitions
of the same term, such as futures commission merchants. Another example
of a technical change is the deletion of references to derivatives
transaction execution facilities, a category of exchange that the DFA
eliminated. Other revisions contained in this rulemaking amend
recordkeeping and reporting requirements, which presently apply to
futures, so that they cover swap transactions as well. An example of
this type of change is the revision to parts 15, 18, 21, and 36 to
implement DFA's grandfathering and phase-out of exempt boards of trade
and exempt commercial markets. Certain amendments in this release are
designed to harmonize recordkeeping requirements for various registered
entities transacting in swaps. For example, the amendments to
Sec. Sec. 1.31 harmonize part 1 recordkeeping requirements with those
applicable to SDs and MSPs under part 23 regulations. Lastly, this
rulemaking amends procedures pertaining to the post-execution
allocation of bunched orders so that they can be used in respect of
swap transactions similarly to how they are currently used for futures
transactions.
The benefits and costs that the Commission considers below are
those attributable to its amendments of the rules discussed compared to
a scenario in which these rules were not amended.
Section 1.31 Books and Records; Keeping and Information
Summary Description
Prior to the amendments made in this final rule, Sec. 1.31
specified the conditions under which records required by the Act of any
applicable entity shall be maintained. The section stated that these
records shall be kept for a period of five years from the transaction
date, must be ``readily accessible'' for the first two years, and
stipulated a number of further conditions pertaining to the auditing of
record storage systems, storing duplicate copies of records, and other
items. As described above in II.A.3, the amendments in this final rule
specify that: (1) Required books and records must be kept in their
original form (for paper records) or in their native file formats (for
electronic records); (2) when books and records are requested by the
Commission, they must be produced in a form and on any media specified
by the Commission; (3) required records of any swap or related cash or
forward transaction must be kept until the ``termination, maturity,
expiration, transfer, assignment, or novation date of the transaction''
and then for an additional five-year period; and (4) records of oral
communications required to be maintained pursuant to regulation
23.202(a)(1) and (b)(1) must be kept until the ``termination, maturity,
expiration, transfer, assignment, or novation date of the transaction''
and then for an additional one-year period.
Benefits
The public and the financial integrity of the markets benefit from
this amendment because it promotes retention of metadata (i.e., data
about data). This amendment enhances the Commission's forensic
capabilities, including the ability to trace communications and
transactions. Moreover, requiring entities to retain data in its native
file format reduces the likelihood that data could be manipulated or
corrupted, either intentionally or unintentionally, which makes it more
reliable.
In addition, if entities are not required to store data in its
native file format, some entities may choose to store some of their
data on paper records or in electronic image formats (such as PDF)
which cannot be easily converted into a form that allows it to be read
by programs that the Commission sometimes uses for purposes of
investigation and analysis. For example, market participants have
sometimes submitted large amounts of financial data to the Commission
on printed pages arguing that OCR technology makes such pages ``machine
readable'' and therefore is compliant with the existing requirements
under Sec. 1.31(b)(3)(i). While OCR technology is useful in converting
printed text into an electronic form, it has not been similarly helpful
in converting financial data provided to the Commission. When market
participants have submitted large data sets to the Commission on
printed pages, it has been problematic, forcing the Commission to
either enter extraordinary amounts of data into its systems manually,
an expensive process that introduces the possibility of data entry
errors, or to abandon the use of programs that are often helpful in the
[[Page 66310]]
course of investigation, which severely limits the usefulness of that
data for investigation purposes.
Requiring all entities subject to regulation 1.31 to retain data in
its native file format mitigates the potential that market participants
could discard records in an effort to thwart Commission investigations,
or that they could do so unintentionally but with similar effect and
increases the likelihood that the data will exist in a form that can be
converted to meet the Commission's needs. The requirement that entities
present that data to the Commission in a format and on a medium
requested by the Commission will help to ensure that the Commission is
able to obtain data from market participants in a form that it can use
effectively for detecting and prosecuting prohibited market activities.
And by improving the efficiency and effectiveness of the Commission's
enforcement efforts, these requirements help deter fraud and
manipulation, and promote the integrity of the markets subject to the
jurisdiction of the Commission.
By providing that required written records pertaining to swaps and
related cash or forward transactions must be retained for the life of
the swap plus five years, the Commission will have the ability to
create a sufficient audit trail from which to ascertain and, if
necessary recreate, the facts and circumstances giving rise to the
transaction, even if the need to do so arises several months or even a
few years after the relevant transactions occurred.
Costs
The amended requirement to store electronic records in their native
format will likely create additional data storage costs for market
participants. The incremental cost of storage depends on whether or not
the entity in question was previously storing data in its native format
and the number and size of records that must be stored in their native
format. The Commission requested but received no data from commenters
quantifying such costs. In order to quantify these costs the Commission
would need data sufficient to estimate the number of entities that do
not store data in its native file format, and the amount of additional
data that they would, on average, have to retain in order to store it
in its native file format. The Commission does not have that
information.
In addition, market participants will have additional storage costs
because the rule provides that required swap and related cash and
forward transaction data must be retained for the life of the swap plus
five years. These costs will depend on the number and tenor of swaps
and related cash and forward transactions that an entity enters into.
These factors are likely to vary widely among market participants. The
Commission does not have adequate information to estimate how many
firms are currently storing data in its native format, the number of
swap transactions that will be affected by the timelines implemented
here, or to estimate their tenor and the storage space required to
store related data. Therefore it is not possible to estimate the
additional storage space or cost of additional storage.
The requirement that entities submit information to the Commission
in a format and on a medium determined by the Commission will create
some costs for market participants. Entities that keep data in
proprietary systems or in formats that are not read by programs that
the Commission uses to aid in its investigations would need to adapt
their systems in order to develop this capability. And when requested
to do so by the Commission, such entities would have to convert their
data into the format requested by the Commission, which creates some
incremental costs as well. The Commission cannot estimate these
additional costs because it does not have adequate information to
estimate the number of entities that would need to adapt their systems
in order to allow for data conversion that meets the Commission's
needs. Moreover, it does not have information regarding the number of
inquiries that will require data conversion, or the amount of time that
entities would need to spend converting data when necessary. The latter
is likely to vary widely, depending on the data formats currently used
by market participants and the presence or absence of standard data
conversion software that might assist with such needs.
The rules provides that required swap and related cash and forward
transaction data must be retained for the life of the swap plus five
years also creates some data migration costs. Entities engaging in
long-dated swaps will likely upgrade their recordkeeping systems during
the period of time that they are required to keep data related to those
swaps and related cash or forward transactions. Such entities will have
to implement backward-compatible systems, or will have to reformat
older data so that it can be retained and retrieved using newer
systems. Either of these approaches will create some cost, however, it
is not possible to determine which approach entities are likely to take
or the cost that would likely result in either case. Therefore, the
Commission is not able to estimate the cost at this time.
Some commenters noted costs that would result from not being
allowed to convert paper records to electronic media for storage.\120\
In response, the Commission notes that regulation 1.31(b) still
provides that paper records stored on micrographic media or electronic
storage media (e.g. scanned copies) is sufficient to fulfill the
requirements of regulation 1.31(a)(1), and therefore the cost that
these commenters noted will not occur. Similarly, the Minneapolis Grain
Exchange expressed a concern that amendments to regulations 1.31 and
1.35, taken together, could ``require an electronic and paper copy of
the same information,'' leading to unnecessary costs on the part of
firms. As stated above, the Commission is not requiring that entities
retain both paper and electronic copies of the same information.
---------------------------------------------------------------------------
\120\ See e.g., FIA and NFA.
---------------------------------------------------------------------------
The amendments to the requirements for keeping and inspection of
records, mandated in this section, create certain costs. It is likely
that some SEF members will not have not been subject to regulation 1.31
previously and therefore will need to design written procedures and
controls for maintaining their recordkeeping system.\121\ For entities
that need to develop such procedures and controls for the first time,
the Commission estimates a one-time cost of approximately $13,000 to
$28,000.\122\
---------------------------------------------------------------------------
\121\ Sec. 1.31(b)(3)(ii).
\122\ Calculations in the PRA section rely calculations rely on
wage estimates from the Bureau of Labor Statistics. However, for the
purposes of the Cost Benefit Considerations section, we have used
wage estimates that are taken from the SIFMA ``Report on Management
and Professional Earnings in the Securities Industry 2011'' because
industry participants are likely to be more familiar with them.
Hourly costs are calculated assuming 2,000 hours per year and a
multiplier of 5.35 to account for overhead and bonuses. All totals
calculated on the basis of cost estimates are rounded to two
significant digits.
This estimate assumes 20-40 hours of a compliance attorney's
time, 20-40 hours of an intermediate compliance specialist's time,
5-15 hours of a senior database administrator's time, and 5-15 hours
of an office manager's time in order to design and implement the
written procedures and controls. The average cost for a compliance
attorney is $351.24/hour [($131,303 per year)/(2000 hours per year)
* 5.35 = $351.24 per hour]. The average cost for an intermediate
compliance specialist is $351.24/hour [($58,303 per year)/(2000
hours per year) * 5.35 = $351.24 per hour]. The average cost for a
senior database administrator's time is $280.22/hour [($104,755 per
year)/(2000 hours per year) * 5.35 = $280.22 per hour]. The average
cost for an office manager's time is $229.72/hour [($85,875 per
year)/(2000 hours per year) * 5.35 = $229.72 per hour].
---------------------------------------------------------------------------
[[Page 66311]]
In addition, the members of SEFs that have not previously been
subject to regulation 1.31 will have to provide a representation to the
Commission prior to their initial use of the system.\123\ The
Commission estimates that such entities will spend approximately 0.5
hours providing the submission, and therefore the estimated cost for
the submission is $78.\124\
Consideration of Alternatives
---------------------------------------------------------------------------
\123\ See Sec. 1.31(c).
\124\ The average wage for an intermediate compliance specialist
is $155.96 [($58,303 per year)/(2,000 hours per year) * 5.35 =
$155.96]
---------------------------------------------------------------------------
One commenter suggested that the Commission require records to be
kept indefinitely.\125\ In the Proposal, the Commission did not propose
to alter the requirements regarding the length of time during which
written records must be retained by relevant entities for any of the
transactions that were previously covered by the requirement, and
continues to believe that the existing requirements ensure access to
relevant records for a reasonable period of time while also limiting
costs to market participants. However, the amendments to regulation
1.31 added swaps and related cash and forward transactions to the types
of transactions that are covered, and as described above, established a
longer recordkeeping requirement for required books and records
regarding those transactions. The Commission believes that the long
product life of some swaps necessitates longer recordkeeping
requirements for related documents and data. However, the Commission
anticipates that data related to such transactions will not be needed
for enforcement purposes more than five years beyond the time when the
swap has been terminated, novated, etc. Therefore, providing that
market participants must retain required data more than five years
beyond that date would, in the Commission's view, impose unnecessary
cost upon market participants without significant added benefit.
---------------------------------------------------------------------------
\125\ Mr. Chris Barnard.
---------------------------------------------------------------------------
The Proposal would have required oral records to be retained by SDs
and MSPs until the swap has been terminated, novated, etc., and for
five years thereafter, whereas the final rule requires these entities
to retain such records until the swap has been terminated, novated,
etc., and for a period of one year thereafter. This may create some
cost by limiting the Commission's ability to obtain from SDs and MSPs
recordings related to events that occurred more than one year ago,
which could reduce the Commission's effectiveness in identifying and
prosecuting certain violations. However, the Commission anticipates
that in most cases, the one year requirementafter the life of the swap,
will be sufficient, and notes that the reduced retention requirement
reduces storage costs to market participants.
Section 1.35 Records of Commodity Interest and Cash Commodity
Transactions Introduction
Prior to this amendment, Sec. 1.35 specified which parties are
required to keep records related to commodity futures, commodity
options, and cash commodities. The requirements of Sec. 1.35 applied
to FCMs, RFEDs, IBs, and members of contract markets. The amendments to
regulation 1.35 extend these recordkeeping requirements to swap
transactions and to members of SEFs.
As described above in II.A.5, the amended rule also applies the
bunched order procedures for futures transactions to swaps, and adds
FCMs and IBs to the list of eligible account managers for orders
executed on a DCM or SEF, and also adds CTAs, FCMs, and IBs as eligible
account managers for orders executed bilaterally.
Benefits
As it explained when adopting similar transactional level
recordkeeping requirements for SDs and MSPs, the Commission believes
these recordkeeping requirements for swap transactions will contribute
to important, though unquantifiable, benefits.\126\ More specifically,
complete, rigorous transactional recordkeeping is a necessary element
to promote market integrity, as well as customer protection, by
providing an audit trail of past swap transactions. For, a strong audit
trail, among other things:
---------------------------------------------------------------------------
\126\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, 20172 (Apr. 3, 2012).
---------------------------------------------------------------------------
Provides a basis for efficiently resolving transactional
disputes.
Facilitates a firm's ability to recognize and manage its
risk, thereby enhancing the risk management of the market as a whole.
Acts as a disincentive to engage in unduly risky,
injurious, or illegal conduct in that the conduct will be traceable.
And, in the event such conduct does occur, provides a
mechanism for policing such conduct, both internally as part of a
firm's compliance efforts and externally by regulators enforcing
applicable laws and regulations.
The rule also applies the procedures for handling bunched orders of
futures, to swaps, which enables account managers to reduce transaction
costs to customers by executing a single, large transaction on behalf
of multiple customers at the same time, and then allocating the
positions that were component parts of that transaction to specific
customers after the transaction has been executed. In addition, bunched
orders provide additional protection to customers against favoritism.
In the absence of bunched orders, when an account manager has several
customers that each need to take out positions in the same swap, the
manager would place several sequential orders for that swap. The series
of orders may move the price for that swap, in which case the last
customer order would receive a less favorable price than the first
customer order. By combining the orders, the manager is more likely to
find a single counterparty and a single price for the orders, in which
case the account manager can distribute the appropriate number of
shares to each account at a constant price per share. No customer is
favored over another in such a distribution. This promotes customer
protection and the integrity of the financial markets.
In addition, by adding FCMs and IBs to the list of eligible account
managers for orders executed on a DCM or SEF, and also adding CTAs,
FCMs, and IBs as eligible account managers for orders executed
bilaterally, the rule promotes competition among entities that are
permitted to execute bunched orders, which in turn, promotes
competitive pricing for account managers who want to execute bunched
orders. And by promoting competitive pricing, the amendment promotes
market efficiency. In addition, by permitting FCMs, IBs, and CTAs to
engage in bunched order transactions, the amendment creates benefits
for those entities because it allows them to provide an additional
service to clients, giving them an additional source of revenue.
Costs
Amendments in this final rule will require SEF members to comply
with regulation 1.35, and it is likely that some of those members will
not have been subject to Sec. 1.35 previously. The Commission
estimates that SEF members that are newly subject to Sec. 1.35 will
spend additional time each day compiling and maintaining transaction
records. The Commission estimates that the cost of that additional time
is
[[Page 66312]]
$236,000 to $393,000 per entity per year.\127\
---------------------------------------------------------------------------
\127\ This is estimated to take 6-10 hours per day (assuming 252
days per year) of the time of an office services supervisor. The
average wage for an office services supervisor is $155.96 [($58,303
per year)/(2,000 hours per year) * 5.35 = $155.96]. $155.95 * 6 *
252 = 235,812.31. $155.95 * 10 * 252 = 393,020.52.
---------------------------------------------------------------------------
Also, the amendments in this final rule will require FCMs, RFEDs,
IBs, and members of DCMs to comply with the regulation Sec. 1.35
recordkeeping requirements for any swap transactions into which they
enter. The Commission estimates that such entities will spend an
additional 0.5 hours per swap capturing and maintaining the records
required under Sec. 1.35, and therefore estimates that the per-swap
cost will be $83.00.\128\
---------------------------------------------------------------------------
\128\ This estimates 0.5 hours of time from an office services
supervisor. The average salary for an office services supervisor is
$165.25/hour [($61,776 per year)/(2,000 hours per year) * 5.35 =
$165.25 per hour]. $165.25 * 0.5 = $82.63
---------------------------------------------------------------------------
Section 1.3 Definitions
Introduction
As discussed in II.A.1, the Commission is amending and adding
several definitions in order to incorporate swaps within the
Commission's regulatory framework. Included among them are definitions
for ``customer,'' ``futures commission merchant,'' ``member,'' ``net
deficit,'' ``proprietary account,'' ``commodity trading advisor,''
``commodity pool operator,'' ``designated self-regulatory
organization,'' ``customer funds,'' ``strike price,'' ``introducing
broker,'' ``registered entity,'' ``registrant,'' ``open contract,''
``physical,'' and ``commodity interest.''
As discussed throughout this release, Congress amended the CEA to
address swaps. The amendments to regulation 1.3 (``Definitions'') help
effectuate that mandate and do not, in and of themselves, implicate any
costs or benefits. Any costs and benefits are associated with
substantive regulations that rely upon the revised definitions
contained in regulation 1.3.
Section 1.4 Electronic Signatures
Introduction
In its original form, Sec. 1.4 allowed a customer of an FCM or IB,
a retail forex customer of an RFED or FCM, and a pool participant or a
client of a CTA to use an electronic signature to provide any required
signatures under the CEA, as long as the FCM, RFED, IB, CPO, or CTA
elects generally to accept electronic signatures for such purposes and
``reasonable safeguards'' are in place. The amended rule published as
part of today's final rulemaking extends the benefit of electronic
signatures by including SDs, MSPs, and counterparties of SDs and MSPs
in the list of entities that may use electronic signatures for
acknowledgement of swap transactions.
Benefits
With respect to the protection of market participants and the
public, permitting FCMs, IBs, CPOs, CTAs, SDs, and MSPs to utilize
electronic signatures when executing swap transactions enables more
rapid processing of steps in the transaction process that requires
signatures than would be possible if using faxed copies or hard copies
for such purposes. This, in turn, reduces costs to market participants
by reducing the amount of time they spend handling paperwork and
enhances market efficiency by allowing transactions to be confirmed
more rapidly. In addition, this facilitates straight through processing
of swaps, which provides numerous efficiency and risk reduction
benefits.
Costs
The amendment to Sec. 1.4 is permissive, allowing SDs, MSPs, and
their counterparties to use electronic signatures if they choose, and
also allowing FCM's, IBs, CPOs, and CTAs to use electronic signatures
when engaging in swap transactions. The rule does not create any
affirmative obligations for market participants, and therefore does not
create direct costs to entities subject to Sec. 1.4. Costs to other
market participants and the public would only occur if electronic
signatures were somehow more susceptible to be falsified or corrupted
than non-electronic signatures. The Commission is not aware of any such
risk, and believes that it is unlikely, given that electronic
signatures are already widely used among market participants, including
other registered entities.
Sections 1.33 and 1.37
Introduction
These amended regulations require FCMs, IBs, RFEDs, SEFs, DCMs and
members of DCMs to comply with the same recordkeeping functions for
swaps that they currently adhere to with respect to futures and
commodity option transactions. Regulation 1.33 deals with monthly
confirmation statements, and regulation 1.37 deals with customers'
names and addresses as well as daily records showing total open long
and short contracts.
Benefits
By incorporating swaps into FCM, IB, RFED, DCM, and DCM members'
reporting requirements, the rule extends the benefits of such reporting
requirements to a new range of transactions, and to additional
customers of such entities. The benefits are likely to be increased
awareness among market participants of any losses or gains due to their
swap transactions, which may contribute to sound risk management.
Moreover, the monthly statements and the confirmation statements
required by Sec. 1.33 provide customers with additional opportunities
to identify potential mistakes made over the course of their
transaction that could result in an undesirable outcome, providing
further protection to customers of such entities that are clearing
swaps. Participants would also be able to view a list of fees charged
to their accounts and verify that all are valid charges and would thus
be better protected against accidental or fraudulent fees and charges.
The requirements of Sec. 1.37 will ensure that proper records are
maintained to identify the rightful owners of customer funds, and that
are kept on an omnibus basis, as well as to identify parties who own,
guarantee, or exercise control over any customer cleared swap accounts.
Proper records regarding the name of individuals or entities that own
customer funds, and daily reconciliation of balances in the omnibus
account, promote protection of customer funds held by entities that
place customer funds in such accounts. Furthermore, by requiring each
FCM carrying an omnibus account for any other person to maintain a
daily record of the total open long contracts and total open short
contracts in each swap, the final rule provides protection for the
customers that hold funds in such accounts. The daily records may be
used by the FCM to reconcile the omnibus accounts to their individual
customer obligations, thus helping to ensure that the omnibus accounts
have sufficient funds to meet their customer obligations.
Costs
Costs of this proposal include the cost of compliance on the part
of FCMs to compile and deliver monthly statements and confirmations
after every transaction. FCMs will bear a one-time cost to design the
confirmation statements, swap section of the monthly reports, and to
set up automated systems to produce them. The amendment is not likely
to necessitate new technology since FCMs can use the systems that
produce existing monthly
[[Page 66313]]
statements and confirmations to produce statements pertaining to swaps.
FCMs, however, will bear some costs designing and setting up their
systems to produce swap transaction confirmations and the swap section
of monthly statements. The Commission estimates that the per-entity
set-up cost will be between $4,900 and $17,000.\129\ The reports are
likely to be highly automated, which mitigates ongoing costs. Such
costs are also likely to be similar in magnitude to those incurred
through compliance with Sec. 1.33 as it pertains to futures positions.
The Commission estimates that it will cost FCMs approximately $1.40 per
swap transaction for the FCM to input the data that is required.\130\
The Commission estimates that entities are likely to spend $3,700 to
$7,300 monthly in order to maintain the systems and to produce the
relevant statements.\131\
---------------------------------------------------------------------------
\129\ Estimate assumes 10-30 hours of IT professional time and
2-10 hours of a regulatory attorney's time in order to create and
automate the report. The average salary for a senior programmer is
$306.86/hour [($114,714 per year)/(2000 hours per year) * 5.35 =
$306.86 per hour]. The average salary for a compliance attorney is
$351.24/hour [($131,303 per year)/(2000 hours per year) * 5.35 =
$351.24 per hour].
\130\ The estimates assume an office services supervisor spends
5 minutes per transaction. The average salary for an office services
supervisor is $165.25/hour [($61,776 per year)/(2,000 hours per
year) * 5.35 = $165.25 per hour]. 5/60 * $165.25 = $1.38.
\131\ Estimate assumes 2-10 hours monthly of IT personnel time
and 2-16 hours of middle office personnel time. The average salary
for a programmer is $220.74/hour [($82,518 per year)/(2,000 hours
per year) * 5.35 = $220.74 per hour], and the average salary for an
office services supervisor is $165.25/hour [($61,776 per year)/
(2,000 hours per year) * 5.35 = $165.25 per hour]. The Commission
anticipates that most monthly reports will be sent to clients
electronically, but includes an additional $1,000 monthly for paper,
postage, and printing costs.
---------------------------------------------------------------------------
Adding the requirement that certain entities maintain records of
the name, address, and occupation of customers that have deposited
funds with them will not create any set-up costs. The Commission
assumes that entities subject to Sec. 1.37 already have systems that
incorporate such information.\132\ The Commission estimates that the
ongoing cost to capture such information is $1,650 to $3,300 per
year.\133\ The Commission expects that creating the daily report that
provides the daily total of open long and short positions in each
omnibus account will require some modifications to existing systems.
The Commission estimates that this cost will be approximately $2,600 to
$9,900.\134\ Producing the daily report is likely to be a process that
is automated and therefore the Commission does not believe that there
will be incremental daily costs to produce the report. In addition, the
Commission recognizes that the requirements will obligate FCMs to enter
position data into their systems and estimates that this will require
approximately 0.2 hours of personnel time per swap transaction, which
results in a cost of approximately $33.00 per transaction.\135\ In
addition, the Commission estimates that for a SEF that will have to
keep records of foreign traders' names, addresses, and occupations
executing transactions on an exchange, the SEF will spend between
$17.00 and $83.00.\136\
---------------------------------------------------------------------------
\132\ This is estimated to take 1-10 hours of time from IT
personnel. The average salary for a programmer is $220.74/hour
[($82,518 per year)/(2,000 hours per year) * 5.35 = $220.74 per
hour].
\133\ The Commission assumes 10-20 hours per year will be
required. The average salary for an office services supervisor is
$165.25/hour [($61,776 per year)/(2,000 hours per year) * 5.35 =
$165.25 per hour]. 10 hours * $165.25/hour = $1,652.50; and 20 hours
* $165.25/hour = $ 3,305.00.
\134\ This estimates 1-3 hours of time from a compliance
attorney and 10-40 hours of time from IT personnel. The average
compensation for a compliance attorney is $351.24/hour [$131,303 per
year/(2,000 hours per year) * 5.35 is $351.24 per hour]. The average
compensation for a programmer is $220.74/hour [($82,518 per year)/
(2,000 hours per year) * 5.35 = $220.74 per hour]. 1 * $351.24 =
$351.24. 3 * $351.24 = $1,053.71. $351.24 * 10 = $2,207.36. $351.24
* 40 = $8,829.43.
\135\ The estimate assumes 0.2 hours of labor per transaction
from an office services supervisor. The average salary for an office
services supervisor is $165.25/hour [($61,776 per year)/(2,000 hours
per year) * 5.35 = $165.25 per hour]. 0.2 * $165.25 = $33.05.
\136\ The estimates assume an office services supervisor spends
between 0.1 and 0.5 hours per transaction. The average salary for an
office services supervisor is $165.25/hour [($61,776 per year)/
(2,000 hours per year) * 5.35 = $165.25 per hour]. 0.1 * $165.25 =
$16.52; 0.5 * $165.25 = 82.63.
---------------------------------------------------------------------------
Section 1.39 Simultaneous Buying and Selling Orders of Different
Principals; Execution of, for and Between Principals
Introduction
As described above in II.A.7, regulation 1.39 permits the member of
a contract market to execute simultaneous buy and sell orders for the
same contract on behalf of different principals if the orders are
executed on the exchange and subject to certain procedures. The
amendments to this rule incorporate SEFs and swaps.
The amendments also delete language barring cross trades; such
trades are no longer defined under 4c(a) as amended by DFA. This latter
amendment is made pursuant to the DFA without the exercise of
Commission discretion and therefore is beyond the scope of
consideration in this section.
Benefits
Under CEA Section 5(d)(9), DCMs have an obligation to provide a
competitive, open, and efficient market. If a member were to match two
orders of its own customers without first making it available to the
broader market through the steps required in regulation 1.39, the trade
would be neither open nor competitive. The trade would, thus, be open
to the risk of non-competitive pricing, which could harm one of the two
customers involved in the trade and would, at least minimally, detract
from price discovery. By requiring that bids or offers related to the
member's customer positions are made available to other parties, the
rule ensures that they are open and that a member only matches one
customer against another in a trade if the terms of that trade are
competitive. This protects each customer and also promotes effective
price discovery. Incorporating SEFs into regulation Sec. 1.39 extends
the same benefits to SEF members, providing improved price discovery,
protection for SEF members' customers, and promoting integrity of the
financial markets.
Costs
In order to comply with the rules, a SEF member will be required to
take certain steps before executing one customer's order against
another customer's order. Those additional steps include first offering
its customers' bid and offer to the other members of the SEF through
open outcry or submission to an electronic platform. Whether its
customers' orders are filled against others in the market or against
one another, by offering the trade through the exchange the member will
be subject to some fees imposed by the exchange that they would not
have otherwise experienced. The fees vary significantly based on the
market and product. In addition, the requirement that a SEF record
these transactions in a manner that ``shows all transaction details
required to be captured by the Act, Commission rule, or regulation''
will create additional data capture costs for the SEF. The Commission
estimates that the cost will be approximately $17.00 per transaction
and storage costs of less than $1 per record.\137\
---------------------------------------------------------------------------
\137\ The estimates assume an office services supervisor spends
between 0.1 per transaction. The average salary for an office
services supervisor is $165.25/hour [($61,776 per year)/(2,000 hours
per year) * 5.35 = $165.25 per hour]. 0.1 * $165.25 = $16.52.
---------------------------------------------------------------------------
[[Page 66314]]
Section 1.40 Crop, Market Information Letters, Reports
Introduction
As described above in II.A.8, the changes to Sec. 1.40 incorporate
members of a SEF into the requirement that such entities provide to the
Commission copies of any circular, telecommunication, or report that
they publish or circulate through other entities concerning crop
conditions, or market conditions that would tend to affect the price of
any commodity.
Benefits
Regulation 1.40 addresses the need for the Commission to have
access to any published or circulated information about market-
affecting commodity prices for the prevention and/or identification of
manipulative behavior such as false reporting. The benefit of extending
regulation 1.40 to members of a SEF is that it will give the Commission
the same ability to prevent and/or identify similar manipulative
activities in connection with any commodity prices underlying the swap
transactions that will be executed on a SEF.
Costs
The requirement will create de minimis costs for members of a SEF
related to printing and postage costs for one copy of such
communications when the Commission requests a copy. Such requests are
infrequent on a per entity basis and therefore the Commission does not
expect most entities to bear such costs frequently.
Section 1.59 Activities of Self-Regulatory Organizations Employees,
etc.
Introduction
Regulation 1.59 imposes restrictions on employees and governing
board members of SROs that prevent them from disclosing or trading in
any contracts traded or cleared by the employing contract market, or in
any related commodity interest. Moreover, it prevents such persons from
trading on the basis of material non-public information. As discussed
above in II.A.9, the Commission is amending regulation 1.59 to include
SEFs and swaps.
Benefits
By preventing employees and governing board members from trading in
contracts traded or cleared by their employing exchange or other
related commodity interests, the rule helps to prevent conflicts of
interest that might otherwise incent employees of an exchange to
perform their duties in a way that benefits their own investments
rather than benefiting the members of the exchange and the public more
generally. In doing so, the rule promotes the integrity of financial
markets. Moreover, the rule prevents employees and governing board
members from trading to their own advantage, using material non-public
information. In doing so, the rule protects other market participants
that would be on the opposite side of such trades, and would be
disadvantaged by not having access to the same material non-public
information.
Costs
The amendments adding SEFs and swaps to the entities and
instruments referenced in this rule will, as stated above, prevent
employees and governing board members of SROs from investing in certain
instruments. There will, therefore, be opportunity costs to those
employees. The Commission cannot quantify those opportunity costs
because it does not have data adequate to determine what investments
employees might have made without such restrictions, what return they
would expect on those investments compared to their existing
investments, or the amount of money such employees have invested.
However, the Commission believes that guarding against conflicts of
interest at the SROs is an important step to maintaining integrity in
the financial markets.
Section 1.63 Service on Self-Regulatory Organization Governing Boards
or Committees by Persons With Disciplinary Histories
Introduction
Prior to the amendments adopted in this rule, regulation 1.63
required SROs to maintain a schedule listing all rule violations which
constitute disciplinary offences, to submit that schedule to the
Commission and to post it in a public place. This final rule amends the
rule to specify that the public place in which the SROs must post the
schedule is the SRO's Web site.\138\
---------------------------------------------------------------------------
\138\ Sec. 1.63(d).
---------------------------------------------------------------------------
Benefits
The amendments to regulation 1.63 promote integrity in the
financial markets by ensuring that the information contained in the
schedule is posted in a public place that fulfills the intent of the
obligation, namely, that the SRO can provide notice to members and the
general public.
Costs
Many SROs likely already post the schedules on their Web sites. To
the extent that SROs were not previously posting the schedule to their
Web sites, they will bear the costs associated with posting schedules
on their Web sites. However, this cost will be offset by eliminating
the need to post the schedule in whatever alternative public place the
SRO was previously using. The Commission estimates that the incremental
cost is between $18.00 and $220.00.\139\
---------------------------------------------------------------------------
\139\ Calculations assume that posting the notice will require 5
to 60 minutes of work by non-senior IT personnel. The average salary
for a programmer is $220.74/hour [($82,518 per year)/(2,000 hours
per year) * 5.35 = $220.74 per hour]. 5/60 * $220.74 = $18.40; 60/60
* $220.74 = $220.74.
---------------------------------------------------------------------------
Section 1.67 Notification of Final Disciplinary Action Involving
Financial Harm to a Customer
Introduction
This rule adds that upon any final disciplinary action in which a
SEF finds that a member has committed a rule violation, which involved
a transaction for a customer that resulted in financial harm to the
customer, a SEF, like a DCM, must provide written notice to such member
of the disciplinary action taken against that member. This rule
additionally requires members of SEFs, like members of DCMs, to provide
written notice of the disciplinary action to the customer upon receipt
of such notice from the SEF.
Benefits
By requiring members of a SEF to communicate disciplinary actions
taken against them to the customers that were impacted by the
activities leading to such disciplinary action, the rule promotes
integrity in the financial markets. Customers harmed by a member's
actions will, if they choose, have an opportunity to bring legal action
against the member that has caused financial harm to them and may also
choose to take their business to another member. Both consequences are
enabled by the rule, and both serve as an incentive to SEF members to
avoid any activity that would harm their customers.
Costs
This amendment is an extension of previously existing regulations
that now apply to SEFs as well as DCMs. The costs to SEFs will likely
be on par with those to DCMs and will be minimal, covering only the
cost of communicating disciplinary actions to members. The Commission
estimates
[[Page 66315]]
that such notification will cost the SEF approximately $350.00 per
notification because appropriate personnel will have to draft and send
the required communication.
Sections 15.05, 18.05, 21.03, 36.1, 36.2, 36.3, Appendix A to Part 36,
and Appendix B to Part 36
Introduction
As described in II.A.15.D, DFA eliminated ECMs and EBOTs and
provided a grandfather relief provision for such entities. The
amendments here remove references to the sections of the CEA that were
deleted by DFA and insert reference to the Grandfather Relief Orders
issued by the Commission.
ECMs and EBOTs are allowed to continue operating as such during the
period provided by the Grandfather Relief Orders, creating benefits for
those entities that intend to register with the Commission as SEFs, and
that wish to continue operating as ECMs or EBOTs until they are able to
make such registration. However, those benefits are conferred by the
Act and the Grandfather Relief Order. The changes here are merely
technical edits to ensure that the regulations reflect the changes to
the CEA that were made by DFA. Therefore, there are no costs or
benefits associated with these changes.
Parts 140 and 145
Introduction
As discussed above in II.A.15.E, the changes to parts 140 and 145
incorporate SEFs and SDRs into existing Commission regulations. The
proposed changes would: (1) Facilitate the disclosure of confidential
information to SEFs and SDRs in order to effectuate the purposes of the
CEA; (2) facilitate publication of information in the Federal Register
related to the applications for registration of SEFs and SDRs as well
as new rules and rule amendments that require additional time to
analyze; (3) include SEFs and SDRs in the category of registered
entities that may petition the Commission for exemptive relief and no-
action interpretive letters; (4) add SEFs and SDRs to the list of
entities from which Commission members and employees may not accept
employment or compensation; and (5) expand the definition of
``submitter'' by adding SEFs and SDRs to the list of registered
entities to which a person's confidential information has been
submitted and which, in turn, submit that information to the
Commission, and also allows such individuals to request confidential
treatment under Sec. 145.9.
Benefits
The amendments described above create the following benefits: (1)
By facilitating disclosure of confidential information to SEFs and
SDRs, they assist the Commission in performing its regulatory role with
respect to swaps, thus providing additional protection to swap market
participants, promoting the integrity of financial markets, and
promoting protection for the public. (2) Facilitating publication of
information in the Federal Register related to registration
applications for prospective SEFs and SDRs as well as new rule
amendments, will assist the Commission when obtaining additional
information from the public in order to ensure that its determinations
regarding such applications and rules are well-informed. (3) Including
SEFs and SDRs in the category of entities that may petition for
exemptive relief and no-action interpretive letters gives these
entities the opportunity to pursue individualized treatment with
respect to Commission regulations in circumstances where they believe
such treatment is appropriate, which in turn, gives the Commission the
opportunity to grant such relief or to issue a no-action interpretive
letter if it believes doing so is not contrary to the public interest
or the intent of the regulations for which such relief is sought.
(4) Adding SEFs and SDRs to the list of registered entities from
which Commission members and employees may not accept employment or
compensation prevents conflicts of interest and in so doing promotes
the Commission's ability to protect market participants and the public
as well as to promote the integrity of the financial markets. (5) The
changes ensure that personal information submitted to SEFs and SDRs is
subject to the same protections under the Commission's regulations as
personal information submitted to other registered entities.
Costs
SEFs and SDRs may bear some cost due to their obligation to submit
personal information that they receive to the Commission. Such
submissions will likely be automated and therefore the SEFs and SDRs
will bear an initial cost that is necessary to modify their systems to
submit the required information, and an ongoing cost to submit it when
required. The Commission estimates that the initial cost is between
$2,100 and $10,000,\140\ and the ongoing cost is between $230 and $460
per month.\141\
---------------------------------------------------------------------------
\140\ This estimates 2-4 hours from a compliance attorney and
10-40 hours from IT personnel. The average salary for a compliance
attorney is $351.24/hour [($131,303 per year)/(2000 hours per year)
* 5.35 = $351.24 per hour]. The average salary for a programmer is
$220.74/hour [($82,518 per year)/(2,000 hours per year) * 5.35 =
$220.74 per hour].
\141\ This estimates 2-4 hours from a compliance attorney and
10-40 hours from IT personnel. The average salary for a compliance
attorney is $351.24/hour [($131,303 per year)/(2000 hours per year)
* 5.35 = $351.24 per hour]. The average salary for a programmer is
$220.74/hour [($82,518 per year)/(2,000 hours per year) * 5.35 =
$220.74 per hour].
---------------------------------------------------------------------------
The other amendments do not impose affirmative obligations on
market participants and therefore do not create costs for them or the
public.
List of Subjects
17 CFR Part 1
Agricultural commodity, Agriculture, Brokers, Committees, Commodity
futures, Conflicts of interest, Consumer protection, Definitions,
Designated contract markets, Directors, Major swap participants,
Minimum financial requirements for intermediaries, Reporting and
recordkeeping requirements, Swap dealers, Swaps.
17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements, Swaps.
17 CFR Part 5
Bulk transfers, Commodity pool operators, Commodity trading
advisors, Consumer protection, Customer's money, Securities and
property, Definitions, Foreign exchange, Minimum financial and
reporting requirements, Prohibited transactions in retail foreign
exchange, Recordkeeping requirements, Retail foreign exchange dealers,
Risk assessment, Special calls, Trading practices.
17 CFR Part 7
Commodity futures, Consumer protection, Registered entity.
17 CFR Part 8
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 15
Brokers, Commodity futures, Reporting and recordkeeping
requirements, Electronic trading facility.
17 CFR Part 16
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 18
Commodity futures, Reporting and recordkeeping requirements,
Grandfather relief order.
[[Page 66316]]
17 CFR Part 21
Brokers, Commodity futures, Reporting and recordkeeping
requirements, Grandfather relief order.
17 CFR Part 22
Brokers, Clearing, Consumer protection, Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 36
Commodity futures, Electronic trading facility, Eligible commercial
entities, Eligible contract participants, Federal financial regulatory
authority, Principal-to-principal, Special calls, Systemic market
event.
17 CFR Part 38
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 41
Brokers, Reporting and recordkeeping requirements, Security futures
products.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organizations and functions (Government agencies).
17 CFR Part 145
Confidential business information, Freedom of information.
17 CFR Part 155
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Swaps.
17 CFR Part 166
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Swaps.
For the reasons stated in the preamble, under the authority of 7
U.S.C. 1 et seq., the Commodity Futures Trading Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations as set
forth below:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3,
8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
0
2. Amend Sec. 1.3 by:
0
a. Revising paragraphs (a), (b), (e), (g), (h), (k), (n), (p), (q),
(r), (s), (t), (x), (y) introductory text, (y)(1), (y)(2) introductory
text, (y)(2)(iii)(B), (y)(2)(iii)(C), (y)(2)(v)(B), (y)(2)(v)(C),
(y)(2)(vii), (y)(2)(viii), (aa)(1)(i), (aa)(2)(i), (aa)(5), (bb), (cc),
(ee), (ff), (gg), (ii), (kk), (mm)(1), (mm)(2) introductory text,
(mm)(2)(i), (nn), (oo), (pp), (rr)(2), (ss), (tt), (vv), (xx), and
(yy);
0
b. Removing and reserving paragraphs (jj), (ll) and (uu); and
0
c. Adding paragraphs (k), (cccc), (dddd), (eeee), (ffff), (gggg),
(hhhh), (iiii), (jjjj), (kkkk), (llll), (mmmm), (nnnn), (oooo), (pppp),
(qqqq), (rrrr), and (ssss) to read as follows:
Sec. 1.3 Definitions.
* * * * *
(a) Board of Trade. This term means an organized exchange or other
trading facility.
(b) Business day. This term means any day other than a Sunday or
holiday. In all notices required by the Act or by the rules and
regulations in this chapter to be given in terms of business days the
rule for computing time shall be to exclude the day on which notice is
given and include the day on which shall take place the act of which
notice is given.
* * * * *
(e) Commodity. This term means and includes wheat, cotton, rice,
corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter,
eggs, Irish potatoes, wool, wool tops, fats and oils (including lard,
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and
oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,
livestock, livestock products, and frozen concentrated orange juice,
and all other goods and articles, except onions (as provided by the
first section of Pub. L. 85-839) and motion picture box office receipts
(or any index, measure, value or data related to such receipts), and
all services, rights and interests (except motion picture box office
receipts, or any index, measure, value or data related to such
receipts) in which contracts for future delivery are presently or in
the future dealt in.
* * * * *
(g) Institutional customer. This term has the same meaning as
``eligible contract participant'' as defined in section 1a(18) of the
Act.
(h) Contract market; designated contract market. These terms mean a
board of trade designated by the Commission as a contract market under
the Act and in accordance with the provisions of part 38 of this
chapter.
* * * * *
(k) Customer. This term means any person who uses a futures
commission merchant, introducing broker, commodity trading advisor, or
commodity pool operator as an agent in connection with trading in any
commodity interest; Provided, however, an owner or holder of a
proprietary account as defined in paragraph (y) of this section shall
not be deemed to be a customer within the meaning of section 4d of the
Act, the regulations that implement sections 4d and 4f of the Act and
Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the
Act and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,
regulations, and orders which do not implement sections 4d and 4f of
the Act.
* * * * *
(n) Floor broker. This term means any person:
(1) Who, in or surrounding any pit, ring, post or other place
provided by a contract market for the meeting of persons similarly
engaged, shall purchase or sell for any other person--
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act;
or
(2) Who is registered with the Commission as a floor broker.
* * * * *
(p) Futures commission merchant. This term means:
(1) Any individual, association, partnership, corporation, or
trust--
(i) Who is engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery; a security
futures product; a swap; any agreement, contract, or transaction
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;
a commodity option authorized under section 4c of the Act; a leverage
transaction authorized under section 19 of the Act; or acting as a
counterparty in any agreement, contract or transaction described in
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
(ii) Who, in connection with any of these activities accepts any
money, securities, or property (or extends credit in lieu thereof) to
margin, guarantee, or secure any trades or contracts that result or may
result therefrom; and
(2) Any person that is registered as a futures commission merchant.
(q) Member. This term means:
(1) An individual, association, partnership, corporation, or
trust--
(i) Owning or holding membership in, or admitted to membership
representation on, a registered entity; or
(ii) Having trading privileges on a registered entity.
[[Page 66317]]
(2) A participant in an alternative trading system that is
designated as a contract market pursuant to section 5f of the Act is
deemed a member of the contract market for purposes of transactions in
security futures products through the contract market.
(r) Net equity. (1) For futures and commodity option positions,
this term means the credit balance which would be obtained by combining
the margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the credit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(s) Net deficit. (1) For futures and commodity option positions,
this term means the debit balance which would be obtained by combining
the margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the debit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(t) Open contracts. This term means:
(1) Positions in contracts of purchase or sale of any commodity
made by or for any person on or subject to the rules of a board of
trade for future delivery during a specified month or delivery period
that have neither been fulfilled by delivery nor been offset by other
contracts of purchase or sale in the same commodity and delivery month;
(2) Positions in commodity option transactions that have not
expired, been exercised, or offset; and
(3) Positions in Cleared Swaps, as Sec. 22.1 of this chapter
defines that term, that have not been fulfilled by delivery; not been
offset; not expired; and not been terminated.
* * * * *
(x) Floor trader. This term means any person:
(1) Who, in or surrounding any pit, ring, post or other place
provided by a contract market for the meeting of persons similarly
engaged, purchases, or sells solely for such person's own account--
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act;
or
(2) Who is registered with the Commission as a floor trader.
(y) Proprietary account. This term means a commodity futures,
commodity option, or swap trading account carried on the books and
records of an individual, a partnership, corporation or other type of
association:
(1) For one of the following persons, or
(2) Of which ten percent or more is owned by one of the following
persons, or an aggregate of ten percent or more of which is owned by
more than one of the following persons:
* * * * *
(iii) * * *
(B) The handling of the trades of customers or customer funds of
such partnership,
(C) The keeping of records pertaining to the trades of customers or
customer funds of such partnership, or
* * * * *
(v) * * *
(B) The handling of the trades of customers or customer funds of
such individual, partnership, corporation or association,
(C) The keeping of records pertaining to the trades of customers or
customer funds of such individual, partnership, corporation or
association, or
* * * * *
(vii) A business affiliate that directly or indirectly controls
such individual, partnership, corporation or association; or
(viii) A business affiliate that, directly or indirectly is
controlled by or is under common control with, such individual,
partnership, corporation or association. Provided, however, That an
account owned by any shareholder or member of a cooperative association
of producers, within the meaning of section 6a of the Act, which
association is registered as a futures commission merchant and carries
such account on its records, shall be deemed to be an account of a
customer and not a proprietary account of such association, unless the
shareholder or member is an officer, director or manager of the
association.
* * * * *
(aa) * * *
(1) * * *
(i) The solicitation or acceptance of customers' orders (other than
in a clerical capacity) or
* * * * *
(2) * * *
(i) The solicitation or acceptance of customers' orders (other than
in a clerical capacity) or
* * * * *
(5) A leverage transaction merchant as a partner, officer,
employee, consultant, or agent (or any natural person occupying a
similar status or performing similar functions), in any capacity which
involves:
(i) The solicitation or acceptance of leverage customers' orders
(other than in a clerical capacity) for leverage transactions as
defined in Sec. 31.4(x) of this chapter, or
(ii) The supervision of any person or persons so engaged.
* * * * *
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery, security futures product, or
swap; any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; any person registered with the
Commission as a commodity trading advisor; or any person, who, for
compensation or profit, and as part of a regular business, issues or
promulgates analyses or reports concerning any of the foregoing. The
term does not include:
(i) Any bank or trust company or any person acting as an employee
thereof;
(ii) Any news reporter, news columnist, or news editor of the print
or electronic media or any lawyer, accountant, or teacher;
(iii) Any floor broker or futures commission merchant;
(iv) The publisher or producer of any print or electronic data of
general and regular dissemination, including its employees;
(v) The named fiduciary, or trustee, of any defined benefit plan
which is subject to the provisions of the Employee Retirement Income
Security Act of 1974, or any fiduciary whose sole business is to advise
that plan;
(vi) Any contract market; and
(vii) Such other persons not within the intent of this definition
as the Commission may specify by rule, regulation or order: Provided,
That the furnishing of such services by the foregoing persons is solely
incidental to the conduct of their business or profession:
Provided further, That the Commission, by rule or regulation, may
include within this definition, any person advising as to the value of
commodities or issuing reports or
[[Page 66318]]
analyses concerning commodities, if the Commission determines that such
rule or regulation will effectuate the purposes of this provision.
(2) Client. This term, as it relates to a commodity trading
advisor, means any person:
(i) To whom a commodity trading advisor provides advice, for
compensation or profit, either directly or through publications,
writings, or electronic media, as to the value of, or the advisability
of trading in, any contract of sale of a commodity for future delivery,
security futures product or swap; any agreement, contract or
transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i)
of the Act; any commodity option authorized under section 4c of the
Act; any leverage transaction authorized under section 19 of the Act;
or
(ii) To whom, for compensation or profit, and as part of a regular
business, the commodity trading advisor issues or promulgates analyses
or reports concerning any of the activities referred to in paragraph
(bb)(2)(i) of this section. The term ``client'' includes, without
limitation, any subscriber of a commodity trading advisor.
(cc) Commodity pool operator. This term means any person engaged in
a business which is of the nature of a commodity pool, investment
trust, syndicate, or similar form of enterprise, and who, in connection
therewith, solicits, accepts, or receives from others, funds,
securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in commodity interests, including
any commodity for future delivery, security futures product, or swap;
any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; or any person who is registered
with the Commission as a commodity pool operator, but does not include
such persons not within the intent of this definition as the Commission
may specify by rule or regulation or by order.
* * * * *
(ee) Self-regulatory organization. This term means a contract
market (as defined in Sec. 1.3(h)), a swap execution facility (as
defined in Sec. 1.3(rrrr)), or a registered futures association under
section 17 of the Act.
(ff) Designated self-regulatory organization. This term means:
(1) Self-regulatory organization of which a futures commission
merchant, an introducing broker, a leverage transaction merchant, a
retail foreign exchange dealer, a swap dealer, or a major swap
participant is a member; or
(2) If a Commission registrant other than a leverage transaction
merchant is a member of more than one self-regulatory organization and
such registrant is the subject of an approved plan under Sec. 1.52,
then a self-regulatory organization delegated the responsibility by
such a plan for monitoring and auditing such registrant for compliance
with the minimum financial and related reporting requirements of the
self-regulatory organizations of which the registrant is a member, and
for receiving the financial reports necessitated by such minimum
financial and related reporting requirements from such registrant; or
(3) If a leverage transaction merchant is a member of more than one
self-regulatory organization and such leverage transaction merchant is
the subject of an approved plan under Sec. 31.28 of this chapter, then
a self-regulatory organization delegated the responsibility by such a
plan for monitoring and auditing such leverage transaction merchant for
compliance with the minimum financial, cover, segregation and sales
practice, and related reporting requirements of the self-regulatory
organizations of which the leverage transaction merchant is a member,
and for receiving the reports necessitated by such minimum financial,
cover, segregation and sales practice, and related reporting
requirements from such leverage transaction merchant.
(gg) Customer funds. This term means, collectively, Cleared Swaps
Customer Collateral and futures customer funds.
* * * * *
(ii) Premium. This term means the amount agreed upon between the
purchaser and seller, or their agents, for the purchase or sale of a
commodity option.
(jj) [Reserved]
(kk) Strike price. This term means the price, per unit, at which a
person may purchase or sell the commodity, swap, or contract of sale of
a commodity for future delivery that is the subject of a commodity
option: Provided, That for purposes of Sec. 1.17, the term strike
price means the total price at which a person may purchase or sell the
commodity, swap, or contract of sale of a commodity for future delivery
that is the subject of a commodity option (i.e., price per unit times
the number of units).
(ll) [Reserved]
(mm) * * *
(1) Any person who, for compensation or profit, whether direct or
indirect:
(i) Is engaged in soliciting or in accepting orders (other than in
a clerical capacity) for the purchase or sale of any commodity for
future delivery, security futures product, or swap; any agreement,
contract or transaction described in section 2(c)(2)(C)(i) or section
2(c)(2)(D)(i) of the Act; any commodity option transaction authorized
under section 4c; or any leverage transaction authorized under section
19; or who is registered with the Commission as an introducing broker;
and
(ii) Does not accept any money, securities, or property (or extend
credit in lieu thereof) to margin, guarantee, or secure any trades or
contracts that result or may result therefrom.
(2) The term introducing broker shall not include:
(i) Any futures commission merchant, floor broker, associated
person, or associated person of a swap dealer or major swap participant
acting in its capacity as such, regardless of whether that futures
commission merchant, floor broker, or associated person is registered
or exempt from registration in such capacity;
* * * * *
(nn) Guarantee agreement. This term means an agreement of guarantee
in the form set forth in part B or C of Form 1-FR, executed by a
registered futures commission merchant or retail foreign exchange
dealer, as appropriate, and by an introducing broker or applicant for
registration as an introducing broker on behalf of an introducing
broker or applicant for registration as an introducing broker in
satisfaction of the alternative adjusted net capital requirement set
forth in Sec. 1.17(a)(1)(iii).
(oo) Leverage transaction merchant. This term means and includes
any individual, association, partnership, corporation, trust or other
person that is engaged in the business of offering to enter into,
entering into or confirming the execution of leverage contracts, or
soliciting or accepting orders for leverage contracts, and who accepts
leverage customer funds (or extends credit in lieu thereof) in
connection therewith.
(pp) Leverage customer funds. This term means all money, securities
and property received, directly or indirectly by a leverage transaction
merchant from, for, or on behalf of leverage customers to margin,
guarantee or secure leverage contracts and all money, securities and
property accruing to such customers as the result of such contracts, or
the
[[Page 66319]]
customers' leverage equity. In the case of a long leverage transaction,
profit or loss accruing to a leverage customer is the difference
between the leverage transaction merchant's current bid price for the
leverage contract and the ask price of the leverage contract when
entered into. In the case of a short leverage transaction, profit or
loss accruing to a leverage customer is the difference between the bid
price of the leverage contract when entered into and the leverage
transaction merchant's current ask price for the leverage contract.
* * * * *
(rr) * * *
(2) In the case of foreign options customers in connection with
open foreign options transactions, money, securities and property
representing premiums paid or received, plus any other funds required
to guarantee or secure open transactions plus or minus any unrealized
gain or loss on such transactions.
(ss) Foreign board of trade. This term means any board of trade,
exchange or market located outside the United States, its territories
or possessions, whether incorporated or unincorporated.
(tt) Electronic signature. This term means an electronic sounds,
symbol, or process attached to or logically associated with a record
and executed or adopted by a person with the intent to sign the record.
(uu) [Reserved]
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of sections 4d(a) and
4d(b) of the Act and the rules thereunder.
* * * * *
(xx) Foreign broker. This term means any person located outside the
United States, its territories or possessions who is engaged in
soliciting or in accepting orders only from persons located outside the
United States, its territories or possessions for the purchase or sale
of any commodity interest transaction on or subject to the rules of any
designated contract market or swap execution facility and that, in or
in connection with such solicitation or acceptance of orders, accepts
any money, securities or property (or extends credit in lieu thereof)
to margin, guarantee, or secure any trades or contracts that result or
may result therefrom.
(yy) Commodity interest. This term means:
(1) Any contract for the purchase or sale of a commodity for future
delivery;
(2) Any contract, agreement or transaction subject to a Commission
regulation under section 4c or 19 of the Act;
(3) Any contract, agreement or transaction subject to Commission
jurisdiction under section 2(c)(2) of the Act; and
(4) Any swap as defined in the Act, by the Commission, or jointly
by the Commission and the Securities and Exchange Commission.
* * * * *
(cccc) Cleared Swaps Customer. This term has the meaning provided
in Sec. 22.1 of this chapter.
(dddd) Cleared Swaps Customer Account. This term has the meaning
provided in Sec. 22.1 of this chapter.
(eeee) Cleared Swaps Customer Collateral. This term has the meaning
provided in Sec. 22.1 of this chapter.
(ffff) Confirmation. When used in reference to a futures commission
merchant, introducing broker, or commodity trading advisor, this term
means documentation (electronic or otherwise) that memorializes
specified terms of a transaction executed on behalf of a customer. When
used in reference to a swap dealer or major swap participant, this term
has the meaning set forth in Sec. 23.500 of this chapter.
(gggg) Customer Account. This term references both a Cleared Swaps
Customer Account and a Futures Account, as defined by paragraphs (dddd)
and (vv) of this section.
(hhhh) Electronic trading facility. This term means a trading
facility that--
(1) Operates by means of an electronic or telecommunications
network; and
(2) Maintains an automated audit trail of bids, offers, and the
matching of orders or the execution of transactions on the facility.
(iiii) Futures customer. This term means any person who uses a
futures commission merchant, introducing broker, commodity trading
advisor, or commodity pool operator as an agent in connection with
trading in any contract for the purchase of sale of a commodity for
future delivery or any option on such contract; Provided, however, an
owner or holder of a proprietary account as defined in paragraph (y) of
this section shall not be deemed to be a futures customer within the
meaning of sections 4d(a) and 4d(b) of the Act, the regulations that
implement sections 4d and 4f of the Act and Sec. 1.35, and such an
owner or holder of such a proprietary account shall otherwise be deemed
to be a futures customer within the meaning of the Act and Sec. Sec.
1.37 and 1.46 and all other sections of these rules, regulations, and
orders which do not implement sections 4d and 4f of the Act.
(jjjj) Futures customer funds. This term means all money,
securities, and property received by a futures commission merchant or
by a derivatives clearing organization from, for, or on behalf of,
futures customers:
(1) To margin, guarantee, or secure contracts for future delivery
on or subject to the rules of a contract market or derivatives clearing
organization, as the case may be, and all money accruing to such
futures customers as the result of such contracts; and
(2) In connection with a commodity option transaction on or subject
to the rules of a contract market, or derivatives clearing
organization, as the case may be:
(i) To be used as a premium for the purchase of a commodity option
transaction for a futures customer;
(ii) As a premium payable to a futures customer;
(iii) To guarantee or secure performance of a commodity option by a
futures customer; or
(iv) Representing accruals (including, for purchasers of a
commodity option for which the full premium has been paid, the market
value of such commodity option) to a futures customer.
(3) Notwithstanding paragraphs (1) and (2) of this definition, the
term ``futures customer funds'' shall exclude money, securities or
property held to margin, guarantee or secure security futures products
held in a securities account, and all money accruing as the result of
such security futures products.
(kkkk) Order. This term means an instruction or authorization
provided by a customer to a futures commission merchant, introducing
broker or commodity trading advisor regarding trading in a commodity
interest on behalf of the customer.
(llll) Organized exchange. This term means a trading facility
that--
(1) Permits trading--
(i) By or on behalf of a person that is not an eligible contract
participant; or
(ii) By persons other than on a principal-to-principal basis; or
(2) Has adopted (directly or through another nongovernmental
entity) rules that--
(i) Govern the conduct of participants, other than rules that
govern the submission of orders or execution of transactions on the
trading facility; and
(ii) Include disciplinary sanctions other than the exclusion of
participants from trading.
(mmmm) Prudential regulator. This term has the meaning given to the
term in section 1a(39) of the Commodity Exchange Act and includes the
Board of Governors of the Federal Reserve
[[Page 66320]]
System, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Farm Credit Administration, and the
Federal Housing Finance Agency, as applicable to the swap dealer or
major swap participant. The term also includes the Federal Deposit
Insurance Corporation, with respect to any financial company as defined
in section 201 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act or any insured depository institution under the Federal
Deposit Insurance Act, and with respect to each affiliate of any such
company or institution.
(nnnn) Registered entity. This term means:
(1) A board of trade designated as a contract market under section
5 of the Act;
(2) A derivatives clearing organization registered under section 5b
of the Act;
(3) A board of trade designated as a contract market under section
5f of the Act;
(4) A swap execution facility registered under section 5h of the
Act;
(5) A swap data repository registered under section 21 of the Act;
and
(6) With respect to a contract that the Commission determines is a
significant price discovery contract, any electronic trading facility
on which the contract is executed or traded.
(oooo) Registrant. This term means: a commodity pool operator;
commodity trading advisor; futures commission merchant; introducing
broker; leverage transaction merchant; floor broker; floor trader;
major swap participant; retail foreign exchange dealer; or swap dealer
that is subject to these regulations; or an associated person of any of
the foregoing other than an associated person of a swap dealer or major
swap participant.
(pppp) Retail forex customer. This term means a person, other than
an eligible contract participant as defined in section 1a(18) of the
Act, acting on its own behalf and trading in any account, agreement,
contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C)
of the Act.
(qqqq) Swap data repository. This term means any person that
collects and maintains information or records with respect to
transactions or positions in, or the terms and conditions of, swaps
entered into by third parties for the purpose of providing a
centralized recordkeeping facility for swaps.
(rrrr) Swap execution facility. This term means a trading system or
platform in which multiple participants have the ability to execute or
trade swaps by accepting bids and offers made by multiple participants
in the facility or system, through any means of interstate commerce,
including any trading facility, that--
(1) Facilitates the execution of swaps between persons; and
(2) Is not a designated contract market.
(ssss) Trading facility. This term has the meaning set forth in
section 1a(51) of the Act.
0
3. Revise Sec. 1.4 to read as follows:
Sec. 1.4 Electronic signatures, acknowledgments and verifications.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that
requires a swap transaction to be acknowledged by a swap dealer or
major swap participant or a document to be signed or verified by a
customer of a futures commission merchant or introducing broker, a
retail forex customer of a retail foreign exchange dealer or futures
commission merchant, a pool participant or a client of a commodity
trading advisor, or a counterparty of a swap dealer or major swap
participant, an electronic signature executed by the customer, retail
forex customer, participant, client, counterparty, swap dealer, or
major swap participant will be sufficient, if the futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
pool operator, commodity trading advisor, swap dealer, or major swap
participant elects generally to accept electronic signatures,
acknowledgments or verifications or another Commission rule permits the
use of electronic signatures for the purposes listed above; Provided,
however, That the electronic signature must comply with applicable
Federal laws and other Commission rules; And, Provided further, That
the futures commission merchant, retail foreign exchange dealer,
introducing broker, commodity pool operator, commodity trading advisor,
swap dealer, or major swap participant must adopt and use reasonable
safeguards regarding the use of electronic signatures, including at a
minimum safeguards employed to prevent alteration of the electronic
record with which the electronic signature is associated, after such
record has been electronically signed.
0
4. Revise paragraph (a)(4) of Sec. 1.16 to read as follows:
Sec. 1.16 Qualifications and reports of accountants.
(a) * * *
(4) Customer. The term ``customer'' means customer (as defined in
Sec. 1.3(k)) and includes a foreign futures or foreign options
customer (as defined in Sec. 30.1(c) of this chapter).
* * * * *
0
5. Amend Sec. 1.17 by:
0
a. Removing and reserving paragraph (a)(1)(ii);
0
b. Removing from paragraph (c)(1)(iii) the term ``physical'' in all
places it appears and adding in its place the term ``commodity'';
0
c. Revising paragraph (c)(5)(ii)(A);
0
d. Removing from paragraph (c)(5)(xi) the term ``physical'' and adding
in its place the term ``commodity''; and
0
e. Revising paragraph (c)(5)(xiii)(C).
The revisions read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
(a)(1)(i) * * *
(ii) [Reserved]
* * * * *
(c) * * *
(5) * * *
(ii) * * *
(A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical commodity--No charge.
* * * * *
(xiii) * * *
(C) A foreign broker that has been granted comparability relief
pursuant to Sec. 30.10 of this chapter, Provided, however, that the
amount of the unsecured receivable not subject to the five percent
capital charge is no greater than 150 percent of the current amount
required to maintain futures and options positions in accounts with the
foreign broker, or 100 percent of such greater amount required to
maintain futures and option positions in the accounts at any time
during the previous six-month period, and Provided, that, in the case
of the foreign futures or foreign options secured amount, as Sec.
1.3(rr) defines such term, such account is treated in accordance with
the special requirements of the applicable Commission order issued
under Sec. 30.10 of this chapter.
* * * * *
0
6. Revise Sec. 1.20 to read as follows:
Sec. 1.20 Futures customer funds to be segregated and separately
accounted for.
(a) All futures customer funds shall be separately accounted for
and segregated as belonging to futures customers. Such futures customer
funds when deposited with any bank, trust company, derivatives clearing
organization or another futures commission merchant shall be deposited
under an account name which clearly identifies them as
[[Page 66321]]
such and shows that they are segregated as required by sections 4d(a)
and 4d(b) of the Act and this part. Each registrant shall obtain and
retain in its files for the period provided in Sec. 1.31 a written
acknowledgment from such bank, trust company, derivatives clearing
organization, or futures commission merchant, that it was informed that
the futures customer funds deposited therein are those of futures
customers and are being held in accordance with the provisions of the
Act and this part: Provided, however, that an acknowledgment need not
be obtained from a derivatives clearing organization that has adopted
and submitted to the Commission rules that provide for the segregation
as futures customer funds, in accordance with all relevant provisions
of the Act and the rules and orders promulgated thereunder, of all
funds held on behalf of futures customers. Under no circumstances shall
any portion of futures customer funds be obligated to a derivatives
clearing organization, any member of a contract market, a futures
commission merchant, or any depository except to purchase, margin,
guarantee, secure, transfer, adjust or settle trades, contracts or
commodity option transactions of futures customers. No person,
including any derivatives clearing organization or any depository, that
has received futures customer funds for deposit in a segregated
account, as provided in this section, may hold, dispose of, or use any
such funds as belonging to any person other than the futures customers
of the futures commission merchant which deposited such funds.
(b) All futures customer funds received by a derivatives clearing
organization from a member of the derivatives clearing organization to
purchase, margin, guarantee, secure or settle the trades, contracts or
commodity options of the clearing member's futures customers and all
money accruing to such futures customers as the result of trades,
contracts or commodity options so carried shall be separately accounted
for and segregated as belonging to such futures customers, and a
derivatives clearing organization shall not hold, use or dispose of
such futures customer funds except as belonging to such futures
customers. Such futures customer funds when deposited in a bank or
trust company shall be deposited under an account name which clearly
shows that they are the futures customer funds of the futures customers
of clearing members, segregated as required by sections 4d(a) and 4d(b)
of the Act and these regulations. The derivatives clearing organization
shall obtain and retain in its files for the period provided by Sec.
1.31 an acknowledgment from such bank or trust company that it was
informed that the futures customer funds deposited therein are those of
futures customers of its clearing members and are being held in
accordance with the provisions of the Act and these regulations.
(c) Each futures commission merchant shall treat and deal with the
futures customer funds of a futures customer as belonging to such
futures customer. All futures customer funds shall be separately
accounted for, and shall not be commingled with the money, securities
or property of a futures commission merchant or of any other person, or
be used to secure or guarantee the trades, contracts or commodity
options, or to secure or extend the credit, of any person other than
the one for whom the same are held: Provided, however, That futures
customer funds treated as belonging to the futures customers of a
futures commission merchant may for convenience be commingled and
deposited in the same account or accounts with any bank or trust
company, with another person registered as a futures commission
merchant, or with a derivatives clearing organization, and that such
share thereof as in the normal course of business is necessary to
purchase, margin, guarantee, secure, transfer, adjust, or settle the
trades, contracts or commodity options of such futures customers or
resulting market positions, with the derivatives clearing organization
or with any other person registered as a futures commission merchant,
may be withdrawn and applied to such purposes, including the payment of
premiums to option grantors, commissions, brokerage, interest, taxes,
storage and other fees and charges, lawfully accruing in connection
with such trades, contracts or commodity options: Provided further,
That futures customer funds may be invested in instruments described in
Sec. 1.25.
0
7. Revise Sec. 1.21 to read as follows:
Sec. 1.21 Care of money and equities accruing to futures customers.
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any
derivatives clearing organization or from any clearing member or from
any member of a contract market incident to or resulting from any
trade, contract or commodity option made by or through such futures
commission merchant on behalf of any futures customer shall be
considered as accruing to such futures customer within the meaning of
the Act and these regulations. Such money and equities shall be treated
and dealt with as belonging to such futures customer in accordance with
the provisions of the Act and these regulations. Money and equities
accruing in connection with futures customers' open trades, contracts,
or commodity options need not be separately credited to individual
accounts but may be treated and dealt with as belonging undivided to
all futures customers having open trades, contracts, or commodity
option positions which if closed would result in a credit to such
futures customers.
0
8. Revise Sec. 1.22 to read as follows:
Sec. 1.22 Use of futures customer funds restricted.
No futures commission merchant shall use, or permit the use of, the
futures customer funds of one futures customer to purchase, margin, or
settle the trades, contracts, or commodity options of, or to secure or
extend the credit of, any person other than such futures customer.
Futures customer funds shall not be used to carry trades or positions
of the same futures customer other than in commodities or commodity
options traded through the facilities of a contract market.
0
9. Revise Sec. 1.23 to read as follows:
Sec. 1.23 Interest of futures commission merchant in segregated
futures customer funds; additions and withdrawals.
The provisions in section 4d(a) and 4d(b) of the Act and the
provision in Sec. 1.20(c), which prohibit the commingling of futures
customer funds with the funds of a futures commission merchant, shall
not be construed to prevent a futures commission merchant from having a
residual financial interest in the futures customer funds, segregated
as required by the Act and the rules in this part and set apart for the
benefit of futures customers; nor shall such provisions be construed to
prevent a futures commission merchant from adding to such segregated
futures customer funds such amount or amounts of money, from its own
funds or unencumbered securities from its own inventory, of the type
set forth in Sec. 1.25, as it may deem necessary to ensure any and all
futures customers' accounts from becoming undersegregated at any time.
The books and records of a futures commission merchant shall at all
times accurately reflect its interest in the segregated funds. A
futures commission merchant may draw upon such segregated funds to its
own order, to the extent of its actual interest therein, including the
[[Page 66322]]
withdrawal of securities held in segregated safekeeping accounts held
by a bank, trust company, contract market, derivatives clearing
organization or other futures commission merchant. Such withdrawal
shall not result in the funds of one futures customer being used to
purchase, margin or carry the trades, contracts or commodity options,
or extend the credit of any other futures customer or other person.
0
10. Revise Sec. 1.24 to read as follows:
Sec. 1.24 Segregated funds; exclusions therefrom.
Money held in a segregated account by a futures commission merchant
shall not include: (a) Money invested in obligations or stocks of any
derivatives clearing organization or in memberships in or obligations
of any contract market; or
(b) Money held by any derivatives clearing organization which it
may use for any purpose other than to purchase, margin, guarantee,
secure, transfer, adjust, or settle the contracts, trades, or commodity
options of the futures customers of such futures commission merchant.
0
11. Revise paragraphs (c)(3) and (e) of Sec. 1.25 to read as follows:
Sec. 1.25 Investment of customer funds.
* * * * *
(c) * * *
(3) A futures commission merchant or derivatives clearing
organization shall maintain the confirmation relating to the purchase
in its records in accordance with Sec. 1.31 and note the ownership of
fund shares (by book-entry or otherwise) in a custody account of the
futures commission merchant or derivatives clearing organization in
accordance with Sec. Sec. 1.26 and 22.5 of this chapter. The futures
commission merchant or the derivatives clearing organization shall
obtain the acknowledgment letter required by Sec. Sec. 1.26 and 22.5
of this chapter from an entity that has substantial control over the
fund shares purchased with customer funds and has the knowledge and
authority to facilitate redemption and payment or transfer of the
customer funds. Such entity may include the fund sponsor or depository
acting as custodian for fund shares.
* * * * *
(e) Deposit of firm-owned securities into segregation. A futures
commission merchant shall not be prohibited from directly depositing
unencumbered securities of the type specified in this section, which it
owns for its own account, into a segregated safekeeping account or from
transferring any such securities from a segregated account to its own
account, up to the extent of its residual financial interest in
customers' segregated funds; provided, however, that such investments,
transfers of securities, and disposition of proceeds from the sale or
maturity of such securities are recorded in the record of investments
required to be maintained by Sec. 1.27. All such securities may be
segregated in safekeeping only with a bank, trust company, derivatives
clearing organization, or other registered futures commission merchant.
Furthermore, for purposes of Sec. Sec. 1.25, 1.27, 1.28, and 1.29,
investments permitted by Sec. 1.25 that are owned by the futures
commission merchant and deposited into such segregated account shall be
considered customer funds until such investments are withdrawn from
segregation. Investments permitted by Sec. 1.25 that are owned by the
futures commission merchant and deposited into a segregated account
pursuant to Sec. 1.26 shall be considered futures customer funds until
such investments are withdrawn from segregation. Investments permitted
by Sec. 1.25 that are owned by the futures commission merchant and
deposited into a segregated account pursuant to Sec. 22.5 of this
chapter shall be considered Cleared Swaps Customer Collateral until
such investments are withdrawn from segregation.
* * * * *
0
12. Revise Sec. 1.26 to read as follows:
Sec. 1.26 Deposit of instruments purchased with futures customer
funds.
(a) Each futures commission merchant who invests futures customer
funds in instruments described in Sec. 1.25 shall separately account
for such instruments and segregate such instruments as belonging to
such futures customers. Such instruments, when deposited with a bank,
trust company, derivatives clearing organization or another futures
commission merchant, shall be deposited under an account name which
clearly shows that they belong to futures customers and are segregated
as required by the Act and this part. Each futures commission merchant
upon opening such an account shall obtain and retain in its files an
acknowledgment from such bank, trust company, derivatives clearing
organization or other futures commission merchant that it was informed
that the instruments belong to futures customers and are being held in
accordance with the provisions of the Act and this part. Provided,
however, that an acknowledgment need not be obtained from a derivatives
clearing organization that has adopted and submitted to the Commission
rules that provide for the segregation as futures customer funds, in
accordance with all relevant provisions of the Act and the rules and
orders promulgated thereunder, of all funds held on behalf of futures
customers and all instruments purchased with futures customer funds.
Such acknowledgment shall be retained in accordance with Sec. 1.31.
Such bank, trust company, derivatives clearing organization or other
futures commission merchant shall allow inspection of such obligations
at any reasonable time by representatives of the Commission.
(b) Each derivatives clearing organization which invests money
belonging or accruing to futures customers of its clearing members in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such futures
customers. Such instruments, when deposited with a bank or trust
company, shall be deposited under an account name which will clearly
show that they belong to futures customers and are segregated as
required by the Act and this part. Each derivatives clearing
organization upon opening such an account shall obtain and retain in
its files a written acknowledgment from such bank or trust company that
it was informed that the instruments belong to futures customers of
clearing members and are being held in accordance with the provisions
of the Act and this part. Such acknowledgment shall be retained in
accordance with Sec. 1.31. Such bank or trust company shall allow
inspection of such instruments at any reasonable time by
representatives of the Commission.
0
13. Revise paragraph (a) introductory text and paragraph (a)(6) of
Sec. 1.27 to read as follows:
Sec. 1.27 Record of investments.
(a) Each futures commission merchant which invests customer funds,
and each derivatives clearing organization which invests customer funds
of its clearing members' customers, shall keep a record showing the
following:
* * * * *
(6) The date on which such investments were liquidated or otherwise
disposed of and the amount of money or current market value of
securities received on such disposition, if any; and
* * * * *
0
14. Revise Sec. 1.29 to read as follows:
Sec. 1.29 Increment or interest resulting from investment of customer
funds.
The investment of customer funds in instruments described in Sec.
1.25 shall not
[[Page 66323]]
prevent the futures commission merchant or derivatives clearing
organization so investing such funds from receiving and retaining as
its own any increment or interest resulting therefrom.
0
15. Revise Sec. 1.30 to read as follows:
Sec. 1.30 Loans by futures commission merchants; treatment of
proceeds.
Nothing in the regulations in this chapter shall prevent a futures
commission merchant from lending its own funds to customers on
securities and property pledged by such customers, or from repledging
or selling such securities and property pursuant to specific written
agreement with such customers. The proceeds of such loans used to
purchase, margin, guarantee, or secure the trades, contracts, or
commodity options of customers shall be treated and dealt with by a
futures commission merchant as belonging to such customers, in
accordance with and subject to the provisions of the Act and these
regulations.
0
16. Amend Sec. 1.31 by revising paragraphs (a), (b) introductory text,
(b)(2)(iii), and (b)(3)(i), to read as follows:
Sec. 1.31 Books and records; keeping and inspection.
(a)(1) All books and records required to be kept by the Act or by
these regulations shall be kept in their original form (for paper
records) or native file format (for electronic records) for a period of
five years from the date thereof and shall be readily accessible during
the first 2 years of the 5-year period; Provided, however, That records
of any swap or related cash or forward transaction shall be kept until
the termination, maturity, expiration, transfer, assignment, or
novation date of the transaction and for a period of five years after
such date. Records of oral communications kept pursuant to Sec.
23.202(a)(1) and (b)(1) of this chapter shall be kept for a period of
one year. All such books and records shall be open to inspection by any
representative of the Commission or the United States Department of
Justice. For purposes of this section, native file format means an
electronic file that exists in the format in which it was originally
created.
(2) Persons required to keep books and records by the Act or by
these regulations shall produce such records in a form specified by any
representative of the Commission. Such production shall be made, at the
expense of the person required to keep the book or record, to a
Commission representative upon the representative's request. Instead of
furnishing a copy, such person may provide the original book or record
for reproduction, which the representative may temporarily remove from
such person's premises for this purpose. All copies or originals shall
be provided promptly. Upon request, the Commission representative shall
issue a receipt provided by such person for any copy or original book
or record received. At the request of the Commission representative,
such person shall, upon the return thereof, issue a receipt for any
copy or original book or record returned by the representative.
(b) Except as provided in paragraph (d) of this section, books and
records required to be kept by the Act or by these regulations may be
stored on either ``micrographic media'' (as defined in paragraph
(b)(1)(i) of this section) or ``electronic storage media'' (as defined
in paragraph (b)(1)(ii) of this section) for the required time period
under the conditions set forth in this paragraph (b); Provided,
however, For electronic records, such storage media must preserve the
native file format of the electronic records as required by paragraph
(a)(1) of this section.
* * * * *
(2) * * *
(iii) Keep only Commission-required records on the individual
medium employed (e.g., a disk or sheets of microfiche);
* * * * *
(3) * * *
(i) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, copies of such
records on such compatible data processing media as defined in Sec.
15.00(d) of this chapter which any representative of the Commission or
the Department of Justice may request. Records must use a format and
coding structure specified in the request.
* * * * *
0
17. Revise paragraphs (a)(1), (a)(2), (a)(3), and (b) of Sec. 1.32 to
read as follows:
Sec. 1.32 Segregated account; daily computation and record.
(a) * * *
(1) The total amount of futures customer funds on deposit in
segregated accounts on behalf of futures customers;
(2) The amount of such futures customer funds required by the Act
and these regulations to be on deposit in segregated accounts on behalf
of such futures customers; and
(3) The amount of the futures commission merchant's residual
interest in such futures customer funds.
(b) In computing the amount of futures customer funds required to
be in segregated accounts, a futures commission merchant may offset any
net deficit in a particular futures customer's account against the
current market value of readily marketable securities, less applicable
percentage deductions (i.e., ``securities haircuts'') as set forth in
Rule 15c3-1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR
240.15c3-1(c)(2)(vi)), held for the same futures customer's account.
The futures commission merchant must maintain a security interest in
the securities, including a written authorization to liquidate the
securities at the futures commission merchant's discretion, and must
segregate the securities in a safekeeping account with a bank, trust
company, derivatives clearing organization, or another futures
commission merchant. For purposes of this section, a security will be
considered readily marketable if it is traded on a ``ready market'' as
defined in Rule 15c3-1(c)(11)(i) of the Securities and Exchange
Commission (17 CFR 240.15c3-1(c)(11)(i)).
* * * * *
0
18. Amend Sec. 1.33 by:
0
a. Revising paragraphs (a) introductory text, (a)(1) introductory text,
and (a)(1)(iii);
0
b. Removing paragraph (a)(1)(iv);
0
c. Revising paragraphs (a)(2) introductory text, (a)(2)(i), (a)(2)(ii),
and (a)(2)(iv);
0
d. Adding paragraphs (a)(3) and (a)(4);
0
e. Revising paragraph (b) introductory text, and (b)(1);
0
f. Redesignating paragraphs (b)(2) through (b)(4) as paragraphs (b)(3)
through (b)(5);
0
g. Adding a new paragraph (b)(2);
0
h. Revising newly designated paragraphs (b)(3)(i), (b)(3)(iv), (b)(4),
and (b)(5); and
0
i. Revising paragraph (d) introductory text.
The revisions and additions read as follows:
Sec. 1.33 Monthly and confirmation statements.
(a) Monthly statements. Each futures commission merchant must
promptly furnish in writing to each customer, and to each foreign
futures or foreign options customer, as defined by Sec. 30.1 of this
chapter, as of the close of the last business day of each month or as
of any regular monthly date selected, except for accounts in which
there are neither open contracts at the end of the statement period nor
any changes to the account balance since the prior statement period,
but in any event not less frequently than once every three
[[Page 66324]]
months, a statement which clearly shows:
(1) For each commodity futures customer and foreign futures or
foreign options customer position--
* * * * *
(iii) Any futures customer funds or foreign futures or foreign
options secured amount, as defined by Sec. 1.3(rr), carried with the
futures commission merchant.
(2) For each commodity option position and foreign option
position--
(i) All commodity options and foreign options purchased, sold,
exercised, or expired during the monthly reporting period, identified
by underlying futures contract or underlying commodity, strike price,
transaction date, and expiration date;
(ii) The open commodity option and foreign option positions carried
for such customer or foreign futures or foreign options customer as of
the end of the monthly reporting period, identified by underlying
futures contract or underlying commodity, strike price, transaction
date, and expiration date;
* * * * *
(iv) Any related customer funds carried in such customer's
account(s) or any related foreign futures or foreign options secured
amount carried in the account(s) of a foreign futures or foreign
options customer.
(3) For each Cleared Swaps Customer position--
(i) The Cleared Swaps, as Sec. 22.1 of this chapter defines that
term, carried by the futures commission merchant for the Cleared Swaps
Customer;
(ii) The net unrealized profits or losses in all Cleared Swaps
marked to the market;
(iii) Any Cleared Swaps Customer Collateral carried with the
futures commission merchant; and
(4) A detailed accounting of all financial charges and credits to
customers and foreign futures or foreign options customers, during the
monthly reporting period, including all customer funds and any foreign
futures or foreign options secured amount, received from or disbursed
to customers or foreign futures or foreign options customers, as well
as realized profits and losses.
(b) Confirmation statement. Each futures commission merchant must,
not later than the next business day after any commodity interest or
commodity option transaction, including any foreign futures or foreign
options transactions, furnish to each customer or foreign futures or
foreign options customer:
(1) A written confirmation of each commodity futures transaction
caused to be executed by it for the customer.
(2) A written confirmation of each Cleared Swap carried by the
futures commission merchant, containing at least the following
information:
(i) The unique swap identifier, as required by Sec. 45.4(a) of
this chapter, for each Cleared Swap and the date each Cleared Swap was
executed;
(ii) The product name of each Cleared Swap;
(iii) The price at which the Cleared Swap was executed;
(iv) The date of maturity for each Cleared Swap; and
(v) The derivatives clearing organization through which it is
cleared.
(3) A written confirmation of each commodity option transaction,
containing at least the following information:
(i) The customer's account identification number;
* * * * *
(iv) The underlying futures contract or underlying commodity;
* * * * *
(4) Upon the expiration or exercise of any commodity option, a
written confirmation statement thereof, which statement shall include
the date of such occurrence, a description of the option involved, and,
in the case of exercise, the details of the futures or physical
position which resulted therefrom including, if applicable, the final
trading date of the contract for future delivery underlying the option.
(5) Notwithstanding the provisions of paragraphs (b)(1) through
(b)(4) of this section, a commodity interest transaction that is caused
to be executed for a commodity pool need be confirmed only to the
operator of the commodity pool.
* * * * *
(d) Controlled accounts. With respect to any account controlled by
any person other than the customer for whom such account is carried,
each futures commission merchant shall:
* * * * *
0
19. Revise Sec. 1.34 to read as follows:
Sec. 1.34 Monthly record, ``point balance''.
(a) With respect to commodity futures transactions, each futures
commission merchant shall prepare, and retain in accordance with the
requirements of Sec. 1.31, a statement commonly known as a ``point
balance,'' which accrues or brings to the official closing price, or
settlement price fixed by the clearing organization, all open contracts
of customers as of the last business day of each month or of any
regular monthly date selected: Provided, however, That a futures
commission merchant who carries part or all of customers' open
contracts with other futures commission merchants on an ``instruct
basis'' will be deemed to have met the requirements of this section as
to open contracts so carried if a monthly statement is prepared which
shows that the prices and amounts of such contracts long and short in
the customers' accounts are in balance with those in the carrying
futures commission merchants' accounts, and such statements are
retained in accordance with the requirements of Sec. 1.31.
(b) With respect to commodity option transactions, each futures
commission merchant shall prepare, and retain in accordance with the
requirements of Sec. 1.31, a listing in which all open commodity
option positions carried for customers are marked to the market. Such
listing shall be prepared as of the last business day of each month, or
as of any regular monthly date selected, and shall be by put or by
call, by underlying contract for future delivery (by delivery month) or
underlying commodity (by option expiration date), and by strike price.
0
20. Section 1.35 is revised to read as follows:
Sec. 1.35 Records of commodity interest and cash commodity
transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets or swap
execution facilities. Each futures commission merchant, retail foreign
exchange dealer, introducing broker, and member of a designated
contract market or swap execution facility shall keep full, complete,
and systematic records, which include all pertinent data and memoranda,
of all transactions relating to its business of dealing in commodity
interests and cash commodities. Each futures commission merchant,
retail foreign exchange dealer, introducing broker, and member of a
designated contract market or swap execution facility shall retain the
required records, in accordance with the requirements of Sec. 1.31,
and produce them for inspection and furnish true and correct
information and reports as to the contents or the meaning thereof, when
and as requested by an authorized representative of the Commission or
the United States Department of Justice. Included among such records
shall be all orders (filled, unfilled, or canceled), trading cards,
signature cards, street books, journals, ledgers, canceled checks,
copies of confirmations, copies of statements of purchase and sale, and
all other records, which have been prepared in the course of its
business of dealing in commodity interests and cash
[[Page 66325]]
commodities. Among such records each member of a designated contract
market or swap execution facility must retain and produce for
inspection are all documents on which trade information is originally
recorded, whether or not such documents must be prepared pursuant to
the rules or regulations of either the Commission, the designated
contract market or the swap execution facility. For purposes of this
section, such documents are referred to as ``original source
documents.''
(b) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets and
swap execution facilities: Recording of customers' orders. (1) Each
futures commission merchant, each retail foreign exchange dealer, each
introducing broker, and each member of a designated contract market or
swap execution facility receiving a customer's order that cannot
immediately be entered into a trade matching engine shall immediately
upon receipt thereof prepare a written record of the order including
the account identification, except as provided in paragraph (b)(5) of
this section, and order number, and shall record thereon, by timestamp
or other timing device, the date and time, to the nearest minute, the
order is received, and in addition, for commodity option orders, the
time, to the nearest minute, the order is transmitted for execution.
(2)(i) Each member of a designated contract market who on the floor
of such designated contract market receives a customer's order which is
not in the form of a written record including the account
identification, order number, and the date and time, to the nearest
minute, the order was transmitted or received on the floor of such
designated contract market, shall immediately upon receipt thereof
prepare a written record of the order in non-erasable ink, including
the account identification, except as provided in paragraph (b)(5) of
this section, and order number and shall record thereon, by timestamp
or other timing device, the date and time, to the nearest minute, the
order is received.
(ii) Except as provided in paragraph (b)(3) of this section:
(A) Each member of a designated contract market who on the floor of
such designated contract market receives an order from another member
present on the floor which is not in the form of a written record
shall, immediately upon receipt of such order, prepare a written record
of the order or obtain from the member who placed the order a written
record of the order, in non-erasable ink including the account
identification and order number and shall record thereon, by time-stamp
or other timing device, the date and time, to the nearest minute, the
order is received; or
(B) When a member of a designated contract market present on the
floor places an order, which is not in the form of a written record,
for his own account or an account over which he has control, with
another member of such designated contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of placement to the nearest
minute on a sequentially-numbered trading card maintained in accordance
with the requirements of paragraph (f) of this section;
(2) The member receiving and executing such order immediately upon
execution of the order shall record the time of execution to the
nearest minute on a trading card or other record maintained pursuant to
the requirements of paragraph (f) of this section; and
(3) The member receiving and executing the order shall return such
trading card or other record to the member placing the order. The
member placing the order then must submit together both of the trading
cards or other records documenting such trade to designated contract
market personnel or the clearing member.
(3)(i) The requirements of paragraph (b)(2)(ii) of this section
will not apply if a designated contract market maintains in effect
rules which provide for an exemption where:
(A) A member of a designated contract market places with another
member of such designated contract market an order that is part of a
spread transaction;
(B) The member placing the order personally executes one or more
legs of the spread; and
(C) The member receiving and executing such order immediately upon
execution of the order records the time of execution to the nearest
minute on his trading card or other record maintained in accordance
with the requirements of paragraph (f) of this section.
(ii) Each contract market shall, as part of its trade practice
surveillance program, conduct surveillance for compliance with the
recordkeeping and other requirements under paragraphs (b)(2) and (3) of
this section, and for trading abuses related to the execution of orders
for members present on the floor of the contract market.
(4) Each member of a designated contract market reporting the
execution from the floor of the designated contract market of a
customer's order or the order of another member of the designated
contract market received in accordance with paragraphs (b)(2)(i) or
(b)(2)(ii)(A) of this section, shall record on a written record of the
order, including the account identification, except as provided in
paragraph (b)(5) of this section, and order number, by time-stamp or
other timing device, the date and time to the nearest minute such
report of execution is made. Each member of a designated contract
market shall submit the written records of customer orders or orders
from other designated contract market members to designated contract
market personnel or to the clearing member responsible for the
collection of orders prepared pursuant to this paragraph. The execution
price and other information reported on the order tickets must be
written in non-erasable ink.
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders executed on
designated contract markets or swap execution facilities need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (b)(5)(i) through (v) of this section are
met. Specific customer account identifiers for accounts included in
bunched orders involving swaps need not be included in confirmations or
acknowledgments provided by swap dealers or major swap participants
pursuant to Sec. 23.501(a) of this chapter if the requirements of
paragraphs (b)(5)(i) through (v) of this section are met.
(i) Eligible account managers for orders executed on designated
contract markets or swap execution facilities. The person placing and
directing the allocation of an order eligible for post-execution
allocation must have been granted written investment discretion with
regard to participating customer accounts. The following persons shall
qualify as eligible account managers for trades executed on designated
contract markets or swap execution facilities:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission's rules, except for entities exempt under Sec.
4.14(a)(3) of this chapter;
(B) An investment adviser registered with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940 or
with a state pursuant to applicable state law or excluded or exempt
from registration under such Act or applicable state law or rule;
[[Page 66326]]
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation;
(D) A foreign adviser that exercises discretionary trading
authority solely over the accounts of non-U.S. persons, as defined in
Sec. 4.7(a)(1)(iv) of this chapter;
(E) A futures commission merchant registered with the Commission
pursuant to the Act; or
(F) An introducing broker registered with the Commission pursuant
to the Act.
(ii) Eligible account managers for orders executed bilaterally. The
person placing and directing the allocation of an order eligible for
post-execution allocation must have been granted written investment
discretion with regard to participating customer accounts. The
following persons shall qualify as eligible account managers for trades
executed bilaterally:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission's rules, except for entities exempt under Sec.
4.14(a)(3) of this chapter;
(B) A futures commission merchant registered with the Commission
pursuant to the Act; or
(C) An introducing broker registered with the Commission pursuant
to the Act.
(iii) Information. Eligible account managers shall make the
following information available to customers upon request:
(A) The general nature of the allocation methodology the account
manager will use;
(B) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable and consistent with Sec. 155.3(a)(1) and Sec. 155.4(a)(1)
of this chapter, any account in which the account manager has an
interest.
(iv) Allocation. Orders eligible for post-execution allocation must
be allocated by an eligible account manager in accordance with the
following:
(A) Allocations must be made as soon as practicable after the
entire transaction is executed, but in any event no later than the
following times: For cleared trades, account managers must provide
allocation information to futures commission merchants no later than a
time sufficiently before the end of the day the order is executed to
ensure that clearing records identify the ultimate customer for each
trade. For uncleared trades, account managers must provide allocation
information to the counterparty no later than the end of the calendar
day that the swap was executed.
(B) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
(v) Records. (A) Eligible account managers shall keep and must make
available upon request of any representative of the Commission, the
United States Department of Justice, or other appropriate regulatory
agency, the information specified in paragraph (b)(5)(iii) of this
section.
(B) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, records
sufficient to demonstrate that all allocations meet the standards of
paragraph (b)(5)(iv) of this section and to permit the reconstruction
of the handling of the order from the time of placement by the account
manager to the allocation to individual accounts.
(C) Futures commission merchants, introducing brokers, or commodity
trading advisors that execute orders or that carry accounts eligible
for post-execution allocation, and members of designated contract
markets or swap execution facilities that execute such orders, must
maintain records that, as applicable, identify each order subject to
post-execution allocation and the accounts to which contracts executed
for such order are allocated.
(D) In addition to any other remedies that may be available under
the Act or otherwise, if the Commission has reason to believe that an
account manager has failed to provide information requested pursuant to
paragraph (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission
may inform in writing any designated contract market, swap execution
facility, swap dealer, or major swap participant, and that designated
contract market, swap execution facility, swap dealer, or major swap
participant shall prohibit the account manager from submitting orders
for execution except for liquidation of open positions and no futures
commission merchant shall accept orders for execution on any designated
contract market, swap execution facility, or bilaterally from the
account manager except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be
adversely affected or aggrieved by action taken by the Commission under
paragraph (b)(5)(v)(D) of this section shall have the opportunity for a
prompt hearing in accordance with the provisions of Sec. 21.03(g) of
this chapter.
(c)(1) Futures commission merchants, introducing brokers, and
members of designated contract markets and swap execution facilities.
Upon request of the designated contract market or swap execution
facility, the Commission, or the United States Department of Justice,
each futures commission merchant, introducing broker, and member of a
designated contract market or swap execution facility shall request
from its customers and, upon receipt thereof, provide to the requesting
body documentation of cash transactions underlying exchanges of futures
or swaps for cash commodities or exchanges of futures or swaps in
connection with cash commodity transactions.
(2) Customers. Each customer of a futures commission merchant,
introducing broker, or member of a designated contract market or swap
execution facility shall create, retain, and produce upon request of
the designated contract market or swap execution facility, the
Commission, or the United States Department of Justice documentation of
cash transactions underlying exchanges of futures or swaps for cash
commodities or exchanges of futures or swaps in connection with cash
commodity transactions.
(3) Contract markets. Every contract market shall adopt rules which
require its members to provide documentation of cash transactions
underlying exchanges of futures for cash commodities or exchanges of
futures in connection with cash commodity transactions upon request of
the contract market.
(4) Documentation. For the purposes of this paragraph (c),
documentation means those documents customarily generated in accordance
with cash market practices which demonstrate the existence and nature
of the underlying cash transactions, including, but not limited to,
contracts, confirmation statements, telex printouts, invoices, and
warehouse receipts or other documents of title.
[[Page 66327]]
(d) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of derivatives clearing organizations
clearing trades executed on designated contract markets and swap
execution facilities. Each futures commission merchant, each retail
foreign exchange dealer, and each member of a derivatives clearing
organization clearing trades executed on a designated contract market
or swap execution facility and, for purposes of paragraph (d)(3) of
this section, each introducing broker, shall, as a minimum requirement,
prepare regularly and promptly, and keep systematically and in
permanent form, the following:
(1) A financial ledger record which will show separately for each
customer all charges against and credits to such customer's account,
including but not limited to customer funds deposited, withdrawn, or
transferred, and charges or credits resulting from losses or gains on
closed transactions;
(2) A record of transactions which will show separately for each
account (including proprietary accounts):
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future;
(ii) All retail forex transactions executed for such account,
including the date, price, quantity, and currency;
(iii) All commodity option transactions executed for such account,
including the date, whether the transaction involved a put or call,
expiration date, quantity, underlying contract for future delivery or
underlying commodity, strike price, and details of the purchase price
of the option, including premium, mark-up, commission and fees; and
(iv) All swap transactions executed for such account, including the
date, price, quantity, market, commodity, swap, and, if cleared, the
derivatives clearing organization; and
(3) A record or journal which will separately show for each
business day complete details of:
(i) All commodity futures transactions executed on that day,
including the date, price, quantity, market, commodity, future and the
person for whom such transaction was made;
(ii) All retail forex transactions executed on that day for such
account, including the date, price, quantity, currency and the person
who whom such transaction was made;
(iii) All commodity option transactions executed on that day,
including the date, whether the transaction involved a put or call, the
expiration date, quantity, underlying contract for future delivery or
underlying commodity, strike price, details of the purchase price of
the option, including premium, mark-up, commission and fees, and the
person for whom the transaction was made;
(iv) All swap transactions executed on that day, including the
date, price, quantity, market, commodity, swap, the person for whom
such transaction was made, and, if cleared, the derivatives clearing
organization; and
(v) In the case of an introducing broker, the record or journal
required by this paragraph (d)(3) shall also include the futures
commission merchant or retail foreign exchange dealer carrying the
account for which each commodity futures, retail forex, commodity
option, and swap transaction was executed on that day. Provided,
however, that where reproductions on microfilm, microfiche or optical
disk are substituted for hard copy in accordance with the provisions of
Sec. 1.31(b), the requirements of paragraphs (d)(1) and (d)(2) of this
section will be considered met if the person required to keep such
records is ready at all times to provide, and immediately provides in
the same city as that in which such person's commodity futures, retail
forex, commodity option, or swap books and records are maintained, at
the expense of such person, reproduced copies which show the records as
specified in paragraphs (d)(1) and (d)(2) of this section, on request
of any representatives of the Commission or the U.S. Department of
Justice.
(e) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
In the daily record or journal required to be kept under paragraph
(d)(3) of this section, each member of a derivatives clearing
organization clearing trades executed on a designated contract market
or swap execution facility shall also show the floor broker or floor
trader executing each transaction, the opposite floor broker or floor
trader, and the opposite clearing member with whom it was made.
(f) Members of designated contract markets. (1) Each member of a
designated contract market who, in the place provided by the designated
contract market for the meeting of persons similarly engaged, executes
purchases or sales of any commodity for future delivery, commodity
option, or swap on or subject to the rules of such designated contract
market, shall prepare regularly and promptly a trading card or other
record showing such purchases and sales. Such trading card or record
shall show the member's name, the name of the clearing member,
transaction date, time, quantity, and, as applicable, underlying
commodity, contract for future delivery, or swap, price or premium,
delivery month or expiration date, whether the transaction involved a
put or a call, and strike price. Such trading card or other record
shall also clearly identify the opposite floor broker or floor trader
with whom the transaction was executed, and the opposite clearing
member (if such opposite clearing member is made known to the member).
(2) Each member of a designated contract market recording purchases
and sales on trading cards must record such purchases and sales in
exact chronological order of execution on sequential lines of the
trading card without skipping lines between trades; Provided, however,
That if lines remain after the last execution recorded on a trading
card, the remaining lines must be marked through.
(3) Each member of a designated contract market must identify on
his or her trading cards the purchases and sales executed during the
opening and closing periods designated by the designated contract
market.
(4) Trading cards prepared by a member of a designated contract
market must contain:
(i) Pre-printed member identification or other unique identifying
information which would permit the trading cards of one member to be
distinguished from those of all other members;
(ii) Pre-printed sequence numbers to permit the intra-day
sequencing of the cards; and
(iii) Unique and pre-printed identifying information which would
distinguish each of the trading cards prepared by the member from other
such trading cards for no less than a one-week period.
(5) Trading cards prepared by a member of a designated contract
market and submitted pursuant to paragraph (f)(7)(i) of this section
must be time-stamped promptly to the nearest minute upon collection by
either the designated contract market or the relevant clearing member.
(6) Each member of a designated contract market shall be
accountable for all trading cards prepared in exact numerical sequence,
whether or not such trading cards are relied on as original source
documents.
(7) Trading records prepared by a member of a designated contract
market must:
(i) Be submitted to designated contract market personnel or the
clearing member within 15 minutes of designated intervals not to exceed
30
[[Page 66328]]
minutes, commencing with the beginning of each trading session. The
time period for submission of trading records after the close of
trading in each market shall not exceed 15 minutes from the close. Such
documents should nevertheless be submitted as often as is practicable
to the designated contract market or relevant clearing member; and
(ii) Be completed in non-erasable ink. A member may correct any
errors by crossing out erroneous information without obliterating or
otherwise making illegible any of the originally recorded information.
With regard to trading cards only, a member may correct erroneous
information by rewriting the trading card; Provided, however, that the
member must submit a ply of the trading card, or in the absence of
plies the original trading card, that is subsequently rewritten in
accordance with the collection schedule for trading cards and provided
further, that the member is accountable for any trading card that
subsequently is rewritten pursuant to paragraph (f)(6) of this section.
(8) Each member of a designated contract market must use a new
trading card at the beginning of each designated 30-minute interval (or
such lesser interval as may be determined appropriate) or as may be
required pursuant hereto.
(g) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
(1) Each member of a derivatives clearing organization clearing trades
executed on a designated contract market or swap execution facility
shall maintain a single record which shall show for each futures,
option, or swap trade: the transaction date, time, quantity, and, as
applicable, underlying commodity, contract for future delivery, or
swap, price or premium, delivery month or expiration date, whether the
transaction involved a put or a call, strike price, floor broker or
floor trader buying, clearing member buying, floor broker or floor
trader selling, clearing member selling, and symbols indicating the
buying and selling customer types. The customer type indicator shall
show, with respect to each person executing the trade, whether such
person:
(i) Was trading for his or her own account, or an account for which
he or she has discretion;
(ii) Was trading for his or her clearing member's house account;
(iii) Was trading for another member present on the exchange floor,
or an account controlled by such other member; or
(iv) Was trading for any other type of customer.
(2) The record required by this paragraph (g) shall also show, by
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with the provisions of subpart J of part 38
of this chapter, and trades cleared on dates other than the date of
execution. Except as otherwise approved by the Commission for good
cause shown, the record required by this paragraph (g) shall be
maintained in a format and coding structure approved by the
Commission--
(i) In hard copy or on microfilm as specified in Sec. 1.31, and
(ii) For 60 days in computer-readable form on compatible magnetic
tapes or discs.
0
21. Revise Sec. 1.36 to read as follows:
Sec. 1.36 Record of securities and property received from customers.
(a) Each futures commission merchant and each retail foreign
exchange dealer shall maintain, as provided in Sec. 1.31, a record of
all securities and property received from customers or retail forex
customers in lieu of money to margin, purchase, guarantee, or secure
the commodity interests of such customers or retail forex customers.
Such record shall show separately for each customer or retail forex
customer: A description of the securities or property received; the
name and address of such customer or retail forex customer; the dates
when the securities or property were received; the identity of the
depositories or other places where such securities or property are
segregated or held; the dates of deposits and withdrawals from such
depositories; and the dates of return of such securities or property to
such customer or retail forex customer, or other disposition thereof,
together with the facts and circumstances of such other disposition. In
the event any futures commission merchant deposits with a derivatives
clearing organization, directly or with a bank or trust company acting
as custodian for such derivatives clearing organization, securities
and/or property which belong to a particular customer, such futures
commission merchant shall obtain written acknowledgment from such
derivatives clearing organization that it was informed that such
securities or property belong to customers of the futures commission
merchant making the deposit. Such acknowledgment shall be retained as
provided in Sec. 1.31.
(b) Each derivatives clearing organization which receives from
members securities or property belonging to particular customers of
such members in lieu of money to margin, purchase, guarantee, or secure
the commodity interests of such customers, or receives notice that any
such securities or property have been received by a bank or trust
company acting as custodian for such derivatives clearing organization,
shall maintain, as provided in Sec. 1.31, a record which will show
separately for each member, the dates when such securities or property
were received, the identity of the depositories or other places where
such securities or property are segregated, the dates such securities
or property were returned to the member, or otherwise disposed of,
together with the facts and circumstances of such other disposition
including the authorization therefor.
0
22. Revise Sec. 1.37 to read as follows:
Sec. 1.37 Customer's name, address, and occupation recorded; record
of guarantor or controller of account.
(a) Each futures commission merchant, retail foreign exchange
dealer, introducing broker, and member of a contract market shall keep
a record in permanent form which shall show for each commodity interest
account carried or introduced by it the true name and address of the
person for whom such account is carried or introduced and the principal
occupation or business of such person as well as the name of any other
person guaranteeing such account or exercising any trading control with
respect to such account. For each such commodity option account, the
records kept by such futures commission merchant, introducing broker,
and member of a contract market must also show the name of the person
who has solicited and is responsible for each customer's account or
assign account numbers in such a manner to identify that person.
(b) As of the close of the market each day, each futures commission
merchant which carries an account for another futures commission
merchant, foreign broker (as defined in Sec. 15.00 of this chapter),
member of a contract market, or other person, on an omnibus basis shall
maintain a daily record for each such omnibus account of the total open
long contracts and the total open short contracts in each future and in
each swap and, for commodity option transactions, the total open put
options purchased, the total open put options granted, the total open
call options purchased, and the total open call options granted for
each commodity option expiration date.
(c) Each designated contract market and swap execution facility
shall keep a record in permanent form, which shall show the true name,
address, and
[[Page 66329]]
principal occupation or business of any foreign trader executing
transactions on the facility or exchange. In addition, upon request, a
designated contract market or swap execution facility shall provide to
the Commission information regarding the name of any person
guaranteeing such transactions or exercising any control over the
trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a designated
contract market or swap execution facility on which transactions in
futures, swaps or options (other than swaps) contracts of foreign
traders are executed through, or the resulting transactions are
maintained in, accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to
the provisions of paragraph (a) of this section.
0
23. Amend Sec. 1.39 by revising paragraph (a) introductory text and
paragraphs (a)(1)(ii), (a)(2), (a)(3), (a)(4), (b), and (c), to read as
follows:
Sec. 1.39 Simultaneous buying and selling orders of different
principals; execution of, for and between principals.
(a) Conditions and requirements. A member of a contract market or a
swap execution facility who shall have at the same time both buying and
selling orders of different principals for the same swap, commodity for
future delivery in the same delivery month or the same option (both
puts or both calls, with the same underlying contract for future
delivery or the same underlying commodity, expiration date and strike
price) may execute such orders for and directly between such principals
at the market price, if in conformity with written rules of such
contract market or swap execution facility which have been approved by
or self-certified to the Commission, and:
(1) * * *
(ii) When in non-pit trading in swaps or contracts of sale for
future delivery, bids and offers are posted on a board, such member:
(A) Pursuant to such buying order posts a bid on the board and,
incident to the execution of such selling order, accepts such bid and
all other bids posted at equal to or higher than the bid posted by him;
or
(B) Pursuant to such selling order posts an offer on the board and,
incident to the execution of such buying order, accepts such offer and
all other offers posted at prices equal to or lower than the offer
posted by him;
(2) Such member executes such orders in the presence of an official
representative of such contract market or swap execution facility
designated to observe such transactions and, by appropriate descriptive
words or symbol, clearly identifies all such transactions on his
trading card or other record, made at the time of execution, and notes
thereon the exact time of execution and promptly presents or makes
available said record to such official representative for verification
and initialing, as appropriate;
(3) Such swap execution facility or contract market keeps a record
in permanent form of each such transaction showing all transaction
details required to be captured by the Act, Commission rule or
regulation; and
(4) Neither the futures commission merchant, other registrant
receiving nor the member executing such orders has any interest
therein, directly or indirectly, except as a fiduciary.
(b) Large order execution procedures. (1) A member of a contract
market or a swap execution facility may execute simultaneous buying and
selling orders of different principals directly between the principals
in compliance with Commission regulations and large order execution
procedures established by written rules of the contract market or swap
execution facility that have been approved by or self-certified to the
Commission: Provided, That, to the extent such large order execution
procedures do not meet the conditions and requirements of paragraph (a)
of this section, the contract market or swap execution facility has
petitioned the Commission for, and the Commission has granted, an
exemption from the conditions and requirements of paragraph (a) of this
section. Any such petition must be accompanied by proposed contract
market or swap execution facility rules to implement the large order
execution procedures. The petition shall include:
(i) An explanation of why the proposed large order execution rules
do not comply with paragraph (a) of this section; and
(ii) A description of a special surveillance program that would be
followed by the contract market or swap execution facility in
monitoring the large order execution procedures.
(2) The Commission may, in its discretion and upon such terms and
conditions as it deems appropriate, grant such petition for exemption
if it finds that the exemption is not contrary to the public interest
and the purpose of the provision from which explanation is sought. The
petition shall be considered concurrently with the proposed large order
execution rules.
(c) Not deemed filling orders by offset. The execution of orders in
compliance with the conditions herein set forth will not be deemed to
constitute the filling of orders by offset within the meaning of
section 4b(a) of the Act.
0
24. Revise Sec. 1.40 to read as follows:
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant, each retail foreign exchange
dealer, each introducing broker, and each member of a contract market
or a swap execution facility shall, upon request, furnish or cause to
be furnished to the Commission a true copy of any letter, circular,
telecommunication, or report published or given general circulation by
such futures commission merchant, retail foreign exchange dealer,
introducing broker, member or eligible contract participant which
concerns crop or market information or conditions that affect or tend
to affect the price of any commodity, including any exchange rate, and
the true source of or authority for the information contained therein.
Sec. 1.44 [Removed and Reserved]
0
25. Remove and reserve Sec. 1.44.
0
26. Amend Sec. 1.46 by revising paragraph (a)(1) introductory text and
paragraphs (a)(1)(iii), (a)(1)(iv), (a)(2)(iii), (a)(2)(iv), and (b),
to read as follows:
Sec. 1.46 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. (1) Except with respect to
purchases or sales which are for omnibus accounts, or where the
customer or account controller has instructed otherwise, any futures
commission merchant who, on or subject to the rules of a designated
contract market:
* * * * *
(iii) Purchases a put or call option for the account of any
customer when the account of such customer at the time of such purchase
has a short put or call option position with the same underlying
futures contract or same underlying commodity, strike price, expiration
date and contract market as that purchased; or
(iv) Sells a put or call option for the account of any customer
when the account of such customer at the time of such sale has a long
put or call option position with the same underlying futures contract
or same underlying commodity, strike price, expiration date and
contract market as that sold--shall on the same day apply such purchase
or sale against such previously held short or long futures or option
position, as the case may be, and shall, for futures transactions,
promptly furnish such
[[Page 66330]]
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant by an introducing broker and the names of
the futures commission merchant and introducing broker.
(2) * * *
(iii) Purchases a put or call option involving foreign currency for
the account of any customer when the account of such customer at the
time of such purchase has a short put or call option position with the
same underlying currency, strike price, and expiration date as that
purchased; or
(iv) Sells a put or call option involving foreign currency for the
account of any customer when the account of such customer at the time
of such sale has a long put or call option position with the same
underlying currency, strike price, and expiration date as that sold--
shall immediately apply such purchase or sale against such previously
held opposite transaction, and shall promptly furnish such retail forex
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant or retail foreign exchange dealer by an
introducing broker and the names of the futures commission merchant or
retail foreign exchange dealer, and the introducing broker.
(b) Close-out against oldest open position. In all instances
wherein the short or long futures, retail forex transaction or option
position in such customer's or retail forex customer's account
immediately prior to such offsetting purchase or sale is greater than
the quantity purchased or sold, the futures commission merchant or
retail foreign exchange dealer shall apply such offsetting purchase or
sale to the oldest portion of the previously held short or long
position: Provided, That upon specific instructions from the customer
the offsetting transaction shall be applied as specified by the
customer without regard to the date of acquisition of the previously
held position; and Provided, further, that a futures commission
merchant or retail foreign exchange dealer, if permitted by the rules
of a registered futures association, may offset, at the customer's
request, retail forex transactions of the same size, even if the
customer holds other transactions of a different size, but in each case
must offset the transaction against the oldest transaction of the same
size. Such instructions may also be accepted from any person who, by
power of attorney or otherwise, actually directs trading in the
customer's or retail forex customer's account unless the person
directing the trading is the futures commission merchant or retail
foreign exchange dealer (including any partner thereof), or is an
officer, employee, or agent of the futures commission merchant or
retail foreign exchange dealer. With respect to every such offsetting
transaction that, in accordance with such specific instructions, is not
applied to the oldest portion of the previously held position, the
futures commission merchant or retail foreign exchange dealer shall
clearly show on the statement issued to the customer or retail forex
customer in connection with the transaction, that because of the
specific instructions given by or on behalf of the customer or retail
forex customer the transaction was not applied in the usual manner,
i.e., against the oldest portion of the previously held position.
However, no such showing need be made if the futures commission
merchant or retail foreign exchange dealer has received such specific
instructions in writing from the customer or retail forex customer for
whom such account is carried.
* * * * *
0
27. Revise paragraph (b)(1)(iii) of Sec. 1.49 to read as follows:
Sec. 1.49 Denomination of customer funds and location of
depositories.
* * * * *
(b) * * *
(1) * * *
(iii) In a currency in which funds have accrued to the customer as
a result of trading conducted on a designated contract market, to the
extent of such accruals.
* * * * *
Sec. 1.53 [Removed and Reserved]
0
28. Remove and reserve Sec. 1.53.
0
29. Amend Sec. 1.57 by revising paragraph (a)(1), (a)(2) introductory
text, (a)(2)(ii), (c) introductory text, (c)(1), (c)(2), (c)(4)(i), and
(c)(4)(iv), to read as follows:
Sec. 1.57 Operations and activities of introducing brokers.
(a) * * *
(1) Open and carry each customer's account with a carrying futures
commission merchant on a fully-disclosed basis: Provided, however, That
an introducing broker which has entered into a guarantee agreement with
a futures commission merchant in accordance with the provisions of
Sec. 1.10(j) must open and carry such customer's account with such
guarantor futures commission merchant on a fully-disclosed basis; and
(2) Transmit promptly for execution all customer orders to:
* * * * *
(ii) A floor broker, if the introducing broker identifies its
carrying futures commission merchant and that carrying futures
commission merchant is also the clearing member with respect to the
customer's order.
* * * * *
(c) An introducing broker may not accept any money, securities or
property (or extend credit in lieu thereof) to margin, guarantee or
secure any trades or contracts of customers, or any money, securities
or property accruing as a result of such trades or contracts: Provided,
however, That an introducing broker may deposit a check in a qualifying
account or forward a check drawn by a customer if:
(1) The futures commission merchant carrying the customer's account
authorizes the introducing broker, in writing, to receive a check in
the name of the futures commission merchant, and the introducing broker
retains such written authorization in its files in accordance with
Sec. 1.31;
(2) The check is payable to the futures commission merchant
carrying the customer's account;
* * * * *
(4) * * *
(i) Which is maintained in an account name which clearly identifies
the funds therein as belonging to customers of the futures commission
merchant carrying the customer's account;
* * * * *
(iv) For which the bank or trust company provides the futures
commission merchant carrying the customer's account with a written
acknowledgment, which the futures commission merchant must retain in
its files in accordance with Sec. 1.31, that it was informed that the
funds deposited therein are those of customers and are being held in
accordance with the provisions of the Act and the regulations in this
chapter.
0
30. Amend Sec. 1.59 by revising paragraphs (a)(1), (a)(4)(i), (a)(5),
(a)(7), (a)(8), (a)(9) introductory text, (a)(10), (b)(1) introductory
text, (b)(1)(i)(A), (b)(1)(i)(C), and (c), to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members and consultants.
(a) * * *
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Sec. 1.3(ee), and includes the
[[Page 66331]]
term ``clearing organization,'' as defined in Sec. 1.3(d).
(4) * * *
(i) Any governing board member compensated by a self-regulatory
organization solely for governing board activities; or
* * * * *
(5) Material information means information which, if such
information were publicly known, would be considered important by a
reasonable person in deciding whether to trade a particular commodity
interest on a contract market or a swap execution facility, or to clear
a swap contract through a derivatives clearing organization. As used in
this section, ``material information'' includes, but is not limited to,
information relating to present or anticipated cash positions,
commodity interests, trading strategies, the financial condition of
members of self-regulatory organizations or members of linked exchanges
or their customers, or the regulatory actions or proposed regulatory
actions of a self-regulatory organization or a linked exchange.
* * * * *
(7) Linked exchange means:
(i) Any board of trade, exchange or market outside the United
States, its territories or possessions, which has an agreement with a
contract market or swap execution facility in the United States that
permits positions in a commodity interest which have been established
on one of the two markets to be liquidated on the other market;
(ii) Any board of trade, exchange or market outside the United
States, its territories or possessions, the products of which are
listed on a United States contract market, swap execution facility, or
a trading facility thereof;
(iii) Any securities exchange, the products of which are held as
margin in a commodity account or cleared by a securities clearing
organization pursuant to a cross-margining arrangement with a futures
clearing organization; or
(iv) Any clearing organization which clears the products of any of
the foregoing markets.
(8) Commodity interest means any commodity futures, commodity
option or swap contract traded on or subject to the rules of a contract
market, a swap execution facility or linked exchange, or cleared by a
derivatives clearing organization, or cash commodities traded on or
subject to the rules of a board of trade which has been designated as a
contract market.
(9) Related commodity interest means any commodity interest which
is traded on or subject to the rules of a contract market, swap
execution facility, linked exchange, or other board of trade, exchange,
or market, or cleared by a derivatives clearing organization, other
than the self-regulatory organization by which a person is employed,
and with respect to which:
* * * * *
(10) Pooled investment vehicle means a trading vehicle organized
and operated as a commodity pool within the meaning of Sec. 4.10(d) of
this chapter, and whose units of participation have been registered
under the Securities Act of 1933, or a trading vehicle for which Sec.
4.5 of this chapter makes available relief from regulation as a
commodity pool operator, i.e., registered investment companies,
insurance company separate accounts, bank trust funds, and certain
pension plans.
(b) Employees of self-regulatory organizations; Self-regulatory
organization rules. (1) Each self-regulatory organization must maintain
in effect rules which have been submitted to the Commission pursuant to
section 5c(c) of the Act and part 40 of this chapter (or, pursuant to
section 17(j) of the Act in the case of a registered futures
association) that, at a minimum, prohibit:
(i) * * *
(A) Trading, directly or indirectly, in any commodity interest
traded on or cleared by the employing contract market, swap execution
facility, or clearing organization;
* * * * *
(C) Trading, directly or indirectly, in a commodity interest traded
on contract markets or swap execution facilities or cleared by
derivatives clearing organizations other than the employing self-
regulatory organization if the employee has access to material, non-
public information concerning such commodity interest;
* * * * *
(c) Governing board members, committee members, and consultants;
Registered futures association rules. Each registered futures
association must maintain in effect rules which have been submitted to
the Commission pursuant to section 17(j) of the Act which provide that
no governing board member, committee member, or consultant shall use or
disclose--for any purpose other than the performance of official duties
as a governing board member, committee member, or consultant--material,
non-public information obtained as a result of the performance of such
person's official duties.
* * * * *
Sec. 1.62 [Removed and Reserved]
0
31. Remove and reserve Sec. 1.62.
0
32. Amend Sec. 1.63 by revising paragraphs (a)(1), (b) introductory
text and (d) to read as follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization'' as defined in Sec. 1.3(ee), and includes a ``clearing
organization'' as defined in Sec. 1.3(d), except as defined in
paragraph (b)(6) of this section.
* * * * *
(b) Each self-regulatory organization must maintain in effect rules
which have been submitted to the Commission pursuant to section 5c(c)
of the Act and part 40 of this chapter or, in the case of a registered
futures association, pursuant to section 17(j) of the Act, that render
a person ineligible to serve on its disciplinary committees,
arbitration panels, oversight panels or governing board who:
* * * * *
(d) Each self-regulatory organization shall submit to the
Commission a schedule listing all those rule violations which
constitute disciplinary offenses as defined in paragraph (a)(6)(i) of
this section and to the extent necessary to reflect revisions shall
submit an amended schedule within thirty days of the end of each
calendar year. Each self-regulatory organization must maintain and keep
current the schedule required by this section, and post the schedule on
the self-regulatory organization's Web site so that it is in a public
place designed to provide notice to members and otherwise ensure its
availability to the general public.
* * * * *
0
33. Revise Sec. 1.67 to read as follows:
Sec. 1.67 Notification of final disciplinary action involving
financial harm to a customer.
(a) Definitions. For purposes of this section:
Final disciplinary action means any decision by or settlement with
a contract market or swap execution facility in a disciplinary matter
which cannot be further appealed at the contract market or swap
execution facility, is not subject to the stay of the Commission or a
court of competent jurisdiction, and has not been reversed by the
Commission or any court of competent jurisdiction.
(b) Upon any final disciplinary action in which a contract market
or swap
[[Page 66332]]
execution facility finds that a member has committed a rule violation
that involved a transaction for a customer, whether executed or not,
and that resulted in financial harm to the customer:
(1)(i) The contract market or swap execution facility shall
promptly provide written notice of the disciplinary action to the
futures commission merchant or other registrant; and
(ii) A futures commission merchant or other registrant that
receives a notice, under paragraph (b)(1)(i) of this section shall
promptly provide written notice of the disciplinary action to the
customer as disclosed on its books and records. If the customer is
another futures commission merchant or other registrant, such futures
commission merchant or other registrant shall promptly provide notice
to the customer.
(2) A written notice required by paragraph (b)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the contract market or swap execution facility has found
that the member has committed a rule violation that involved a
transaction for the customer, whether executed or not, and that
resulted in financial harm to the customer. For the purposes of this
paragraph, a notice which includes the information listed in Sec.
9.11(b) of this chapter shall be deemed to include the principal facts
of the disciplinary action thereof.
Sec. 1.68 [Removed and Reserved]
0
34. Remove and reserve Sec. 1.68.
0
35. Amend Appendix B to part 1 by revising paragraph (b) to read as
follows:
Appendix B--Fees for Contract Market Rule Enforcement Reviews and
Financial Reviews
* * * * *
(b) The Commission determines fees charged to exchanges based
upon a formula that considers both actual costs and trading volume.
* * * * *
Appendix C to Part 1--[Removed and Reserved]
0
36. Remove and reserve Appendix C to Part 1.
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
37. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a
and 23, as amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
Sec. 4.23 [Amended]
0
38. Amend Sec. 4.23 by removing the term ``physical'' in paragraphs
(a)(1) and (b)(1) and adding in its place the term ``commodity''.
Sec. 4.33 [Amended]
0
39. Amend Sec. 4.33 by removing the word ``physical'' in paragraph
(b)(1) and adding in its place the word ``commodity''.
PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS
0
40. The authority citation for part 5 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6m, 6n, 6o, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21,
and 23, as amended by Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (Jul.
21, 2010).
0
41. Revise paragraphs (k) and (m) of Sec. 5.1 to read as follows:
Sec. 5.1 Definitions.
* * * * *
(k) Retail forex customer means a person, other than an eligible
contract participant as defined in section 1a(18) of the Act, acting on
its own behalf and trading in any account, agreement, contract or
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
* * * * *
(m) Retail forex transaction means any account, agreement, contract
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the
Act. A retail forex transaction does not include an account, agreement,
contract or transaction in foreign currency that is a contract of sale
of a commodity for future delivery (or an option thereon) that is
executed, traded on or otherwise subject to the rules of a contract
market designated pursuant to section 5(a) of the Act.
0
42. Revise Part 7 to read as follows:
PART 7--REGISTERED ENTITY RULES ALTERED OR SUPPLEMENTED BY THE
COMMISSION
Authority: 7 U.S.C. 7a-2(c) and 12a(7), as amended by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
Subpart A--General Provisions
Sec. 7.1 Scope of rules.
This part sets forth registered entity rules altered or
supplemented by the Commission pursuant to section 8a(7) of the Act.
Subpart B--[Reserved]
Subpart C--[Reserved]
PART 8--[REMOVED AND RESERVED]
0
43. Remove and reserve part 8.
PART 15--REPORTS--GENERAL PROVISIONS
0
44. The authority citation for part 15 continues to read as follows:
Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7,
7a, 9, 12a, 19, and 21, as amended by Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010).
0
45. Revise paragraph (p)(1)(ii) of Sec. 15.00 to read as follows:
Sec. 15.00 Definitions of terms used in parts 15 to 19, and 21 of
this chapter.
* * * * *
(p) * * *
(1) * * *
(ii) Long or short put or call options that exercise into the same
future of any commodity, or other long or short put or call commodity
options that have identical expirations and exercise into the same
commodity, on any one reporting market.
* * * * *
0
46. Revise paragraphs (a), (e), (f), (g) and (h) of Sec. 15.05 to read
as follows:
Sec. 15.05 Designation of agent for foreign persons.
(a) For purposes of this section, the term ``futures contract''
means any contract for the purchase or sale of any commodity for future
delivery, or a contract identified under Sec. 36.3(c)(1)(i) traded on
an electronic trading facility operating in reliance on the exemption
set forth in Sec. 36.3 of this chapter, traded or executed on or
subject to the rules of any designated contract market, or for the
purposes of paragraph (i) of this section, a reporting market
(including all agreements, contracts and transactions that are treated
by a clearing organization as fungible with such contracts); the term
``option contract'' means any contract for the purchase or sale of a
commodity option, or as applicable, any other instrument subject to the
Act, traded or executed on or subject to the rules of any designated
contract market, or for the purposes of paragraph (i) of this section,
a reporting market (including all agreements, contracts and
transactions that are treated by a clearing organization as fungible
with such contracts); the term
[[Page 66333]]
``customer'' means any person for whose benefit a foreign broker makes
or causes to be made any futures contract or option contract; and the
term ``communication'' means any summons, complaint, order, subpoena,
special call, request for information, or notice, as well as any other
written document or correspondence.
* * * * *
(e) Any designated contract market that permits a foreign broker to
intermediate contracts, agreements or transactions, or permits a
foreign trader to effect contracts, agreements or transactions on the
facility or exchange, shall be deemed to be the agent of the foreign
broker and any of its customers for whom the transactions were
executed, or the foreign trader, for purposes of accepting delivery and
service of any communication issued by or on behalf of the Commission
to the foreign broker, any of its customers or the foreign trader with
respect to any contracts, agreements or transactions executed by the
foreign broker or the foreign trader on the designated contract market.
Service or delivery of any communication issued by or on behalf of the
Commission to a designated contract market shall constitute valid and
effective service upon the foreign broker, any of its customers, or the
foreign trader. A designated contract market which has been served
with, or to which there has been delivered, a communication issued by
or on behalf of the Commission to a foreign broker, any of its
customers, or a foreign trader shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the Commission in the communication, to the
foreign broker, any of its customers or the foreign trader.
(f) It shall be unlawful for any designated contract market to
permit a foreign broker, any of its customers or a foreign trader to
effect contracts, agreements or transactions on the facility unless the
designated contract market prior thereto informs the foreign broker,
any of its customers or the foreign trader, in any reasonable manner
the facility deems to be appropriate, of the requirements of this
section.
(g) The requirements of paragraphs (e) and (f) of this section
shall not apply to any contracts, transactions or agreements traded on
any designated contract market if the foreign broker, any of its
customers or the foreign trader has duly executed and maintains in
effect a written agency agreement in compliance with this paragraph
with a person domiciled in the United States and has provided a copy of
the agreement to the designated contract market prior to effecting any
contract, agreement or transaction on the facility. This agreement must
authorize the person domiciled in the United States to serve as the
agent of the foreign broker, any of its customers or the foreign trader
for purposes of accepting delivery and service of all communications
issued by or on behalf of the Commission to the foreign broker, any of
its customers or the foreign trader and must provide an address in the
United States where the agent will accept delivery and service of
communications from the Commission. This agreement must be filed with
the Commission by the designated contract market prior to permitting
the foreign broker, any of its customers or the foreign trader to
effect any transactions in futures or option contracts. Unless
otherwise specified by the Commission, the agreements required to be
filed with the Commission shall be filed with the Secretary of the
Commission at Three Lafayette Centre, 1155 21st Street NW., Washington,
DC 20581. A foreign broker, any of its customers or a foreign trader
shall notify the Commission immediately if the written agency agreement
is terminated, revoked, or is otherwise no longer in effect. If the
designated contract market knows or should know that the agreement has
expired, been terminated, or is no longer in effect, the designated
contract market shall notify the Secretary of the Commission
immediately. If the written agency agreement expires, terminates, or is
not in effect, the designated contract market and the foreign broker,
any of its customers or the foreign trader are subject to the
provisions of paragraphs (e) and (f) of this section.
(h) The provisions of paragraphs (e), (f) and (g) of this section
shall not apply to a designated contract market on which all
transactions of foreign brokers, their customers or foreign traders in
futures or option contracts are executed through, or the resulting
transactions are maintained in, accounts carried by a registered
futures commission merchant or introduced by a registered introducing
broker subject to the provisions of paragraphs (a), (b), (c) and (d) of
this section.
* * * * *
PART 16--REPORTS BY REPORTING MARKETS
0
47. The authority citation for part 16 continues to read as follows:
Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008), unless
otherwise noted.
0
48. Revise paragraph (a) introductory text of Sec. 16.00 to read as
follows:
Sec. 16.00 Clearing member reports.
(a) Information to be provided. Each reporting market shall submit
to the Commission, in accordance with paragraph (b) of this section, a
report for each business day, showing for each clearing member, by
proprietary and customer account, the following information separately
for futures by commodity and by future, and, for options, by underlying
futures contract (for options on futures contracts) or by underlying
commodity (for other commodity options), and by put, by call, by
expiration date and by strike price:
* * * * *
0
49. Amend Sec. 16.01 by revising the section heading and paragraphs
(a)(1)(ii), (a)(1)(iv), (b)(1)(ii), and (b)(1)(iv) to read as follows:
Sec. 16.01 Publication of market data on futures, swaps and options
thereon: trading volume, open contracts, prices, and critical dates.
(a) * * *
(1) * * *
(ii) For options, by underlying futures contracts for options on
futures contracts or by underlying commodity for options on
commodities, and by put, by call, by expiration date and by strike
price;
* * * * *
(iv) For options on swaps or classes of options on swaps, by
underlying swap contracts for options on swap contracts or by
underlying commodity for options on swaps on commodities, and by put,
by call, by expiration date and by strike price.
* * * * *
(b) * * *
(1) * * *
(ii) For options, by underlying futures contracts for options on
futures contracts or by underlying commodity for options on
commodities, and by put, by call, by expiration date and by strike
price;
* * * * *
(iv) For options on swaps or classes of options on swaps, by
underlying swap contracts for options on swap contracts or by
underlying commodity for options on swaps on commodities, and by put,
by call, by expiration date and by strike price.
* * * * *
PART 18--REPORTS BY TRADERS
0
50. The authority citation for part 18 continues to read as follows:
[[Page 66334]]
Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n,
12a and 19, as amended by Title XIII of the Food, Conservation and
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008);
5 U.S.C. 552 and 552(b), unless otherwise noted.
0
51. Revise paragraphs (a)(2), (a)(3), and (a)(4) of Sec. 18.05 to read
as follows:
Sec. 18.05 Maintenance of books and records.
(a) * * *
(2) Executed over the counter or pursuant to part 35 of this
chapter;
(3) On exempt commercial markets operating under a Commission
grandfather relief order issued pursuant to Section 723(c)(2)(B) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-
203, 124 Stat. 1376 (2010));
(4) On exempt boards of trade operating under a Commission
grandfather relief order issued pursuant to Section 734(c)(2) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-
203, 124 Stat. 1376 (2010)); and
* * * * *
PART 21--SPECIAL CALLS
0
52. The authority citation for part 21 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 7, 7a, 12a, 19 and 21, as amended by Pub. L. 111-203, 124 Stat.
1376; 5 U.S.C. 552 and 552(b), unless otherwise noted.
0
53. Revise paragraph (b) of Sec. 21.03 to read as follows:
Sec. 21.03 Selected special calls--duties of foreign brokers,
domestic and foreign traders, futures commission merchants, clearing
members, introducing brokers, and reporting markets.
* * * * *
(b) It shall be unlawful for a futures commission merchant to open
a futures or options account or to effect transactions in futures or
options contracts for an existing account, or for an introducing broker
to introduce such an account, for any customer for whom the futures
commission merchant or introducing broker is required to provide the
explanation provided for in Sec. 15.05(c) of this chapter, or for a
reporting market that is a registered entity under section 1a(40)(F) of
the Act, to cause to open an account, or to cause transactions to be
effected, in a contract traded in reliance on a Commission grandfather
relief order issued pursuant to Section 723(c)(2)(B) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124
Stat. 1376 (2010)), for an existing account for any person that is a
foreign clearing member or foreign trader, until the futures commission
merchant, introducing broker, clearing member or reporting market has
explained fully to the customer, in any manner that such person deems
appropriate, the provisions of this section.
* * * * *
PART 22--CLEARED SWAPS
0
54. The authority citation for part 22 continues to read as follows:
Authority: 7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203,
124 Stat. 1376.
Sec. 22.1 [Amended]
0
55. Amend Sec. 22.1 by removing the definition of ``Customer.''
0
56. Amend Sec. 22.2 by revising paragraphs (c)(2)(ii) and (e)(1) to
read as follows:
Sec. 22.2 Futures Commission Merchants: Treatment of Cleared Swaps
and Associated Cleared Swaps Customer Collateral.
* * * * *
(c) * * *
(2) * * *
(ii) Other categories of funds belonging to Futures Customers (as
Sec. 1.3 of this chapter defines that term), or Foreign Futures or
Foreign Options Customers (as Sec. 30.1 of this chapter defines that
term) of the futures commission merchant, including Futures Customer
Funds (as Sec. 1.3 of this chapter defines such term) or the foreign
futures or foreign options secured amount (as Sec. 1.3 of this chapter
defines such term), except as expressly permitted by Commission rule,
regulation, or order, or by a derivatives clearing organization rule
approved in accordance with Sec. 39.15(b)(2) of this chapter.
* * * * *
(e) * * *
(1) Permitted investments. A futures commission merchant may invest
money, securities, or other property constituting Cleared Swaps
Customer Collateral in accordance with Sec. 1.25 of this chapter.
* * * * *
0
57. Amend Sec. 22.3 by revising paragraphs (c)(2)(iii) and (d) to read
as follows:
Sec. 22.3 Derivatives clearing organizations: Treatment of cleared
swaps customer collateral.
* * * * *
(c) * * *
(2) * * *
(iii) Futures Customer Funds (as Sec. 1.3 of this chapter defines
such term) or the foreign futures or foreign options secured amount (as
Sec. 1.3 of this chapter defines such term), except as expressly
permitted by Commission rule, regulation, or order, (or by a
derivatives clearing organization rule approved in accordance with
Sec. 39.15(b)(2) of this chapter).
(d) Exceptions; Permitted Investments. Notwithstanding the
foregoing and Sec. 22.15, a derivatives clearing organization may
invest the money, securities, or other property constituting Cleared
Swaps Customer Collateral in accordance with Sec. 1.25 of this
chapter.
0
58. Amend Sec. 22.5 by revising paragraphs (a) and (b) to read as
follows:
Sec. 22.5 Futures commission merchants and derivatives clearing
organizations: Written acknowledgement.
(a) Before depositing Cleared Swaps Customer Collateral, the
futures commission merchant or derivatives clearing organization shall
obtain and retain in its files a separate written acknowledgement
letter from each depository in accordance with Sec. Sec. 1.20 and 1.26
of this chapter, with all references to ``Futures Customer Funds''
modified to apply to Cleared Swaps Customer Collateral, and with all
references to section 4d(a) or 4d(b) of the Act and the regulations
thereunder modified to apply to section 4d(f) of the Act and the
regulations thereunder.
(b) The futures commission merchant or derivatives clearing
organization shall adhere to all requirements specified in Sec. Sec.
1.20 and 1.26 of this chapter regarding retaining, permitting access
to, filing, or amending the written acknowledgement letter, in all
cases as if the Cleared Swaps Customer Collateral comprised Futures
Customer Funds subject to segregation pursuant to section 4d(a) or
4d(b) of the Act and the regulations thereunder.
* * * * *
0
59. Amend Sec. 22.9 by revising paragraphs (a) and (b) to read as
follows:
Sec. 22.9 Denomination of Cleared Swaps Customer Collateral and
location of depositories.
(a) Subject to paragraph (b) of this section, futures commission
merchants and derivatives clearing organizations may hold Cleared Swaps
Customer Collateral in the denominations, at the locations and
depositories, and subject to the segregation requirements specified in
Sec. 1.49 of this chapter.
(b) Notwithstanding the requirements in Sec. 1.49 of this chapter,
a futures commission merchant's obligations to a Cleared Swaps Customer
may be denominated in a currency in which funds have accrued to the
Cleared
[[Page 66335]]
Swaps Customer as a result of a Cleared Swap carried through such
futures commission merchant, to the extent of such accruals.
* * * * *
0
60. Revise Sec. 22.10 to read as follows:
Sec. 22.10 Application of other regulatory provisions.
Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to
the Cleared Swaps Customer Collateral in accordance with the terms
therein.
0
61. Amend Sec. 22.11 by revising the section heading and paragraphs
(a)(1), (a)(2), (b)(2), (c)(1), (c)(2), and (d)(2), to read as follows:
Sec. 22.11 Information to be provided regarding Cleared Swaps
Customers and their Cleared Swaps.
(a) * * *
(1) The first time that the Depositing Futures Commission Merchant
intermediates a Cleared Swap for a Cleared Swaps Customer with a
Collecting Futures Commission Merchant, provide information sufficient
to identify such Cleared Swaps Customer to the relevant Collection
Futures Commission Merchant; and
(2) At least once each business day thereafter, provide information
to the relevant Collecting Futures Commission Merchant sufficient to
identify, for each Cleared Swaps Customer, the portfolio of rights and
obligations arising from the Cleared Swaps that the Depositing Futures
Commission Merchant intermediates for such Cleared Swaps Customer.
(b) * * *
(2) The information that such entity must provide to its Collecting
Futures Commission Merchant pursuant to paragraph (a)(2) of this
section shall also include information sufficient to identify, for each
Cleared Swaps Customer referenced in paragraph (b)(1) of this section,
the portfolio of rights and obligations arising from the Cleared Swaps
that such entity intermediates as a Collecting Futures Commission
Merchant, on behalf of its Depositing Futures Commission Merchant, for
such Cleared Swaps Customer.
(c) * * *
(1) The first time that such futures commission merchant
intermediates a Cleared Swap for a Cleared Swaps Customer, provide
information to the relevant derivatives clearing organization
sufficient to identify such Cleared Swaps Customer; and
(2) At least once each business day thereafter, provide information
to the relevant derivatives clearing organization sufficient to
identify, for each Cleared Swaps Customer, the portfolio of rights and
obligations arising from the Cleared Swaps that such futures commission
merchant intermediates for such Cleared Swaps Customer.
(d) * * *
(2) The information that it must provide to the derivatives
clearing organization pursuant to paragraph (c)(2) of this section
shall also include information sufficient to identify, for each Cleared
Swaps Customer referenced in paragraph (d)(1) of this section, the
portfolio of rights and obligations arising from the Cleared Swaps that
the Collecting Futures Commission Merchant intermediates, on behalf of
the Depositing Futures Commission Merchant, for such Cleared Swaps
Customer.
* * * * *
0
62. Amend Sec. 22.12 by revising paragraph (a) introductory text and
paragraph (c) introductory text to read as follows:
Sec. 22.12 Information to be maintained regarding Cleared Swaps
Customer Collateral.
(a) Each Collecting Futures Commission Merchant receiving Cleared
Swaps Customer Collateral from an entity serving as a Depositing
Futures Commission Merchant shall, no less frequently than once each
business day, calculate and record:
* * * * *
(c) Each derivatives clearing organization receiving Cleared Swaps
Customer Collateral from a futures commission merchant shall, no less
frequently than once each business day, calculate and record:
* * * * *
0
63. Amend Sec. 22.13 by revising paragraph (a) to read as follows:
Sec. 22.13 Additions to Cleared Swaps Customer Collateral.
(a)(1) At the election of the derivatives clearing organization or
Collecting Futures Commission Merchant, the collateral requirement
referred to in Sec. 22.12(a), (c), and (d) applicable to a particular
Cleared Swaps Customer or group of Cleared Swaps Customers may be
increased based on an evaluation of the credit risk posed by such
Cleared Swaps Customer or group, in which case the derivatives clearing
organization or Collecting Futures Commission Merchant shall collect
and record such higher amount as provided in Sec. 22.12.
(2) Nothing in paragraph (a)(1) of this section is intended to
interfere with the right of a futures commission merchant to increase
the collateral requirements at such futures commission merchant with
respect to any of its Cleared Swaps Customers, Futures Customers (as
Sec. 1.3 of this chapter defines that term), or Foreign Futures or
Foreign Options Customers (as Sec. 30.1 of this chapter defines that
term).
* * * * *
0
64. Amend Sec. 22.14 by revising the section heading and paragraphs
(a)(2) and (c)(2) to read as follows:
Sec. 22.14 Futures Commission Merchant failure to meet a Cleared
Swaps Customer Margin Call in full.
(a) * * *
(2) Advise the Collecting Futures Commission Merchant of the
identity of each such Cleared Swaps Customer, and the amount
transmitted on behalf of each such Cleared Swaps Customer.
* * * * *
(c) * * *
(2) Advise the derivatives clearing organization of the identity of
each such Cleared Swaps Customer, and the amount transmitted on behalf
of each such Cleared Swaps Customer.
* * * * *
0
65. Section 22.15 is revised to read as follows:
Sec. 22.15 Treatment of Cleared Swaps Customer Collateral on an
individual basis.
Subject to Sec. 22.3(d), each derivatives clearing organization
and each Collecting Futures Commission Merchant receiving Cleared Swaps
Customer Collateral from a futures commission merchant shall treat the
value of collateral required with respect to the portfolio of rights
and obligations arising out of the Cleared Swaps intermediated for each
Cleared Swaps Customer, and collected from the futures commission
merchant, as belonging to such Cleared Swaps Customer, and such amount
shall not be used to margin, guarantee, or secure the Cleared Swaps or
other obligations of the futures commission merchant, or of any other
Cleared Swaps Customer, Futures Customer (as Sec. 1.3 of this chapter
defines that term), or Foreign Futures or Foreign Options Customer (as
Sec. 30.1 of this chapter defines that term). Nothing contained herein
shall be construed to limit, in any way, the right of a derivatives
clearing organization or Collecting Futures Commission Merchant to
liquidate any or all positions in a Cleared Swaps Customer Account in
the event of a default of a clearing member or Depositing Futures
Commission Merchant.
0
66. Amend Sec. 22.16 by revising the section heading to read as
follows:
[[Page 66336]]
Sec. 22.16 Disclosures to Cleared Swaps Customers.
* * * * *
PART 36--EXEMPT MARKETS
0
67. The authority citation for part 36 continues to read as follows:
Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by
Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L.
110-246, 122 Stat. 1624 (June 18, 2008).
0
68. Section 36.1 is revised to read as follows:
Sec. 36.1 Scope.
The provisions of this part apply to any board of trade or
electronic trading facility that operates as:
(a) An exempt commercial market operating under:
(1) Until July 16, 2012, a grandfather relief order issued by the
Commission pursuant to Section 723(c)(2)(B) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat.
1376 (2010)), or
(2) Any other applicable relief granted by the Commission; or
(b) An exempt board of trade operating under:
(1) Until July 16, 2012, a grandfather relief order issued by the
Commission pursuant to Section 734(c)(2) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376
(2010)), or
(2) Any other applicable relief granted by the Commission.
0
69. Amend Sec. 36.2 by:
0
a. Revising paragraph (a) introductory text and (a)(2)(i);
0
b. Adding paragraph (a)(3); and
0
c. Revising paragraph (b) introductory text, (c)(1), (c)(2)(i)
introductory text, (c)(2)(ii) introductory text, (c)(2)(iii),
(c)(2)(iv)(A) introductory text, and (c)(3), to read as follows:
Sec. 36.2 Exempt boards of trade.
(a) Eligible commodities. Commodities eligible to be traded by an
exempt board of trade are:
* * * * *
(2) * * *
(i) The commodities defined in section 1a(19) of the Act as
``excluded commodities'' (other than a security, including any group or
index thereof or any interest in, or based on the value of, any
security or group or index of securities); and
* * * * *
(3) Such contracts must be entered into only between persons that
are eligible contract participants, as defined in section 1a(18) of the
Act and as further defined by the Commission, at the time at which the
persons entered into the contract.
(b) Notification. Boards of trade operating as exempt boards of
trade shall maintain on file with the Secretary of the Commission at
the Commission's Washington, DC headquarters, in electronic form, a
``Notification of Operation as an Exempt Board of Trade,'' and it shall
include:
* * * * *
(c) Additional requirements--(1) Prohibited representation. A board
of trade that meets the criteria set forth in this section and operates
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 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:
* * * * *
(ii) Notification. An exempt board of trade operating a market in
reliance on the criteria set forth in this section shall notify the
Commission when:
* * * * *
(iii) Price discovery determination. Following receipt of notice
under paragraph (c)(2)(ii) of this section, or on its own initiative,
the Commission may notify an exempt board of trade 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 criteria set forth
in this section:
* * * * *
(3) Annual certification. A board of trade operating 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.
0
70. Section 36.3 is revised to read as follows:
Sec. 36.3 Exempt commercial markets.
(a) Eligible transactions. Agreements, contracts or transactions in
an exempt commodity eligible to be entered into on an exempt commercial
market must be:
(1) Entered into on a principal-to-principal basis solely between
persons that are eligible commercial entities, as that term is defined
in section 1a(17) of the Act, at the time the persons enter into the
agreement, contract or transaction; and
(2) Executed or traded on an electronic trading facility.
(b) Notification. An electronic trading facility relying upon the
exemption set forth in this section shall maintain on file with the
Secretary of the Commission at the Commission's Washington, DC
headquarters, in electronic form, a ``Notification of Operation as an
Exempt Commercial Market,'' and it shall include the information and
certifications specified in this section.
(c) Required information--(1) All electronic trading facilities. A
facility operating in reliance on the exemption set forth in this
section on an on-going basis, must:
(i) Provide the Commission with the terms and conditions, as
defined in Sec. 40.1(i) of this chapter and product descriptions for
each agreement, contract or transaction listed by the facility in
reliance on the exemption set forth in this section, as well as trading
conventions, mechanisms and practices;
(ii) Provide the Commission with information explaining how the
facility meets the definition of ``trading facility'' contained in
section 1a(51) of the Act and provide the Commission with access to the
electronic trading facility's trading protocols, in a format specified
by the Commission;
(iii) Demonstrate to the Commission that the facility requires, and
will require, with respect to all current and future agreements,
contracts and transactions, that each participant
[[Page 66337]]
agrees to comply with all applicable laws; that the authorized
participants are ``eligible commercial entities'' as defined in section
1a(17) of the Act; that all agreements, contracts and transactions are
and will be entered into solely on a principal-to-principal basis; and
that the facility has in place a program to routinely monitor
participants' compliance with these requirements;
(iv) At the request of the Commission, provide any other
information that the Commission, in its discretion, deems relevant to
its determination whether an agreement, contract, or transaction
performs a significant price discovery function; and
(v) File with the Commission annually, no later than the end of
each calendar year, a completed copy of CFTC Form 205--Exempt
Commercial Market Annual Certification. The information submitted in
Form 205 shall include:
(A) A statement indicating whether the electronic trading facility
continues to operate under the exemption; and
(B) A certification that affirms the accuracy of and/or updates the
information contained in the previous Notification of Operation as an
Exempt Commercial Market.
(2) Electronic trading facilities trading or executing agreements,
contracts or transactions other than significant price discovery
contracts. In addition to the requirements of paragraph (c)(1) of this
section, a facility operating in reliance on the exemption set forth in
this section, with respect to agreements, contracts or transactions
that have not been determined to perform significant price discovery
function, on an on-going basis must:
(i) Identify to the Commission those agreements, contracts and
transactions conducted on the electronic trading facility with respect
to which it intends, in good faith, to rely on the exemption set forth
in this section, and which averaged five trades per day or more over
the most recent calendar quarter; and, with respect to such agreements,
contracts and transactions, either:
(A) Submit to the Commission, in a form and manner acceptable to
the Commission, a report for each business day. Each such report shall
be electronically transmitted weekly, within such time period as is
acceptable to the Commission after the end of the week to which the
data applies, and shall show for each agreement, contract or
transaction executed the following information:
(1) The underlying commodity, the delivery or price-basing location
specified in the agreement, contract or transaction maturity date,
whether it is a financially settled or physically delivered instrument,
and the date of execution, time of execution, price, and quantity;
(2) Total daily volume and, if cleared, open interest;
(3) For an option instrument, in addition to the foregoing
information, the type of option (i.e., call or put) and strike prices;
and
(4) Such other information as the Commission may determine; or
(B) Provide to the Commission, in a form and manner acceptable to
the Commission, electronic access to those transactions conducted on
the electronic trading facility in reliance on the exemption set forth
in this section, and meeting the average five trades per day or more
threshold test of this section, which would allow the Commission to
compile the information set forth in paragraph (c)(2)(i)(A) of this
section and create a permanent record thereof.
(ii) Maintain a record of allegations or complaints received by the
electronic trading facility concerning instances of suspected fraud or
manipulation in trading activity conducted in reliance on the exemption
set forth in this section. The record shall contain the name of the
complainant, if provided, date of the complaint, market instrument,
substance of the allegations, and name of the person at the electronic
trading facility who received the complaint;
(iii) Provide to the Commission, in the form and manner prescribed
by the Commission, a copy of the record of each complaint received
pursuant to paragraph (c)(2)(ii) of this section that alleges, or
relates to, facts that would constitute a violation of the Act or
Commission regulations. Such copy shall be provided to the Commission
no later than 30 calendar days after the complaint is received;
Provided, however, that in the case of a complaint alleging, or
relating to, facts that would constitute an ongoing fraud or market
manipulation under the Act or Commission rules, such copy shall be
provided to the Commission within three business days after the
complaint is received; and
(iv) Provide to the Commission on a quarterly basis, within 15
calendar days of the close of each quarter, a list of each agreement,
contract or transaction executed on the electronic trading facility in
reliance on the exemption set forth in this section and indicate for
each such agreement, contract or transaction the contract terms and
conditions, the contract's average daily trading volume, and the most
recent open interest figures.
(3) Electronic trading facilities trading or executing significant
price discovery contracts. In addition to the requirements of paragraph
(c)(1) of this section, if the Commission determines that a facility
operating in reliance on the exemption set forth in this section trades
or executes an agreement, contract or transaction that performs a
significant price discovery function, the facility must, with respect
to any significant price discovery contract, publish and provide to the
Commission the information required by Sec. 16.01 of this chapter.
(4) Delegation of authority. The Commission hereby delegates, until
the Commission orders otherwise, the authority to determine the form
and manner of submitting the required information under paragraphs
(c)(1) through (3) of this section, to the Director of the Division of
Market Oversight and such members of the Commission's staff as the
Director may designate. The Director may submit to the Commission for
its consideration any matter that has been delegated by this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph (c)(4).
(5) Special calls. (i) All information required upon special call
of the Commission shall be transmitted at the same time and to the
office of the Commission as may be specified in the call.
(ii) Such information shall include information related to the
facility's business as an exempt electronic trading facility in
reliance on the exemption set forth in this section, including
information relating to data entry and transaction details in respect
of transactions entered into in reliance on the exemption, as the
Commission may determine appropriate--
(A) To enforce the antifraud and anti-manipulation provisions in
the Act and Commission regulations, and
(B) To evaluate a systemic market event; or
(C) To obtain information requested by a Federal financial
regulatory authority in order to enable the regulator to fulfill its
regulatory or supervisory responsibilities.
(iii) The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls to the Directors of the
Division of Market Oversight, the Division of Clearing and Risk, the
Division of Swap Dealer and Intermediary Oversight, and the Division of
Enforcement to be exercised by each such Director or by such other
employee or employees as
[[Page 66338]]
the Director may designate. The Directors may submit to the Commission
for its consideration any matter that has been delegated in this
paragraph. Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in this paragraph
(c)(5).
(6) Subpoenas to foreign persons. A foreign person whose access to
an electronic trading facility is limited or denied at the direction of
the Commission based on the Commission's belief that the foreign person
has failed timely to comply with a subpoena shall have an opportunity
for a prompt hearing under the procedures provided in Sec. 21.03(b)
and (h) of this chapter.
(7) Prohibited representation. An electronic trading facility
relying upon the exemption set forth in this section, with respect to
agreements, contracts or transactions that are not significant price
discovery contracts, shall not represent to any person that it is
registered with, designated, recognized, licensed or approved by the
Commission.
(d) Significant price discovery contracts--(1) Criteria for
significant price discovery determination. The Commission may
determine, in its discretion, that an electronic trading facility
operating a market in reliance on the exemption set forth in this
section performs a significant price discovery function for
transactions in the cash market for a commodity underlying any
agreement, contract or transaction executed or traded on the facility.
In making such a determination, the Commission shall consider, as
appropriate:
(i) Price linkage. The extent to which the agreement, contract or
transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market, or a significant price discovery contract traded on an
electronic trading facility, to value a position, transfer or convert a
position, cash or financially settle a position, or close out a
position;
(ii) Arbitrage. The extent to which the price for the agreement,
contract or transaction is sufficiently related to the price of a
contract or contracts listed for trading on or subject to the rules of
a designated contract market, or a significant price discovery contract
or contracts trading on or subject to the rules of an electronic
trading facility, so as to permit market participants to effectively
arbitrage between the markets by simultaneously maintaining positions
or executing trades in the contracts on a frequent and recurring basis;
(iii) Material price reference. The extent to which, on a frequent
and recurring basis, bids, offers, or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility;
(iv) Material liquidity. The extent to which the volume of
agreements, contracts or transactions in the commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a designated contract market or an electronic
trading facility operating in reliance on the exemption set forth in
this section;
(v) Other material factors. [Reserved]
(2) Notification of possible significant price discovery contract
conditions. An electronic trading facility operating in reliance on the
exemption set forth in this section shall promptly notify the
Commission, and such notification shall be accompanied by supporting
information or data concerning any contract that:
(i) Averaged five trades per day or more over the most recent
calendar quarter; and
(ii)(A) For which the exchange sells its price information
regarding the contract to market participants or industry publications;
or
(B) Whose daily closing or settlement prices on 95 percent or more
of the days in the most recent quarter were within 2.5 percent of the
contemporaneously determined closing, settlement or other daily price
of another agreement, contract or transaction.
(3) Procedure for significant price discovery determination. Before
making a final price discovery determination under this paragraph, the
Commission shall publish notice in the Federal Register that it intends
to undertake a determination with respect to whether a particular
agreement, contract or transaction performs a significant price
discovery function and to receive written data, views and arguments
relevant to its determination from the electronic trading facility and
other interested persons. Any such written data, views and arguments
shall be filed with the Secretary of the Commission, in the form and
manner specified by the Commission, within 30 calendar days of
publication of notice in the Federal Register or within such other time
specified by the Commission. After prompt consideration of all relevant
information, the Commission shall, within a reasonable period of time
after the close of the comment period, issue an order explaining its
determination whether the agreement, contract or transaction executed
or traded by the electronic trading facility performs a significant
price discovery function under the criteria specified in paragraph
(d)(1)(i) through (v) of this section.
(4) Compliance with core principles. (i) Following the issuance of
an order by the Commission that the electronic trading facility
executes or trades an agreement, contract or transaction that performs
a significant price discovery function, the electronic trading facility
must demonstrate, with respect to that agreement, contract or
transaction, compliance with the Core Principles set forth in this
section and the applicable provisions of this part. If the Commission's
order represents the first time it has determined that one of the
electronic trading facility's agreements, contracts or transactions
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 90 calendar days of the date of the Commission's order. For each
subsequent determination by the Commission that the electronic trading
facility has an additional agreement, contract or transaction that
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 30 calendar days of the date of the Commission's order.
Attention is directed to Appendix B of this part for guidance on and
acceptable practices for complying with the Core Principles.
Submissions demonstrating how the electronic trading facility complies
with the Core Principles with respect to its significant price
discovery contract must be filed with the Secretary of the Commission
at its Washington, DC headquarters. Submissions must include the
following:
(A) A written certification that the significant price discovery
contract(s) complies with the Act and regulations thereunder;
(B) A copy of the electronic trading facility's rules (as defined
in Sec. 40.1 of this chapter) and any technical manuals, other guides
or instructions for users of, or participants in, the market, including
minimum financial standards for members or market participants.
Subsequent rule changes must be certified by the electronic trading
facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this
chapter. The electronic trading facility also may request Commission
approval of any
[[Page 66339]]
rule changes pursuant to section 5c(c) of the Act and Sec. 40.5 of
this chapter;
(C) A description of the trading system, algorithm, security and
access limitation procedures with a timeline for an order from input
through settlement, and a copy of any system test procedures, tests
conducted, test results and contingency or disaster recovery plans;
(D) A copy of any documents pertaining to or describing the
electronic trading system's legal status and governance structure,
including governance fitness information;
(E) An executed or executable copy of any agreements or contracts
entered into or to be entered into by the electronic trading facility,
including partnership or limited liability company, third-party
regulatory service, or member or user agreements, that enable or
empower the electronic trading facility to comply with a Core
Principle;
(F) A copy of any manual or other document describing, with
specificity, the manner in which the trading facility will conduct
trade practice, market and financial surveillance;
(G) To the extent that any of the items in paragraphs (d)(4)(i)(A)
through (F) of this section raise issues that are novel, or for which
compliance with a Core Principle is not self-evident, an explanation of
how that item satisfies the applicable Core Principle or Principles.
(ii) The electronic trading facility must identify with
particularity information in the submission that will be subject to a
request for confidential treatment pursuant to Sec. 145.09 of this
chapter. The electronic trading facility must follow the procedures
specified in Sec. 40.8 of this chapter with respect to any information
in its submission for which confidential treatment is requested.
(5) Determination of compliance with core principles. The
Commission shall take into consideration differences between cleared
and uncleared significant price discovery contracts when reviewing the
implementation of the Core Principles by an electronic trading
facility. The electronic facility has reasonable discretion in
accounting for differences between cleared and uncleared significant
price discovery contracts when establishing the manner in which it
complies with the Core Principles.
(6) Information relating to compliance with core principles. Upon
request by the Commission, an electronic trading facility trading a
significant price discovery contract shall file with the Commission a
written demonstration, containing such supporting data, information and
documents, in the form and manner and within such time as the
Commission may specify, that the electronic trading facility is in
compliance with one or more Core Principles as specified in the
request, or that is otherwise requested by the Commission to enable the
Commission to satisfy its obligations under the Act.
(7) Enforceability. An agreement, contract or transaction entered
into on or pursuant to the rules of an electronic trading facility
trading or executing a significant price discovery contract shall not
be void, voidable, subject to rescission or otherwise invalidated or
rendered unenforceable as a result of:
(i) A violation by the electronic trading facility of the
provisions set forth in this section; or
(ii) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement or require an electronic trading facility
to adopt a specific term or condition, trading rule or procedure, or to
take or refrain from taking a specific action.
(8) Procedures for vacating a determination of a significant price
discovery function--(i) By the electronic trading facility. An
electronic trading facility that executes or trades an agreement,
contract or transaction that the Commission has determined performs a
significant price discovery function under paragraph (d)(3) of this
section may petition the Commission to vacate that determination. The
petition shall demonstrate that the agreement, contract or transaction
no longer performs a significant price discovery function under the
criteria specified in paragraph (d)(1), and has not done so for at
least the prior 12 months. An electronic trading facility shall not
petition for a vacation of a significant price discovery determination
more frequently than once every 12 months for any individual contract.
(ii) By the Commission. The Commission may, on its own initiative,
begin vacation proceedings if it believes that an agreement, contract
or transaction has not performed a significant price discovery function
for at least the prior 12 months.
(iii) Procedure. Before making a final determination whether an
agreement, contract or transaction has ceased to perform a significant
price discovery function, the Commission shall publish notice in the
Federal Register that it intends to undertake such a determination and
to receive written data, views and arguments relevant to its
determination from the electronic trading facility and other interested
persons. Written submissions shall be filed with the Secretary of the
Commission in the form and manner specified by the Commission, within
30 calendar days of publication of notice in the Federal Register, or
within such other time specified by the Commission. After consideration
of all relevant information, the Commission shall issue an order
explaining its determination whether the agreement, contract or
transaction has ceased to perform a significant price discovery
function and, if so, vacating its prior order. If such an order issues,
and the Commission subsequently determines, on its own initiative or
after notification by the electronic trading facility, that the
agreement, contract or transaction that was subject to the vacation
order again performs a significant price discovery function, the
electronic trading facility must comply with the Core Principles within
30 calendar days of the date of the Commission's order.
(iv) Automatic vacation of significant price discovery
determination. Regardless of whether a proceeding to vacate has been
initiated, any significant price discovery contract that has no open
interest and in which no trading has occurred for a period of 12
complete and consecutive calendar months shall, without further
proceedings, no longer be considered to be a significant price
discovery contract.
(e) Commission review. The Commission shall, at least annually,
evaluate as appropriate agreements, contracts or transactions conducted
on an electronic trading facility in reliance on the exemption set
forth in this section to determine whether they serve a significant
price discovery function as set forth in paragraph (d)(1) of this
section.
0
71. Amend Appendix A to part 36 by revising introductory paragraph 1,
the headings to paragraphs (A), (B), and (C), and paragraphs (D)2. and
(D)4., to read as follows:
Appendix A to Part 36--Guidance on Specific Price Discovery Contracts
1. There are four factors that the Commission must consider, as
appropriate, in making a determination that a contract is performing
a significant price discovery function. The four factors prescribed
by the statute are: Price Linkage; Arbitrage; Material Price
Reference; and Material Liquidity.
* * * * *
(A) MATERIAL LIQUIDITY--The extent to which the volume of
agreements, contracts or transactions in the commodity being traded
on the electronic trading facility is sufficient to have a material
effect on other agreements, contracts or transactions listed for
trading on or subject to the rules of a designated
[[Page 66340]]
contract market, or an electronic trading facility operating in
reliance on the exemption set forth in this section.
* * * * *
(B) PRICE LINKAGE--The extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final
settlement price, or other major price parameter, of a contract or
contracts listed for trading on or subject to the rules of a
designated contract market, or a significant price discovery
contract traded on an electronic trading facility, to value a
position, transfer or convert a position, cash or financially settle
a position, or close out a position.
* * * * *
(C) ARBITRAGE CONTRACTS--The extent to which the price for the
agreement, contract or transaction is sufficiently related to the
price of a contract or contracts listed for trading on or subject to
the rules of a designated contract market or a significant price
discovery contract or contracts trading on or subject to the rules
of an electronic trading facility, so as to permit market
participants to effectively arbitrage between the markets by
simultaneously maintaining positions or executing trades in the
contracts on a frequent and recurring basis.
* * * * *
(D) * * *
2. In evaluating a contract's price discovery role as a directly
referenced price source, the Commission will perform an analysis to
determine whether cash market participants are quoting bid or offer
prices or entering into transactions at prices that are set either
explicitly or implicitly at a differential to prices established for
the contract. Cash market prices are set explicitly at a
differential to the contract being traded on the electronic trading
facility when, for instance, they are quoted in dollars and cents
above or below the reference contract's price. Cash market prices
are set implicitly at a differential to a contract being traded on
the electronic trading facility when, for instance, they are arrived
at after adding to, or subtracting from the contract being traded on
the electronic trading facility, but then quoted or reported at a
flat price. The Commission will also consider whether cash market
entities are quoting cash prices based on a contract being traded on
the electronic trading facility on a frequent and recurring basis.
* * * * *
4. In applying this criterion, consideration will be given to
whether prices established by a contract being traded on the
electronic trading facility are reported in a widely distributed
industry publication. In making this determination, the Commission
will consider the reputation of the publication within the industry,
how frequently it is published, and whether the information
contained in the publication is routinely consulted by industry
participants in pricing cash market transactions.
* * * * *
0
72. Revise Appendix B to part 36 to read as follows:
Appendix B to Part 36--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
1. This Appendix provides guidance on complying with the core
principles set forth in this part, both initially and on an ongoing
basis. The guidance is provided in paragraph (a) following each core
principle and can be used to demonstrate to the Commission core
principle compliance under Sec. 36.3(d)(4). The guidance for each
core principle is illustrative only of the types of matters an
electronic trading facility may address, as applicable, and is not
intended to be used as a mandatory checklist. Addressing the issues
and questions set forth in this guidance will help the Commission in
its consideration of whether the electronic trading facility is in
compliance with the core principles. A submission pursuant to Sec.
36.3(d)(4) should include an explanation or other form of
documentation demonstrating that the electronic trading facility
complies with the core principles.
2. Acceptable practices meeting selected requirements of the
core principles are set forth in paragraph (b) following each core
principle. Electronic trading facilities on which significant price
discovery contracts are traded or executed that follow the specific
practices outlined under paragraph (b) for any core principle in
this appendix will meet the selected requirements of the applicable
core principle. Paragraph (b) is for illustrative purposes only, and
does not state the exclusive means for satisfying a core principle.
CORE PRINCIPLE I--CONTRACTS NOT READILY SUSCEPTIBLE TO
MANIPULATION. The electronic trading facility shall list only
significant price discovery contracts that are not readily
susceptible to manipulation.
(a) Guidance. Upon determination by the Commission that a
contract listed for trading on an electronic trading facility is a
significant price discovery contract, the electronic trading
facility must self-certify the terms and conditions of the
significant price discovery contract under Sec. 36.3(d)(4) within
90 calendar days of the date of the Commission's order if the
contract is the electronic trading facility's first significant
price discovery contract; or 30 days from the date of the
Commission's order if the contract is not the electronic trading
facility's first significant price discovery contract. Once the
Commission determines that a contract performs a significant price
discovery function, subsequent rule changes must be self-certified
to the Commission by the electronic trading facility pursuant to
Sec. 40.6 of this chapter or submitted to the Commission for review
and approval pursuant to Sec. 40.5 of this chapter.
(b) Acceptable practices. Guideline No. 1, 17 CFR part 40,
Appendix A may be used as guidance in meeting this core principle
for significant price discovery contracts.
CORE PRINCIPLE II--MONITORING OF TRADING. The electronic trading
facility shall monitor trading in significant price discovery
contracts to prevent market manipulation, price distortion, and
disruptions of the delivery of cash-settlement process through
market surveillance, compliance and disciplinary practices and
procedures, including methods for conducting real-time monitoring of
trading and comprehensive and accurate trade reconstructions.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, demonstrate a capacity to prevent
market manipulation and have trading and participation rules to
detect and deter abuses. The facility should seek to prevent market
manipulation and other trading abuses through a dedicated regulatory
department or by delegation of that function to an appropriate third
party. An electronic trading facility also should have the authority
to intervene as necessary to maintain an orderly market.
(b) Acceptable practices--(1) An acceptable trade monitoring
program. An acceptable trade monitoring program should facilitate,
on both a routine and non-routine basis, arrangements and resources
to detect and deter abuses through direct surveillance of each
significant price discovery contract. Direct surveillance of each
significant price discovery contract will generally involve the
collection of various market data, including information on
participants' market activity. Those data should be evaluated on an
ongoing basis in order to make an appropriate regulatory response to
potential market disruptions or abusive practices. For contracts
with a substantial number of participants, an effective surveillance
program should employ a much more comprehensive large trader
reporting system.
(2) Authority to collect information and documents. The
electronic trading facility should have the authority to collect
information and documents in order to reconstruct trading for
appropriate market analysis. Appropriate market analysis should
enable the electronic trading facility to assess whether each
significant price discovery contract is responding to the forces of
supply and demand. Appropriate data usually include various
fundamental data about the underlying commodity, its supply, its
demand, and its movement through market channels. Especially
important are data related to the size and ownership of deliverable
supplies--the existing supply and the future or potential supply--
and to the pricing of the deliverable commodity relative to the
futures price and relative to the similar, but non-deliverable,
kinds of the commodity. For cash-settled contracts, it is more
appropriate to pay attention to the availability and pricing of the
commodity making up the index to which the contract will be settled,
as well as monitoring the continued suitability of the methodology
for deriving the index.
(3) Ability to assess participants' market activity and power.
To assess participants' activity and potential power in a market,
electronic trading facilities, with respect to significant price
discovery contracts, at a minimum should have routine access to the
positions and trading of its participants and, if applicable, should
provide for such access through its agreements with its third-party
provider of clearing services.
[[Page 66341]]
CORE PRINCIPLE III--ABILITY TO OBTAIN INFORMATION. The
electronic trading facility shall establish and enforce rules that
allow the electronic trading facility to obtain any necessary
information to perform any of the functions set forth in this
subparagraph, provide the information to the Commission upon
request, and have the capacity to carry out such international
information-sharing agreements as the Commission may require.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, have the ability and authority to
collect information and documents on both a routine and non-routine
basis, including the examination of books and records kept by
participants. This includes having arrangements and resources for
recording full data entry and trade details and safely storing audit
trail data. An electronic trading facility should have systems
sufficient to enable it to use the information for purposes of
assisting in the prevention of participant and market abuses through
reconstruction of trading and providing evidence of any violations
of the electronic trading facility's rules.
(b) Acceptable practices--(1) The goal of an audit trail is to
detect and deter market abuse. An effective contract audit trail
should capture and retain sufficient trade-related information to
permit electronic trading facility staff to detect trading abuses
and to reconstruct all transactions within a reasonable period of
time. An audit trail should include specialized electronic
surveillance programs that identify potentially abusive trades and
trade patterns. An acceptable audit trail must be able to track an
order from time of entry into the trading system through its fill.
The electronic trading facility must create and maintain an
electronic transaction history database that contains information
with respect to transactions executed on each significant price
discovery contract.
(2) An acceptable audit trail should include the following:
original source documents, transaction history, electronic analysis
capability, and safe storage capability. An acceptable audit trail
system would satisfy the following practices.
(i) Original source documents. Original source documents include
unalterable, sequentially identified records on which trade
execution information is originally recorded. For each order
(whether filled, unfilled or cancelled, each of which should be
retained or electronically captured), such records reflect the terms
of the order, an account identifier that relates back to the
account(s) owner(s), and the time of order entry.
(ii) Transaction history. A transaction history consists of an
electronic history of each transaction, including:
(A) All the data that are input into the trade entry or matching
system for the transaction to match and clear;
(B) Timing and sequencing data adequate to reconstruct trading;
and
(C) The identification of each account to which fills are
allocated.
(iii) Electronic analysis capability. An electronic analysis
capability permits sorting and presenting data included in the
transaction history so as to reconstruct trading and to identify
possible trading violations with respect to market abuse.
(iv) Safe storage capability. Safe storage capability provides
for a method of storing the data included in the transaction history
in a manner that protects the data from unauthorized alteration, as
well as from accidental erasure or other loss. Data should be
retained in the form and manner specified by the Commission or,
where no acceptable manner of retention is specified, in accordance
with the recordkeeping standards of Sec. 1.31 of this chapter.
(3) Arrangements and resources for the disclosure of the
obtained information and documents to the Commission upon request.
The electronic trading facility should maintain records of all
information and documents related to each significant price
discovery contract in a form and manner acceptable to the
Commission. Where no acceptable manner of maintenance is specified,
records should be maintained in accordance with the recordkeeping
standards of Sec. 1.31 of this chapter.
(4) The capacity to carry out appropriate information-sharing
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the
Commission can act in conjunction with the electronic trading
facility to carry out such information sharing.
CORE PRINCIPLE IV--POSITION LIMITATIONS OR ACCOUNTABILITY. The
electronic trading facility shall adopt, where necessary and
appropriate, position limitations or position accountability for
speculators in significant price discovery contracts, taking into
account positions in other agreements, contracts and transactions
that are treated by a derivatives clearing organization, whether
registered or not registered, as fungible with such significant
price discovery contracts to reduce the potential threat of market
manipulation or congestion, especially during trading in the
delivery month.
(a) Guidance. [Reserved]
(b) Acceptable practices for uncleared trades. [Reserved]
(c) Acceptable practices for cleared trades--(1) Introduction.
In order to diminish potential problems arising from excessively
large speculative positions, and to facilitate orderly liquidation
of expiring contracts, an electronic trading facility relying on the
exemption set forth in this section should adopt rules that set
position limits or accountability levels on traders' cleared
positions in significant price discovery contracts. These position
limit rules specifically may exempt bona fide hedging; permit other
exemptions; or set limits differently by market, delivery month or
time period. For the purpose of evaluating a significant price
discovery contract's speculative-limit program for cleared
positions, the Commission will consider the specified position
limits or accountability levels, aggregation policies, types of
exemptions allowed, methods for monitoring compliance with the
specified limits or levels, and procedures for dealing with
violations.
(2) Accounting for cleared trades--(i) Speculative-limit levels
typically should be set in terms of a trader's combined position
involving cleared trades in a significant price discovery contract,
plus positions in agreements, contracts and transactions that are
treated by a derivatives clearing organization, whether registered
or not registered, as fungible with such significant price discovery
contract. (This circumstance typically exists where an exempt
commercial market lists a particular contract for trading but also
allows for positions in that contract to be cleared together with
positions established through bilateral or off-exchange
transactions, such as block trades, in the same contract.
Essentially, both the on-facility and off-facility transactions are
considered fungible with each other.) In this connection, the
electronic trading facility should make arrangements to ensure that
it is able to ascertain accurate position data for the market.
(ii) For significant price discovery contracts that are traded
on a cleared basis, the electronic trading facility should apply
position limits to cleared transactions in the contract.
(3) Limitations on spot-month positions. Spot-month limits
should be adopted for significant price discovery contracts to
minimize the susceptibility of the market to manipulation or price
distortions, including squeezes and corners or other abusive trading
practices.
(i) Contracts economically equivalent to an existing contract.
An electronic trading facility that lists a significant price
discovery contract that is economically-equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market should set the spot-month limit for its
significant price discovery contract at the same level as that
specified for the economically-equivalent contract.
(ii) Contracts that are not economically equivalent to an
existing contract. There may not be an economically-equivalent
significant price discovery contract or economically-equivalent
contract traded on a designated contract market. In this case, the
spot-month speculative position limit should be established in the
following manner. The spot-month limit for a physical delivery
market should be based upon an analysis of deliverable supplies and
the history of spot-month liquidations. The spot-month limit for a
physical-delivery market is appropriately set at no more than 25
percent of the estimated deliverable supply. In the case where a
significant price discovery contract has a cash settlement
provision, the spot-month limit should be set at a level that
minimizes the potential for price manipulation or distortion in the
significant price discovery contract itself; in related futures and
options contracts traded on a designated contract market; in other
significant price discovery contracts; in other fungible agreements,
contracts and transactions; and in the underlying commodity.
(4) Position accountability for non-spot-month positions. The
electronic trading facility should establish for its significant
price discovery contracts non-spot individual
[[Page 66342]]
month position accountability levels and all-months-combined
position accountability levels. An electronic trading facility may
establish non-spot individual month position limits and all-months-
combined position limits for its significant price discovery
contracts in lieu of position accountability levels.
(i) Definition. Position accountability provisions provide a
means for an exchange to monitor traders' positions that may
threaten orderly trading. An acceptable accountability provision
sets target accountability threshold levels that may be exceeded,
but once a trader breaches such accountability levels, the
electronic trading facility should initiate an inquiry to determine
whether the individual's trading activity is justified and is not
intended to manipulate the market. As part of its investigation, the
electronic trading facility may inquire about the trader's rationale
for holding a position in excess of the accountability levels. An
acceptable accountability provision should provide the electronic
trading facility with the authority to order the trader not to
further increase positions. If a trader fails to comply with a
request for information about positions held, provides information
that does not sufficiently justify the position, or continues to
increase contract positions after a request not to do so is issued
by the facility, then the accountability provision should enable the
electronic trading facility to require the trader to reduce
positions.
(ii) Contracts economically equivalent to an existing contract.
When an electronic trading facility lists a significant price
discovery contract that is economically equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market, the electronic trading facility should
set the non-spot individual month position accountability level and
all-months-combined position accountability level for its
significant price discovery contract at the same levels, or lower,
as those specified for the economically-equivalent contract.
(iii) Contracts that are not economically equivalent to an
existing contract. For significant price discovery contracts that
are not economically equivalent to an existing contract, the trading
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10
percent of the average combined futures and delta-adjusted option
month-end open interest for the most recent calendar year. For
electronic trading facilities that choose to adopt non-spot
individual month and all-months-combined position limits in lieu of
position accountability levels for their significant price discovery
contracts, the limits should be set in the same manner as the
accountability levels.
(iv) Contracts economically equivalent to an existing contract
with position limits. If a significant price discovery contract is
economically equivalent to another significant price discovery
contract or to a contract traded on a designated contract market
that has adopted non-spot or all-months-combined position limits,
the electronic trading facility should set non-spot month position
limits and all-months-combined position limits for its significant
price discovery contract at the same (or lower) levels as those
specified for the economically-equivalent contract.
(5) Account aggregation. An electronic trading facility should
have aggregation rules for significant price discovery contracts
that apply to accounts under common control, those with common
ownership, i.e., where there is a ten percent or greater financial
interest, and those traded according to an express or implied
agreement. Such aggregation rules should apply to cleared
transactions with respect to applicable speculative position limits.
An electronic trading facility will be permitted to set more
stringent aggregation policies. An electronic trading facility may
grant exemptions to its price discovery contracts' position limits
for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)
and may grant exemptions for reduced risk positions, such as
spreads, straddles and arbitrage positions.
(6) Implementation deadlines. An electronic trading facility
with a significant price discovery contract is required to comply
with Core Principle IV within 90 calendar days of the date of the
Commission's order determining that the contract performs a
significant price discovery function if such contract is the
electronic trading facility's first significant price discovery
contract, or within 30 days of the date of the Commission's order if
such contract is not the electronic trading facility's first
significant price discovery contract. For the purpose of applying
limits on speculative positions in newly-determined significant
price discovery contracts, the Commission will permit a grace period
following issuance of its order for traders with cleared positions
in such contracts to become compliant with applicable position limit
rules. Traders who hold cleared positions on a net basis in the
electronic trading facility's significant price discovery contract
must be at or below the specified position limit level no later than
90 calendar days from the date of the electronic trading facility's
implementation of position limit rules, unless a hedge exemption is
granted by the electronic trading facility. This grace period
applies to both initial and subsequent price discovery contracts.
Electronic trading facilities should notify traders of this
requirement promptly upon implementation of such rules.
(7) Enforcement provisions. The electronic trading facility
should have appropriate procedures in place to monitor its position
limit and accountability provisions and to address violations.
(i) An electronic trading facility with significant price
discovery contracts should use an automated means of detecting
traders' violations of speculative limits or exemptions,
particularly if the significant price discovery contracts have large
numbers of traders. An electronic trading facility should monitor
the continuing appropriateness of approved exemptions by
periodically reviewing each trader's basis for exemption or
requiring a reapplication. An automated system also should be used
to determine whether a trader has exceeded applicable non-spot
individual month position accountability levels and all-months-
combined position accountability levels.
(ii) An electronic trading facility should establish a program
for effective enforcement of position limits for significant price
discovery contracts. Electronic trading facilities should use a
large trader reporting system to monitor and enforce daily
compliance with position limit rules. The Commission notes that an
electronic trading facility may allow traders to periodically apply
to the electronic trading facility for an exemption and, if
appropriate, be granted a position level higher than the applicable
speculative limit. The electronic trading facility should establish
a program to monitor approved exemptions from the limits. The
position levels granted under such hedge exemptions generally should
be based upon the trader's commercial activity in related markets
including, but not limited to, positions held in related futures and
options contracts listed for trading on designated contract markets,
fungible agreements, contracts and transactions, as determined by a
derivatives clearing organization. Electronic trading facilities may
allow a brief grace period where a qualifying trader may exceed
speculative limits or an existing exemption level pending the
submission and approval of appropriate justification. An electronic
trading facility should consider whether it wants to restrict
exemptions during the last several days of trading in a delivery
month. Acceptable procedures for obtaining and granting exemptions
include a requirement that the electronic trading facility approve a
specific maximum higher level.
(iii) An acceptable speculative limit program should have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The electronic trading
facility policies should consider appropriate actions.
(8) Violation of Commission rules. A violation of position
limits for significant price discovery contracts that have been
self-certified by an electronic trading facility is also a violation
of section 4a(e) of the Act.
CORE PRINCIPLE V--EMERGENCY AUTHORITY. The electronic trading
facility shall adopt rules to provide for the exercise of emergency
authority, in consultation or cooperation with the Commission, where
necessary and appropriate, including the authority to liquidate open
positions in significant price discovery contracts and to suspend or
curtail trading in a significant price discovery contract.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded should have clear
procedures and guidelines for decision-making regarding emergency
intervention in the market, including procedures and guidelines to
avoid conflicts of interest while carrying out such decision-making.
An electronic trading facility on which significant price discovery
contracts are executed or traded should also have the authority to
intervene as necessary to maintain markets with fair and orderly
trading as well as procedures for carrying out the intervention.
Procedures and guidelines should include notifying the Commission of
[[Page 66343]]
the exercise of the electronic trading facility's regulatory
emergency authority, explaining how conflicts of interest are
minimized, and documenting the electronic trading facility's
decision-making process and the reasons for using its emergency
action authority. Information on steps taken under such procedures
should be included in a submission of a certified rule and any
related submissions for rule approval pursuant to part 40 of this
chapter, when carried out pursuant to an electronic trading
facility's emergency authority. To address perceived market threats,
the electronic trading facility on which significant price discovery
contracts are executed or traded should, among other things, be able
to impose position limits in the delivery month, impose or modify
price limits, modify circuit breakers, call for additional margin
either from market participants or clearing members (for contracts
that are cleared through a clearinghouse), order the liquidation or
transfer of open positions, order the fixing of a settlement price,
order a reduction in positions, extend or shorten the expiration
date or the trading hours, suspend or curtail trading on the
electronic trading facility, order the transfer of contracts and the
margin for such contracts from one market participant to another, or
alter the delivery terms or conditions or, if applicable, should
provide for such actions through its agreements with its third-party
provider of clearing services.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE VI--DAILY PUBLICATION OF TRADING INFORMATION. The
electronic trading facility shall make public daily information on
price, trading volume, and other trading data to the extent
appropriate for significant price discovery contracts.
(a) Guidance. An electronic trading facility, with respect to
significant price discovery contracts, should provide to the public
information regarding settlement prices, price range, volume, open
interest, and other related market information for all applicable
contracts as determined by the Commission on a fair, equitable and
timely basis. Provision of information for any applicable contract
can be through such means as provision of the information to a
financial information service or by timely placement of the
information on the electronic trading facility's public Web site.
(b) Acceptable practices. Compliance with Sec. 16.01 of this
chapter, which is mandatory, is an acceptable practice that
satisfies the requirements of Core Principle VI.
CORE PRINCIPLE VII--COMPLIANCE WITH RULES. The electronic
trading facility shall monitor and enforce compliance with the rules
of the electronic trading facility, including the terms and
conditions of any contracts to be traded and any limitations on
access to the electronic trading facility.
(a) Guidance--(1) An electronic trading facility on which
significant price discovery contracts are executed or traded should
have appropriate arrangements and resources for effective trade
practice surveillance programs, with the authority to collect
information and documents on both a routine and non-routine basis,
including the examination of books and records kept by its market
participants. The arrangements and resources should facilitate the
direct supervision of the market and the analysis of data collected.
Trade practice surveillance programs may be carried out by the
electronic trading facility itself or through delegation or
contracting-out to a third party. If the electronic trading facility
on which significant price discovery contracts are executed or
traded delegates or contracts-out the trade practice surveillance
responsibility to a third party, such third party should have the
capacity and authority to carry out such programs, and the
electronic trading facility should retain appropriate supervisory
authority over the third party.
(2) An electronic trading facility on which significant price
discovery contracts are executed or traded should have arrangements,
resources and authority for effective rule enforcement. The
Commission believes that this should include the authority and
ability to discipline and limit or suspend the activities of a
market participant as well as the authority and ability to terminate
the activities of a market participant pursuant to clear and fair
standards. The electronic trading facility can satisfy this
criterion for market participants by expelling or denying such
person's future access upon a determination that such a person has
violated the electronic trading facility's rules.
(b) Acceptable practices. An acceptable trade practice
surveillance program generally would include:
(1) Maintenance of data reflecting the details of each
transaction executed on the electronic trading facility;
(2) Electronic analysis of this data routinely to detect
potential trading violations;
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to the electronic trading
facility's attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend the activities of a market
participant pursuant to clear and fair standards that are available
to market participants. See, e.g., 17 CFR part 8.
CORE PRINCIPLE VIII--CONFLICTS OF INTEREST. The electronic
trading facility on which significant price discovery contracts are
executed or traded shall establish and enforce rules to minimize
conflicts of interest in the decision-making process of the
electronic trading facility and establish a process for resolving
such conflicts of interest.
(a) Guidance. (1) The means to address conflicts of interest in
the decision-making of an electronic trading facility on which
significant price discovery contracts are executed or traded should
include methods to ascertain the presence of conflicts of interest
and to make decisions in the event of such a conflict. In addition,
the Commission believes that the electronic trading facility on
which significant price discovery contracts are executed or traded
should provide for appropriate limitations on the use or disclosure
of material non-public information gained through the performance of
official duties by board members, committee members and electronic
trading facility employees or gained through an ownership interest
in the electronic trading facility or its parent organization(s).
(2) All electronic trading facilities on which significant price
discovery contracts are traded bear special responsibility to
regulate effectively, impartially, and with due consideration of the
public interest, as provided in section 3 of the Act. Under Core
Principle VIII, they are also required to minimize conflicts of
interest in their decision-making processes. To comply with this
core principle, electronic trading facilities on which significant
price discovery contracts are traded should be particularly vigilant
for such conflicts between and among any of their self-regulatory
responsibilities, their commercial interests, and the several
interests of their management, members, owners, market participants,
other industry participants and other constituencies.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE IX--ANTITRUST CONSIDERATIONS. Unless necessary or
appropriate to achieve the purposes of this Act, the electronic
trading facility, with respect to any significant price discovery
contracts, shall endeavor to avoid adopting any rules or taking any
actions that result in any unreasonable restraints of trade or
imposing any material anticompetitive burden on trading on the
electronic trading facility.
(a) Guidance. An electronic trading facility, with respect to a
significant price discovery contract, may at any time request that
the Commission consider under the provisions of section 15(b) of the
Act any of the electronic trading facility's rules, which may be
trading protocols or policies, operational rules, or terms or
conditions of any significant price discovery contract. The
Commission intends to apply section 15(b) of the Act to its
consideration of issues under this core principle in a manner
consistent with that previously applied to contract markets.
(b) Acceptable practices. [Reserved]
PART 38--DESIGNATED CONTRACT MARKETS
0
73. The authority citation for part 38 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203,124 Stat. 1376 (2010).
0
74. Revise Sec. 38.2 to read as follows:
Sec. 38.2 Exempt provisions.
A designated contract market, the designated contract market's
operator and transactions traded on or through a designated contract
market under section 5 of the Act shall comply with all applicable
regulations under Title 17
[[Page 66344]]
of the Code of Federal Regulations, except for the requirements of
Sec. 1.39(b), Sec. 1.44, Sec. 1.53, Sec. 1.54, Sec. 1.59(b) and
(c), Sec. 1.62, Sec. 1.63(a) and (b) and (d) through (f), Sec. 1.64,
Sec. 1.69, part 8, Sec. 100.1, Sec. 155.2, and part 156.
PART 41--SECURITY FUTURES PRODUCTS
0
75. The authority citation for part 41 continues to read as follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat.
2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
0
76. Revise paragraph (e) of Sec. 41.1 to read as follows:
Sec. 41.1 Definitions
* * * * *
(e) Narrow-based security index has the same meaning as in section
1a(35) of the Commodity Exchange Act.
* * * * *
0
77. Revise Sec. 41.2 to read as follows:
Sec. 41.2 Required records.
A designated contract market that trades a security index or
security futures product shall maintain in accordance with the
requirements of Sec. 1.31 of this chapter books and records of all
activities related to the trading of such products, including: Records
related to any determination under subpart B of this part whether or
not a futures contract on a security index is a narrow-based security
index or a broad-based security index.
0
78. Amend Sec. 41.11 by revising paragraphs (a) introductory text,
(b)(1) introductory text, (b)(2) introductory text, (c), and (d)(5)
introductory text to read as follows:
Sec. 41.11 Method for determining market capitalization and dollar
value of average daily trading volume; application of the definition of
narrow-based security index.
(a) Market capitalization. For purposes of section 1a(35)(B) of the
Act (7 U.S.C. 1a(35)(B)):
* * * * *
(b) * * *
(1) For purposes of section 1a(35)(A) and (B) of the Act (7 U.S.C.
1a(35)(A) and (B)):
* * * * *
(2) For purposes of section 1a(35)(B)(III)(cc) of the Act (7 U.S.C.
1a(35)(B)(III)(cc)):
* * * * *
(c) Depositary Shares and Section 12 Registration. For purposes of
section 1a(35)(B)(III)(aa) of the Act (7 U.S.C. 1a(35)(B)(III)(aa)),
the requirement that each component security of an index be registered
pursuant to section 12 of the Securities Exchange Act of 1934 (15
U.S.C. 78l) shall be satisfied with respect to any security that is a
depositary share if the deposited securities underlying the depositary
share are registered pursuant to section 12 of the Securities Exchange
Act of 1934 and the depositary share is registered under the Securities
Act of 1933 (15 U.S.C. 77a et seq.) on Form F-6 (17 CFR 239.36).
(d) * * *
(5) Lowest weighted 25% of an index. With respect to any particular
day, the lowest weighted component securities comprising, in the
aggregate, 25% of an index's weighting for purposes of section
1a(35)(A)(iv) of the Act (7 U.S.C. 1a(35)(A)(iv)) (``lowest weighted
25% of an index'') means those securities:
* * * * *
0
79. Revise paragraph (a) introductory text of Sec. 41.12 to read as
follows:
Sec. 41.12 Indexes underlying futures contracts trading for fewer
than 30 days.
(a) An index on which a contract of sale for future delivery is
trading on a designated contract market or foreign board of trade is
not a narrow-based security index under section 1a(35) of the Act (7
U.S.C. 1a(35)) for the first 30 days of trading, if:
* * * * *
0
80. Revise Sec. 41.13 to read as follows:
Sec. 41.13 Futures contracts on security indexes trading on or
subject to the rules of a foreign board of trade.
When a contract of sale for future delivery on a security index is
traded on or subject to the rules of a foreign board of trade, such
index shall not be a narrow-based security index if it would not be a
narrow-based security index if a futures contract on such index were
traded on a designated contract market.
0
81. Revise paragraphs (a)(1), (a)(3), (b)(1), (b)(2), and (b)(4) of
Sec. 41.21 to read as follows:
Sec. 41.21 Requirements for underlying securities.
(a) * * *
(1) The underlying security is registered pursuant to section 12 of
the Securities Exchange Act of 1934;
* * * * *
(3) The underlying security conforms with the listing standards for
the security futures product that the designated contract market has
filed with the SEC under section 19(b) of the Securities Exchange Act
of 1934.
(b) * * *
(1) The index is a narrow-based security index as defined in
section 1a(35) of the Act;
(2) The securities in the index are registered pursuant to section
12 of the Securities Exchange Act of 1934;
* * * * *
(4) The index conforms with the listing standards for the security
futures product that the designated contract market has filed with the
SEC under section 19(b) of the Securities Exchange Act of 1934.
0
82. Revise the introductory text and paragraph (e) of Sec. 41.22 to
read as follows:
Sec. 41.22 Required certifications.
It shall be unlawful for a designated contract market to list for
trading or execution a security futures product unless the designated
contract market has provided the Commission with a certification that
the specific security futures product or products and the designated
contract market meet, as applicable, the following criteria:
* * * * *
(e) If the board of trade is a designated contract market pursuant
to section 5 of the Act, dual trading in these security futures
products is restricted in accordance with Sec. 41.27;
* * * * *
0
83. Revise paragraph (a) introductory text, paragraph (a)(5), and
paragraph (b) of Sec. 41.23 to read as follows:
Sec. 41.23 Listing of security futures products for trading.
(a) Initial listing of products for trading. To list new security
futures products for trading, a designated contract market shall submit
to the Commission at its Washington, DC headquarters, either in
electronic or hard-copy form, to be received by the Commission no later
than the day prior to the initiation of trading, a filing that:
* * * * *
(5) If the board of trade is a designated contract market pursuant
to section 5 of the Act, it includes a certification that the security
futures product complies with the Act and rules thereunder; and
* * * * *
(b) Voluntary submission of security futures products for
Commission approval. A designated contract market may request that the
Commission approve any security futures product under the procedures of
Sec. 40.5 of this chapter, provided however, that the registered
entity shall include the certification required by Sec. 41.22 with its
submission under Sec. 40.5 of this chapter. Notice designated contract
markets may not request Commission approval of security futures
products.
0
84. Amend Sec. 41.24 by removing paragraph (b), redesignating
paragraph
[[Page 66345]]
(c) as paragraph (b), and revising redesignated paragraph (b), to read
as follows:
Sec. 41.24 Rule amendments to security futures products.
* * * * *
(b) Voluntary submission of rules for Commission review and
approval. A designated contract market or a registered derivatives
clearing organization clearing security futures products may request
that the Commission approve any rule or proposed rule or rule amendment
relating to a security futures product under the procedures of Sec.
40.5 of this chapter, provided however, that the registered entity
shall include the certifications required by Sec. 41.22 with its
submission under Sec. 40.5 of this chapter. Notice designated contract
markets may not request Commission approval of rules.
0
85. Revise paragraphs (a)(1), (a)(2) introductory text, (a)(3)
introductory text, (a)(3)(i)(A), (a)(3)(i)(B), (a)(3)(iv), and (d) of
Sec. 41.25 to read as follows:
Sec. 41.25 Additional conditions for trading for security futures
products.
(a) Common provisions--(1) Reporting of data. The designated
contract market shall comply with part 16 of this chapter requiring the
daily reporting of market data.
(2) Regulatory trading halts. The rules of a designated contract
market that lists or trades one or more security futures products must
include the following provisions:
* * * * *
(3) Speculative position limits. The designated contract market
shall have rules in place establishing position limits or position
accountability procedures for the expiring futures contract month. The
designated contract market shall:
(i) * * *
(A) For security futures products where the average daily trading
volume in the underlying security exceeds 20 million shares, or exceeds
15 million shares and there are more than 40 million shares of the
underlying security outstanding, the designated contract market may
adopt a net position limit no greater than 22,500 (100-share) contracts
applicable to positions held during the last five trading days of an
expiring contract month; or
(B) For security futures products where the average daily trading
volume in the underlying security exceeds 20 million shares and there
are more than 40 million shares of the underlying security outstanding,
the designated contract market may adopt a position accountability
rule. Upon request by the designated contract market, traders who hold
net positions greater than 22,500 (100-share) contracts, or such lower
level specified by exchange rules, must provide information to the
exchange and consent to halt increasing their positions when so ordered
by the exchange.
* * * * *
(iv) For purposes of this section, average daily trading volume
shall be calculated monthly, using data for the most recent six-month
period. If the data justify a higher or lower speculative limit for a
security future, the designated contract market may raise or lower the
position limit for that security future effective no earlier than the
day after it has provided notification to the Commission and to the
public under the submission requirements of Sec. 41.24. If the data
require imposition of a reduced position limit for a security future,
the designated contract market may permit any trader holding a position
in compliance with the previous position limit, but in excess of the
reduced limit, to maintain such position through the expiration of the
security futures contract; provided, that the designated contract
market does not find that the position poses a threat to the orderly
expiration of such contract.
* * * * *
(d) The Commission may exempt a designated contract market from the
provisions of paragraphs (a)(2) and (b) of this section, either
unconditionally or on specified terms and conditions, if the Commission
determines that such exemption is consistent with the public interest
and the protection of customers. An exemption granted pursuant to this
paragraph shall not operate as an exemption from any Securities and
Exchange Commission rules. Any exemption that may be required from such
rules must be obtained separately from the Securities and Exchange
Commission.
0
86. Amend Sec. 41.27 by:
0
a. Revising paragraphs (a)(1), (a)(3) introductory text, (a)(4)(v),
(a)(5), (b), (d) introductory text, (d)(1), (d)(4), and (f); and
0
b. Removing and reserving paragraphs (c)(2) and (e)(2), to read as
follows:
Sec. 41.27 Prohibition of dual trading in security futures products
by floor brokers.
(a) * * *
(1) Trading session means hours during which a designated contract
market is scheduled to trade continuously during a trading day, as set
forth in its rules, including any related post settlement trading
session. A designated contract market may have more than one trading
session during a trading day.
* * * * *
(3) Broker association includes two or more designated contract
market members with floor trading privileges of whom at least one is
acting as a floor broker who:
* * * * *
(4) * * *
(v) An account for another member present on the floor of a
designated contract market or an account controlled by such other
member.
(5) Dual trading means the execution of customer orders by a floor
broker through open outcry during the same trading session in which the
floor broker executes directly or by initiating and passing to another
member, either through open outcry or through a trading system that
electronically matches bids and offers pursuant to a predetermined
algorithm, a transaction for the same security futures product on the
same designated contract market for an account described in paragraphs
(a)(4)(i) through (v) of this section.
(b) Dual Trading Prohibition. (1) No floor broker shall engage in
dual trading in a security futures product on a designated contract
market, except as otherwise provided under paragraphs (d), (e), and (f)
of this section.
(2) A designated contract market operating an electronic market or
electronic trading system that provides market participants with a time
or place advantage or the ability to override a predetermined algorithm
must submit an appropriate rule proposal to the Commission consistent
with the procedures set forth in Sec. 40.5. The proposed rule must
prohibit electronic market participants with a time or place advantage
or the ability to override a predetermined algorithm from trading a
security futures product for accounts in which these same participants
have any interest during the same trading session that they also trade
the same security futures product for other accounts. This paragraph,
however, is not applicable with respect to execution priorities or
quantity guarantees granted to market makers who perform that function,
or to market participants who receive execution priorities based on
price improvement activity, in accordance with the rules governing the
designated contract market.
(c) * * *
(2) [Reserved]
(d) Specific Permitted Exceptions. Notwithstanding the
applicability of a dual trading prohibition under
[[Page 66346]]
paragraph (b) of this section, dual trading may be permitted on a
designated contract market pursuant to one or more of the following
specific exceptions:
(1) Correction of errors. To offset trading errors resulting from
the execution of customer orders, provided, that the floor broker must
liquidate the position in his or her personal error account resulting
from that error through open outcry or through a trading system that
electronically matches bids and offers as soon as practicable, but,
except as provided herein, not later than the close of business on the
business day following the discovery of error. In the event that a
floor broker is unable to offset the error trade because the daily
price fluctuation limit is reached, a trading halt is imposed by the
designated contract market, or an emergency is declared pursuant to the
rules of the designated contract market, the floor broker must
liquidate the position in his or her personal error account resulting
from that error as soon as practicable thereafter.
* * * * *
(4) Market emergencies. To address emergency market conditions
resulting in a temporary emergency action as determined by a designated
contract market.
(e) * * *
(2) [Reserved]
(f) Unique or Special Characteristics of Agreements, Contracts or
Transactions, or of Designated Contract Markets. Notwithstanding the
applicability of a dual trading prohibition under paragraph (b) of this
section, dual trading may be permitted on a designated contract market
to address unique or special characteristics of agreements, contracts,
or transactions, or of the designated contract market as provided
herein. Any rule of a designated contract market that would permit dual
trading when it would otherwise be prohibited, based on a unique or
special characteristic of agreements, contracts, or transactions, or of
the designated contract market must be submitted to the Commission for
prior approval under the procedures set forth in Sec. 40.5. The rule
submission must include a detailed demonstration of why an exception is
warranted.
0
87. Revise paragraphs (a)(4)(i)(B) and (a)(30) of Sec. 41.43 to read
as follows:
Sec. 41.43 Definitions.
(a) * * *
(4) * * *
(i) * * *
(B) If the instrument underlying such security future is a narrow-
based security index, as defined in section 1a(35)(A) of the Act, the
product of the daily settlement price of such security future as shown
by any regularly published reporting or quotation service, and the
applicable contract multiplier.
* * * * *
(30) Self-regulatory authority means a national securities exchange
registered under section 6 of the Exchange Act, a national securities
association registered under section 15A of the Exchange Act, or a
contract market registered under section 5 of the Act or section 5f of
the Act.
* * * * *
0
88. Revise paragraph (b) introductory text of Sec. 41.49 to read as
follows:
Sec. 41.49 Filing proposed margin rule changes with the Commission.
* * * * *
(b) Filing requirements under the Act. Any self-regulatory
authority that is registered with the Commission as a designated
contract market under section 5 of the Act shall, when filing a
proposed rule change regarding customer margin for security futures
with the SEC for approval in accordance with section 19(b)(2) of the
Exchange Act, submit such proposed rule change to the Commission as
follows:
* * * * *
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
89. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2 and 12a.
0
90. Amend Sec. 140.72 by revising the section heading and paragraphs
(a), (b), (d) and (f), to read as follows:
Sec. 140.72 Delegation of authority to disclose confidential
information to a contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization.
(a) Pursuant to the authority granted under sections 2(a)(11),
8a(5) and 8a(6) of the Act, the Commission hereby delegates, until such
time as the Commission orders otherwise, to the Executive Director, the
Deputy Executive Director, the Special Assistant to the Executive
Director, the Director of the Division of Clearing and Intermediary
Oversight, each Deputy Director of the Division of Clearing and
Intermediary Oversight, the Chief Accountant, the General Counsel, each
Deputy General Counsel, the Director of the Division of Market
Oversight, each Deputy Director of the Division of Market Oversight,
the Deputy Director of the Market and Trade Practice Surveillance
Branch, the Director of the Division of Enforcement, each Deputy
Director of the Division of Enforcement, each Associate Director of the
Division of Enforcement, the Chief Counsel of the Division of
Enforcement, each Regional Counsel of the Division of Enforcement, each
of the Regional Administrators, the Chief Economist of the Office of
the Chief Economist, the Deputy Chief Economist of the Office of the
Chief Economist, the Director of the Office of International Affairs,
and the Deputy Director of the Office of International Affairs, the
authority to disclose to an official of any contract market, swap
execution facility, swap data repository, registered futures
association, or self-regulatory organization as defined in section
3(a)(26) of the Securities Exchange Act of 1934, any information
necessary or appropriate to effectuate the purposes of the Act,
including, but not limited to, the full facts concerning any
transaction or market operation, including the names of the parties
thereto. This authority to disclose shall be based on a determination
that the transaction or market operation disrupts or tends to disrupt
any market or is otherwise harmful or against the best interests of
producers, consumers, or investors or that disclosure is necessary or
appropriate to effectuate the purposes of the Act. The authority to
make such a determination is also delegated by the Commission to the
Commission employees identified in this section. A Commission employee
delegated authority under this section may exercise that authority on
his or her own initiative or in response to a request by an official of
a contract market, swap execution facility, swap data repository,
registered futures association or self-regulatory organization.
(b) Disclosure under this section shall only be made to a contract
market, swap execution facility, swap data repository, registered
futures association or self-regulatory organization official who is
named in a list filed with the Commission by the chief executive
officer of the contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization, which sets forth the official's name, business address
and telephone number. The chief executive officer shall thereafter
notify the Commission of any deletions or additions to the list of
officials authorized to receive disclosures under this section. The
original list and any supplemental list required by this paragraph
shall be filed with the Secretary of the Commission, and a
[[Page 66347]]
copy thereof shall also be filed with the Regional Coordinator for the
region in which the contract market, swap execution facility, or swap
data repository is located or in which the registered futures
association or self-regulatory organization has its principal office.
* * * * *
(d) For purposes of this section, the term ``official'' shall mean
any officer or member of a committee of a contract market, swap
execution facility, swap data repository, registered futures
association or self-regulatory organization who is specifically charged
with market surveillance or audit or investigative responsibilities, or
their duly authorized representative or agent, who is named on the list
filed pursuant to paragraph (b) of this section or any supplement
thereto.
* * * * *
(f) Any contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization receiving information from the Commission under these
provisions shall not disclose such information except that disclosure
may be made in any self-regulatory action or proceeding.
0
91. Amend Sec. 140.77 by revising the section heading and paragraph
(a) to read as follows:
Sec. 140.77 Delegation of authority to determine that applications
for contract market designation, swap execution facility registration,
or swap data repository registration are materially incomplete.
(a) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director's designees, the
authority to determine that an application for contract market
designation, swap execution facility registration, or swap data
repository registration is materially incomplete under section 6 of the
Commodity Exchange Act and to so notify the applicant.
* * * * *
0
92. Revise paragraphs (a) and (b) of Sec. 140.96 to read as follows:
Sec. 140.96 Delegation of authority to publish in the Federal
Register.
(a) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director's designee, with the
concurrence of the General Counsel or the General Counsel's designee,
the authority to publish in the Federal Register notice of the
availability for comment of the proposed terms and conditions of
applications for contract market designation, swap execution facility
and swap data repository registration, and to determine to publish, and
to publish, requests for public comment on proposed exchange, swap
execution facility, or swap data repository rules, and rule amendments,
when there exists novel or complex issues that require additional time
to analyze, an inadequate explanation by the submitting registered
entity, or a potential inconsistency with the Act, including
regulations under the Act.
(b) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director's designee, and to the
Director of the Division of Clearing and Intermediary Oversight or the
Director's designee, with the concurrence of the General Counsel or the
General Counsel's designee, the authority to determine to publish, and
to publish, in the Federal Register, requests for public comment on
proposed exchange and self-regulatory organization rule amendments when
publication of the proposed rule amendment is in the public interest
and will assist the Commission in considering the views of interested
persons.
* * * * *
0
93. Revise paragraph (d)(2) of Sec. 140.99 to read as follows:
Sec. 140.99 Requests for exemptive, no-action and interpretative
letters.
* * * * *
(d) * * *
(2) A request for a Letter relating to the provisions of the Act or
the Commission's rules, regulations or orders governing designated
contract markets, registered swap execution facilities, registered swap
data repositories, exempt commercial markets, exempt boards of trade,
the nature of particular transactions and whether they are exempt or
excluded from being required to be traded on one of the foregoing
entities, foreign trading terminals, hedging exemptions, and the
reporting of market positions shall be filed with the Director,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. A
request for a Letter relating to all other provisions of the Act or
Commission rules shall be filed with the Director, Division of Clearing
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. The
request must be submitted electronically using the email address
[email protected] (for requests filed with the Division of Market
Oversight), or [email protected] (for requests filed with the
Division of Clearing and Intermediary Oversight), as appropriate, and a
properly signed paper copy of the request must be provided to the
Division of Market Oversight or the Division of Clearing and
Intermediary Oversight, as appropriate, within ten days for purposes of
verification of the electronic submission.
* * * * *
0
94. Amend Sec. 140.735-2 by:
0
a. Redesignating paragraphs (b)(1)(i), (b)(1)(ii), and (b)(1)(iii) as
(b)(1)(ii), (b)(1)(iv), and (b)(1)(v), respectively;
0
b. Adding paragraphs (b)(1)(i) and (b)(1)(iii); and
0
c. Revising paragraphs (b)(2) and (c), to read as follows:
Sec. 140.735-2 Prohibited transactions.
* * * * *
(b) * * *
(1) * * *
(i) In swaps;
* * * * *
(iii) In retail forex transactions, as that term is defined in
Sec. 5.1(m) of this chapter;
* * * * *
(2) Effect any purchase or sale of a commodity option, futures
contract, or swap involving a security or group of securities;
* * * * *
(c) Exception for farming, ranching, and natural resource
operations. The prohibitions in paragraphs (b)(1)(i), (ii), and (iv) of
this section shall not apply to a transaction in connection with any
farming, ranching, oil and gas, mineral rights, or other natural
resource operation in which the member or employee has a financial
interest, if he or she is not involved in the decision to engage in,
and does not have prior knowledge of, the actual futures, commodity
option, or swap transaction and has previously notified the General
Counsel \2\ in writing of the nature of the operation, the extent of
the member's or employee's interest, the types of transactions in which
the operation may engage, and the identity of the person or
[[Page 66348]]
persons who will make trading decisions for the operation; \3\ or
---------------------------------------------------------------------------
\2\ As used in this subpart, ``General Counsel'' refers to the
General Counsel in his or her capacity as counselor for the
Commission and designated agency ethics official for the Commission,
and includes his or her designee and the alternate designated agency
ethics official appointed by the agency head pursuant to 5 CFR
2638.202.
\3\ Although not required, if they choose to do so, members or
employees may use powers of attorney or other arrangements in order
to meet the notice requirements of, and to assure that they have no
control or knowledge of, futures, commodity option, or swap
transactions permitted under paragraph (c) of this section. A member
or employee considering such arrangements should consult with the
Office of General Counsel in advance for approval. Should a member
or employee gain knowledge of an actual futures, commodity option,
or swap transaction entered into by an operation described in
paragraph (c) of this section that has already taken place and the
market position represented by that transaction remains open, he or
she should promptly report that fact and all other details to the
General Counsel and seek advice as to what action, including recusal
from any particular matter that will have a direct and predictable
effect on the financial interest in question, may be appropriate.
---------------------------------------------------------------------------
* * * * *
0
95. Revise paragraph (b)(1) of Sec. 140.735-2a to read as follows:
Sec. 140.735-2a Prohibited interests.
* * * * *
(b) * * *
(1) Have a financial interest, through ownership of securities or
otherwise, in any person \5\ registered with the Commission (including
futures commission merchants, associated persons and agents of futures
commission merchants, floor brokers, commodity trading advisors and
commodity pool operators, and any other persons required to be
registered in a fashion similar to any of the above under the Commodity
Exchange Act or pursuant to any rule or regulation promulgated by the
Commission), or any contract market, swap execution facility, swap data
repository, board of trade, or other trading facility, or any
derivatives clearing organization subject to regulation or oversight by
the Commission; \6\
---------------------------------------------------------------------------
\5\ As defined in section 1a(38) of the Commodity Exchange Act
and 17 CFR 1.3(u) thereunder, a ``person'' includes an individual,
association, partnership, corporation and a trust.
\6\ Attention is directed to 18 U.S.C. 208.
---------------------------------------------------------------------------
* * * * *
0
96. Revise Sec. 140.735-3 to read as follows:
Sec. 140.735-3 Non-governmental employment and other outside
activity.
A Commission member or employee shall not accept employment or
compensation from any person, exchange, swap execution facility, swap
data repository or derivatives clearing organization subject to
regulation by the Commission. For purposes of this section, a person
subject to regulation by the Commission includes but is not limited to
a contract market, swap execution facility, swap data repository or
derivatives clearing organization or member thereof, a registered
futures commission merchant, any person associated with a futures
commission merchant or with any agent of a futures commission merchant,
floor broker, commodity trading advisor, commodity pool operator or any
person required to be registered in a fashion similar to any of the
above or file reports under the Act or pursuant to any rule or
regulation promulgated by the Commission.\11\
---------------------------------------------------------------------------
\11\ Attention is directed to section 2(a)(8) of the Commodity
Exchange Act, which provides, among other things, that no Commission
member or employee shall accept employment or compensation from any
person, exchange or derivatives clearing organization
(``clearinghouse'') subject to regulation by the Commission, or
participate, directly or indirectly, in any contract market
operations or transactions of a character subject to regulation by
the Commission.
---------------------------------------------------------------------------
PART 145--COMMISSION RECORDS AND INFORMATION
0
97. The authority citation for part 145 continues to read as follows:
Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389
(5 U.S.C. 4a(j)); unless otherwise noted.
0
98. Revise paragraphs (c)(1), (d)(1) introductory text, and (d)(1)(vi)
of Sec. 145.9 to read as follows:
Sec. 145.9 Petition for confidential treatment of information
submitted to the Commission.
* * * * *
(c) * * *
(1) Submitter. A ``submitter'' is any person who submits any
information or material to the Commission or who permits any
information or material to be submitted to the Commission. For purposes
of paragraph (d)(1)(ii) of this section only, ``submitter'' includes
any person whose information has been submitted to a designated
contract market, derivatives clearing organization, swap execution
facility, swap data repository or registered futures association that
in turn has submitted the information to the Commission.
* * * * *
(d) Written request for confidential treatment. (1) Any submitter
may request in writing that the Commission afford confidential
treatment under the Freedom of Information Act to any information that
he or she submits to the Commission. Except as provided in paragraph
(d)(4) of this section, no oral requests for confidential treatment
will be accepted by the Commission. The submitter shall specify the
grounds on which confidential treatment is being requested but need not
provide a detailed written justification of the request unless required
to do so under paragraph (e) of this section. Confidential treatment
may be requested only on the grounds that disclosure:
* * * * *
(vi) Would reveal investigatory records compiled for law
enforcement purposes when disclosure would interfere with enforcement
proceedings or disclose investigative techniques and procedures,
provided, that the claim may be made only by a designated contract
market, derivatives clearing organization, swap execution facility,
swap data repository or registered futures association with regard to
its own investigatory records.
* * * * *
0
99. Revise paragraphs (a)(6), (a)(8), and (b)(13) of Appendix A to part
145 to read as follows:
Appendix A to Part 145--Compilation of Commission Records Available to
the Public
* * * * *
(a) * * *
(6) Rule enforcement and financial reviews (public version).
* * * * *
(8) Commission rules and regulations, Federal Register notices,
interpretative letters.
* * * * *
(b) * * *
(13) Publicly available portions of applications to become a
registered entity including the transmittal letter, first page of
the application cover sheet, proposed rules, proposed bylaws,
corporate documents, any overview or similar summary provided by the
applicant, any documents pertaining to the applicant's legal status
and governance structure, including governance fitness information,
and any other part of the application not covered by a request for
confidential treatment.
* * * * *
PART 155--TRADING STANDARDS
0
100. The authority citation for part 155 continues to read as follows:
Authority: 7 U.S.C. 6b, 6c, 6g, 6j, and 12a, unless otherwise
noted.
0
101. Revise the introductory text of Sec. 155.2 to read as follows:
Sec. 155.2 Trading standards for floor brokers.
Each contract market shall adopt rules which shall, at a minimum,
with respect to each member of the contract market acting as a floor
broker:
* * * * *
[[Page 66349]]
0
102. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(1) of Sec. 155.3 to
read as follows:
Sec. 155.3 Trading standards for futures commission merchants.
(a) * * *
(1) Insure, to the extent possible, that each order received from a
customer which is executable at or near the market price is transmitted
to the floor of the appropriate contract market before any order in any
future or in any commodity option in the same commodity for any
proprietary account, any other account in which an affiliated person
has an interest, or any account for which an affiliated person may
originate orders without the prior specific consent of the account
owner, if the affiliated person has gained knowledge of the customer's
order prior to the transmission to the floor of the appropriate
contract market of the order for a proprietary account, an account in
which the affiliated person has an interest, or an account in which the
affiliated person may originate orders without the prior specific
consent of the account owner; and
* * * * *
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an
``institutional customer'' as defined in Sec. 1.3(g) of this chapter,
a futures commission merchant must obtain the customer's prior consent
through a signed acknowledgment, which may be accomplished in
accordance with Sec. 1.55(d) of this chapter.
(c) * * *
(1) Receives written authorization from a person designated by such
other futures commission merchant or introducing broker with
responsibility for the surveillance over such account pursuant to
paragraph (a)(2) of this section or Sec. 155.4(a)(2), respectively;
* * * * *
0
103. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(2) of Sec. 155.4 to
read as follows:
Sec. 155.4 Trading standards for introducing brokers.
(a) * * *
(1) Insure, to the extent possible, that each order received from a
customer which is executable at or near the market price is transmitted
to the futures commission merchant carrying the account of the customer
before any order in any future or in any commodity option in the same
commodity for any proprietary account, any other account in which an
affiliated person has an interest, or any account for which an
affiliated person may originate orders without the prior specific
consent of the account owner, if the affiliated person has gained
knowledge of the customer's order prior to the transmission to the
floor of the appropriate contract market of the order for a proprietary
account, an account in which the affiliated person has an interest, or
an account in which the affiliated person may originate orders without
the prior specific consent of the account owner; and
* * * * *
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an
``institutional customer'' as defined in Sec. 1.3(g) of this chapter,
an introducing broker must obtain the customer's prior consent through
a signed acknowledgment, which may be accomplished in accordance with
Sec. 1.55(d) of this chapter.
* * * * *
(c) * * *
(2) Copies of all statements for such account and of all written
records prepared by such futures commission merchant upon receipt of
orders for such account pursuant to Sec. 155.3(c)(2) are transmitted
on a regular basis to the introducing broker with which such person is
affiliated.
Sec. 155.6 [Removed and Reserved]
0
104. Remove and reserve Sec. 155.6.
PART 166--CUSTOMER PROTECTION RULES
0
105. The authority citation for part 155 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,
12a, 21, and 23, as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010).
0
106. Revise paragraph (a) introductory text and paragraph (b) of Sec.
166.2 to read as follows:
Sec. 166.2 Authorization to trade.
* * * * *
(a) With respect to a commodity interest as defined in any
paragraph of the commodity interest definition in Sec. 1.3(yy) of this
chapter, specifically authorized the futures commission merchant,
retail foreign exchange dealer, introducing broker or any of their
associated persons to effect the transaction (a transaction is
``specifically authorized'' if the customer or person designated by the
customer to control the account specifies--
* * * * *
(b) With respect to a commodity interest as defined in paragraph
(1) or (2) of the commodity interest definition in Sec. 1.3(yy) of
this chapter, authorized in writing the futures commission merchant,
introducing broker or any of their associated persons to effect
transactions in commodity interests for the account without the
customer's specific authorization; Provided, however, That if any such
futures commission merchant, introducing broker or any of their
associated persons is also authorized to effect transactions in foreign
futures or foreign options without the customer's specific
authorization, such authorization must be expressly documented.
0
107. Revise paragraph (a)(2) of Sec. 166.5 to read as follows:
Sec. 166.5 Dispute settlement procedures.
(a) * * *
(2) The term customer as used in this section includes any person
for or on behalf of whom a member of a designated contract market, or a
participant transacting on or through such designated contract market,
effects a transaction on such contract market, except another member of
or participant in such designated contract market. Provided, however, a
person who is an ``eligible contract participant'' as defined in
section 1a(18) of the Act shall not be deemed to be a customer within
the meaning of this section.
* * * * *
Issued in Washington, DC on October 16, 2012, by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Appendices to Adaptation of Regulations To Incorporate Swaps--
Commission Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to amend and conform certain provisions
of the Commodity Futures Trading Commission's (CFTC) regulations to
incorporate swaps. These final conforming amendments are crucial to
integrating the CFTC's regulations with the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), which expanded
the scope of the Commodity Exchange Act to cover swaps.
[[Page 66350]]
Specifically, this final rule updates the CFTC's definitions of
futures commission merchant (FCM) and introducing broker (IB) to
fulfill the Dodd-Frank Act's requirement to permit these entities to
trade swaps on behalf of their customers. This final rule also
updates the definitions of commodity interest, customer, and
customer funds to incorporate swaps. In addition, the final rule
adds swap execution facilities (SEFs) to the list of CFTC-regulated
trading venues.
The final rule amends existing recordkeeping requirements for
FCMs and IBs to ensure that similar records are kept for swaps as
are currently kept for futures. In addition, SEF members will be
obligated to comply with the same recordkeeping duties as are
required of designated contract market (DCM) members.
[FR Doc. 2012-25764 Filed 11-1-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 2, 2012