2024-24388
[Federal Register Volume 89, Number 216 (Thursday, November 7, 2024)]
[Rules and Regulations]
[Pages 88594-88629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-24388]
[[Page 88593]]
Vol. 89
Thursday,
No. 216
November 7, 2024
Part IV
Commodity Futures Trading Commission
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17 CFR Parts 37, 38, and 40
Provisions Common to Registered Entities; Final Rule
Federal Register / Vol. 89 , No. 216 / Thursday, November 7, 2024 /
Rules and Regulations
[[Page 88594]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37, 38, and 40
RIN 3038-AF28
Provisions Common to Registered Entities
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting amendments to the Commission's regulations under the Commodity
Exchange Act (``CEA'' or ``Act'') that govern how registered entities
submit self-certifications, and requests for approval, of their rules,
rule amendments, and new products for trading and clearing, as well as
the Commission's review and processing of such submissions. The
amendments are intended to clarify, simplify and enhance the utility of
those regulations for registered entities, market participants and the
Commission.
DATES: The effective date for this final rule is December 9, 2024.
FOR FURTHER INFORMATION CONTACT: Rachel Kaplan, Senior Special Counsel,
[email protected], 202-418-6233, Steven Benton, Industry Economist,
[email protected], 202-418-5617, and Nancy Markowitz, Deputy Director,
[email protected], 202-418-5453, Division of Market Oversight, and
Eileen Chotiner, Senior Compliance Analyst, [email protected], 202-
418-5467, Division of Clearing and Risk, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amendments
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost Benefit Considerations
D. Antitrust Considerations
I. Background
Part 40 of the Commission's regulations \1\ implements section
5c(c) of the CEA and sets forth provisions that are common to
registered entities, including designated contract markets (``DCMs''),
derivatives clearing organizations (``DCOs''), swap execution
facilities (``SEFs'') and swap data repositories (``SDRs'').\2\ Part 40
establishes requirements and procedures for registered entities to
submit their rules and products to the Commission prior to implementing
rules, listing products for trading, or accepting products for
clearing. Part 40 generally provides two means for registered entities
to submit products, rules, and rule amendments (which include product
amendments) to the Commission. Typically, a registered entity elects to
use the self-certification process through which the registered entity
certifies that the product, rule or rule amendment complies with the
CEA and the Commission regulations.\3\ Alternatively, a registered
entity may seek Commission approval of the product, rule or rule
amendment.\4\
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\1\ Commission regulations referred to in this release are found
at 17 CFR chapter I (2024), and are accessible on the Commission's
website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
\2\ Section 1a(40) of the CEA defines the term registered entity
to include DCMs, DCOs, SEFs and SDRs.
\3\ See CEA section 5c(c)(1), Sec. Sec. 40.2 and 40.6. But see,
e.g., Sec. 40.4 (requiring that a DCM submit for Commission
approval any rule that would materially change a term or condition
of a contract for future delivery in an agricultural commodity
enumerated in CEA Section 1a(9) or of an option on such contract or
commodity).
\4\ See CEA section 5c(c)(4), Sec. Sec. 40.3 and 40.5.
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The part 40 regulations also set forth the Commission's procedures
for review (including approval or non-approval) of product and rule
submissions. The part 40 regulations set forth certain information that
must be made publicly available in connection with an application to
become designated as a DCM, or registered as a SEF, DCO or SDR and when
registered entities file new products, new rules and rule
amendments.\5\ Additionally, the regulations include special
certification provisions for certain rules submitted by systemically
important DCOs (``SIDCOs'').\6\
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\5\ See Sec. 40.8. Regulation Sec. 40.8 is not the subject of
this rulemaking. Regulations 40.11 and 40.12 (which relate to the
Commission's review of certain event contracts and the staying of
certification and tolling of review period pending jurisdictional
determination, respectively) are also not the subject of this
rulemaking. A private citizen suggested changes to Sec. Sec. 40.11
and 40.12. See Ravnitzky at 2-3. The Commission cannot consider
herein changes to Sec. Sec. 40.11 and 40.12 as Sec. Sec. 40.11 and
40.12 are not the subject of this rulemaking and no changes were
proposed to Sec. Sec. 40.11 or 40.12 in the NPRM for notice and
public comment.
\6\ See Sec. 40.10.
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With two exceptions, the Commission last amended the part 40
regulations in 2011,\7\ in connection with implementing various
amendments made to the CEA by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''). In September 2023, based
on the Commission's experience applying the part 40 regulations over
the ensuing years, the Commission issued a notice of proposed
rulemaking (the ``NPRM'') in which it proposed amendments to the part
40 regulations.\8\ The Commission proposed the amendments to the part
40 regulations in the NPRM to clarify, simplify and enhance the utility
of the part 40 regulations for registered entities, market participants
and the Commission.\9\
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\7\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011) (the ``2011 Final Rule''). In 2021, the Commission made
targeted, conforming amendments to Sec. 40.1(j)(1)(vii) and
(j)(2)(vii) (the portion of the definition of ``terms and
conditions'' that relates to position limits) to conform this text
to reflect the position limits amendments adopted by the Commission
at that time. See Position Limits for Derivatives, 86 FR 3236
(January 14, 2021). Additionally, in 2015, the Commission removed
from Sec. 40.8 and appendix D to part 40 all references to
electronic trading facilities on which significant price discovery
contracts are traded or executed to reflect the fact that the Dodd-
Frank Act eliminated these facilities from the CEA. See Repeal of
the Exempt Commercial Market and Exempt Board of Trade Exemptions,
80 FR 59575 (October 2, 2015).
\8\ Provisions Common to Registered Entities, 88 FR 61432
(September 6, 2023).
\9\ As discussed below in note 19, the Commission is also making
two conforming, non-substantive changes to update the citations
referencing the Sec. 40.1 definition of emergency mentioned in
appendix B to part 37 and appendix B to part 38.
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The comment period for the NPRM ended on November 6, 2023.\10\ In
response to the NPRM, the Commission received nine comment letters that
expressed a wide range of views on the proposed revisions to part 40.
The letters collectively represented eight DCMs; \11\ two SEFs; \12\
one SDR; \13\ seven DCOs; \14\ one non-profit; \15\ two trade
[[Page 88595]]
associations; \16\ one private citizen; \17\ and one venture capital
firm.\18\
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\10\ The comment file for responses to the NPRM is available at
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7430.
\11\ Cboe Global Markets, Inc. (``Cboe'') commented on behalf of
its two DCMs--Cboe Futures Exchange, LLC and Cboe Digital Exchange,
LLC. CME Group Inc. (``CME Group'') commented on behalf of its four
DCMs--Chicago Mercantile Exchange Inc. (``CME''), Board of Trade of
the City of Chicago, Inc., New York Mercantile Exchange, Inc. and
Commodity Exchange, Inc. (collectively, the ``CME Group
Exchanges''). The Intercontinental Exchange Inc. (``ICE'') commented
on behalf of its DCM--ICE Futures U.S. LMX Labs, LLC, which does
business as Coinbase Derivatives (``Coinbase'') commented as a DCM.
\12\ Cboe commented on behalf of its SEF--Cboe SEF, LLC. ICE
commented on behalf of its SEF--Ice Swap Trade.
\13\ ICE commented on behalf of its SDR--Ice Trade Vault.
\14\ Cboe commented on behalf of its DCO--Cboe Clear Digital,
LLC. CME Group commented on behalf of CME in its capacity as a DCO
(also known as ``CME Clearing''). Eurex Clearing AG (``Eurex'')
commented as a DCO. ICE commented on behalf of its four DCOs--ICE
Clear Credit, ICE Clear U.S., ICE Clear Europe, and ICE NGX.
\15\ Better Markets.
\16\ The Futures Industry Association (``FIA'') and the
International Swap Derivatives Association (``ISDA'') submitted a
joint letter.
\17\ Mr. Michael Ravnitzky.
\18\ Andreessen Horowitz (``a16z'').
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The Commission is making revisions and additions to Sec. Sec. 40.1
through 40.7, 40.10 and appendices D and E to part 40 to clarify,
simplify and enhance the utility of the part 40 regulations for
registered entities, market participants and the Commission. This
release will address the comments received on each of the relevant
regulations and appendices below.
II. Amendments
A. Sec. 40.1--Definitions
1. Formatting Change to Sec. 40.1
Currently, the defined terms in Sec. 40.1 are arranged in
alphabetical order, with lettered headers. The Commission is adopting
the amendments proposed to remove the lettered headers from Sec. 40.1
and to instead arrange the defined terms in Sec. 40.1 solely in
alphabetical order,\19\ resulting in the Commission having to make
fewer conforming changes in the future to Sec. 40.1 and other
regulations when adding or removing defined terms.\20\ The Commission
received no comments on these proposed changes.
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\19\ The Commission also is making two conforming changes that
are necessitated by this change to Sec. 40.1. Specifically, the
Commission is updating the references to the definition of emergency
located in the guidance section regarding Emergency Authority of
appendix B for each of parts 37 and 38 such that they reference
Sec. 40.1 rather than Sec. 40.1(h). No substance is intended to be
changed by these amendments.
\20\ The Office of the Federal Register prefers the solely
alphabetical approach to definitions sections. See Document Drafting
Handbook, Office of the Federal Register at 2-27 (Revision 1.4,
January 7, 2022).
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2. Non-Substantive Amendments to the Definition of ``Business Day''
The Commission is adopting the proposed non-substantive changes to
the definition of the term ``business day'' in Sec. 40.1(a).
Currently, the definition of the term ``business day'' in Sec. 40.1(a)
uses the term ``business hour'' and defines the term ``business hour''
to mean ``any hour between 8:15 a.m. and 4:45 p.m.'' With the exception
of Sec. 40.1(a), the term ``business hour'' is not used in part 40. To
enhance the readability of the definition of ``business day,'' the
Commission is deleting the definition of the term ``business hour'' and
all references to the term ``business hour'' that currently appear in
the definition of ``business day'' in Sec. 40.1(a). As amended, the
term ``business day'' means ``the intraday period of time starting at
8:15 a.m. and ending at 4:45 p.m. Eastern Standard Time or Eastern
Daylight Savings Time, whichever is currently in effect in Washington,
DC, on all days except Saturdays, Sundays, and Federal holidays in
Washington, DC.'' \21\ By way of example, both prior to this amendment
and as amended, the Commission must receive a Sec. 40.2 self-
certification submission before 8:15 a.m. on a business day in order
for the DCM or SEF to be able to list the product starting at 8:15 a.m.
on the following business day.\22\ The Commission received no comments
on these proposed changes.
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\21\ The Commission is not making any substantive changes to the
definition of ``Business day.''
\22\ See Sec. 40.2(a)(2).
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3. Amendments to the Definitions of Dormant Entities
The Commission is amending as proposed the definitions of the terms
``dormant designated contract market,'' ``dormant derivatives clearing
organization,'' ``dormant swap data repository,'' and ``dormant swap
execution facility'' in Sec. 40.1. These amendments relate to the
calculation of the duration of inactivity of a registered entity that
will result in the registered entity being deemed dormant. As noted in
the NPRM, the definitions in Sec. 40.1(c) through (f) were
inconsistent and, in some cases, unclear as to how the applicable time
periods were to be determined. Specifically, the Commission is amending
the regulations as proposed to consistently state the time periods in
days--i.e., 365 calendar days instead of 12 months, and 1,095 calendar
days rather than 36 months.
The amendments establish consistency of the regulatory text across
the sections with respect to the calculation of the duration of
inactivity and simplify the calculation of how long a registered entity
has been inactive thereby reducing the potential that market
participants may interpret the regulatory language differently. The
Commission received no comments on these proposed changes.
4. Removal of the Terms ``Dormant Contract or Dormant Product'' and
``Dormant Rule,'' and Related Requirements
Regulation Sec. 40.1(b) defines the term ``dormant contract or
dormant product,'' and Sec. 40.1(g) defines the term ``dormant rule.''
If a contract or product of a DCM or SEF is dormant pursuant to
Sec. Sec. 40.1(b), 40.2(a) prohibits the DCM or SEF from listing the
contract or product until the DCM or SEF either self certifies that the
contract or product to be listed complies with the CEA and Commission
regulations pursuant to Sec. 40.2(a) or obtains Commission approval of
the contract or product pursuant to Sec. 40.3. Likewise, if a rule of
a registered entity is dormant pursuant to Sec. Sec. 40.1(g), 40.6(a)
prohibits the registered entity from implementing the rule until the
registered entity either certifies that the rule complies with the CEA
and Commission regulations in accordance with Sec. 40.6(a) or obtains
Commission approval of the rule pursuant to Sec. 40.5.
In the NPRM, the Commission proposed to remove the terms ``dormant
contract or dormant product'' and ``dormant rule'' from Sec. 40.1, and
the requirements relating to dormant products and dormant rules from
Sec. Sec. 40.2 and 40.6.\23\ The Commission noted in the NPRM that at
the time the Commission adopted the dormant contract definition and the
applicable requirements, contract markets were generally required to
obtain Commission approval of any new products prior to listing the
products.\24\ The Commission also noted that the CEA no longer requires
approval of each contract or product listed by an exchange.\25\ Rather,
a DCM or SEF may list a product after self-certifying that the product
to be listed complies with the CEA and Commission regulations in
accordance with Sec. 40.2. Given this flexibility, DCMs and SEFs
typically use the self-certification process in Sec. 40.6(a) to delist
a contract that does not have any open interest before the contract
could be considered dormant. Monitoring the dormancy status of products
is an inefficient and unnecessary use of Commission resources.
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\23\ This release uses ``dormant contract'' and ``dormant
product'' interchangeably.
\24\ NPRM at 61433.
\25\ Section 113 of the Commodity Futures Modernization Act of
2000 [Appendix E of Pub. L. 106-554, 114 Stat. 2763] added Section
5c(c) to the CEA.
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The Commission received comments from Cboe and CME Group in support
of the proposal to remove the dormant product definition. Cboe and CME
Group commented that the removal of the dormant product definition
would result in little, if any, market integrity or safety concerns as
the DCM or SEF listing the product has a continuing obligation to
ensure that the product complies with the CEA and applicable Commission
regulations.\26\ Cboe and CME Group also noted that removing the
dormant product definition would have the benefit of reducing, or
potentially reducing, compliance costs
[[Page 88596]]
for market participants and oversight costs for the Commission.\27\
Cboe further commented in support of removing the dormant rule
definition and noted that such removal will not result in any reduction
in market integrity or safety and will reduce compliance costs for
market participants and oversight costs for the Commission.\28\
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\26\ Cboe at 2; CME Group at 3.
\27\ Id.
\28\ Cboe at 2.
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While the removal of the term ``dormant product'' will enable a
contract that has not been traded for an extended period of time to
remain listed, the Commission believes any new trading of the contract
will likely not pose concerns regarding market integrity or safety
because the DCM or SEF listing the contract has a continuing obligation
to ensure that the contract complies with the CEA and Commission's
regulations thereunder.\29\ The removal of the term ``dormant rule''
will enable a registered entity to implement a rule more than one year
after the rule is certified by the registered entity as complying with
the CEA and Commission regulations in accordance with Sec. 40.6, or
approved by the Commission in accordance with Sec. 40.5. The
Commission believes the implementation of a rule more than one year
after it was certified or approved likely will not pose concerns
regarding market integrity or safety because the registered entity
implementing the rule has a continuing obligation to ensure that the
rule complies with the CEA and the Commission's regulations
thereunder.\30\ The Commission believes that monitoring the dormancy
status of rules is an inefficient and unnecessary use of Commission
resources.
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\29\ See CEA sections 5(d)(1) and 5h(f)(1) and Sec. Sec.
38.100(a) and 37.100(a).
\30\ See CEA sections 5(d)(1) and 5h(f)(1) and Sec. Sec.
38.100(a) and 37.100(a).
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The Commission considered all comments received and believes that
deleting the definitions would result in little, if any, reduction in
market integrity or safety while potentially reducing compliance costs
for market participants and oversight costs for the Commission.
Accordingly, the Commission is removing the definitions of ``dormant
contract or dormant product'' and ``dormant rule,'' and all references
to ``dormant contract or dormant product'' and ``dormant rule'' in the
regulations. The Commission will retain its definitions of dormant
registered entities, and the rules of a dormant DCM, dormant SEF,
dormant DCO, or dormant SDR would still need to be approved in
connection with the entity being reinstated as a DCM, SEF, DCO or SDR,
respectively.\31\ Also, all products of a registered entity that
becomes dormant (including products previously listed for trading or
offered for clearing) would still need to be approved or self-certified
in order to be listed for trading by the reinstated DCM or SEF or
offered for clearing by the reinstated DCO.\32\
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\31\ See, e.g., Sec. Sec. 38.4(a)(2), 37.4(d), and 49.8(b).
Similarly, in adopting changes to Sec. 39.4(a) in 2020, the
Commission stated that ``[its] issuance of an order of registration
as a DCO constitutes an approval of the applicant's rules that were
submitted as part of the application.'' 85 FR 4852, Jan. 27, 2020.
\32\ See, e.g., Sec. Sec. 38.4(b), 37.4(d), 40.2, and 40.3.
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5. Amendment to the Definitions of ``rule'' and ``Terms and
Conditions''
In the NPRM, the Commission proposed to add ``margin methodology''
to the definition of ``rule'' in Sec. 40.1. Prior to 2011, the
definition of rule in Sec. 40.1 included a restriction on Commission
review of rules relating to margin levels, based on section 8a(7) of
the CEA.\33\ After section 736 of the Dodd-Frank Act amended section
8a(7) of the CEA to remove the restriction on Commission review of
rules relating to margin levels, the Commission removed the restriction
from the definition of ``rule.'' Although DCOs have been submitting
margin-related rule changes to the Commission since 2011, in order to
address any perceived ambiguity regarding whether DCOs are required to
do so, the Commission proposed to revise the definition of ``rule'' to
include an explicit reference to margin methodology.
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\33\ As noted in the NPRM, prior to the enactment of the CFMA in
2000, section 5a(a)(12)(A) of the CEA required that all changes to
contract terms and conditions be submitted to the Commission for
approval ``except those rules relating to the setting of levels of
margin.'' The CFMA removed Section 5a(a)(12)(A) and adopted new
Section 5c(c), allowing registered entities to amend their rules by
self-certification. The new provision did not retain any reference
to the exclusion of margin rules. However, Section 8a(7) of the CEA
was not amended by the CFMA except to replace ``contract market''
with ``registered entity'', and retained the provision that allowed
the Commission to alter or supplement the rules of a DCO, except for
rules related to ``the setting of levels of margin,'' thereby
creating uncertainty as to whether registered entities could adopt
or change margin rules without certifying those rules to the
Commission. Because there was no indication that Congress intended
to alter the status of rules relating to the setting of margin
levels, the Commission had resolved this ambiguity by excluding the
setting of margin levels, with limited exceptions, from the
definition of ``rule'' in Sec. 40.1(h), as in effect prior to the
July 2011 amendments to part 40. Section 8a(7)(D) of the CEA, as
amended by the Dodd-Frank Act, provides that the Commission is
authorized to alter or supplement rules of a DCO, including rules
with respect to margin requirements, provided that the rules: (i)
are limited to protecting the financial integrity of the [DCO]; (ii)
are designed for risk management purposes to protect the financial
integrity of transactions; and (iii) do not set specific margin
amounts. The Commission eliminated the exclusion of the setting of
margin levels from the definition of ``rule'' in its 2011 Final
Rule.
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ISDA and FIA supported the inclusion of ``margin methodology'' in
the definition of ``rule,'' and noted the change would provide further
clarity to DCOs with respect to submission of proposed changes relating
specifically to margin methodology.\34\ CME Group also supported the
addition, noting that its margin methodologies are filed as rules and
it would be prudent to apply this practice uniformly across all
DCOs.\35\ ICE opposed the addition. ICE argued a margin methodology is
not the same as a margin-related rule and the reference to ``margin
methodology'' could broaden the scope of the definition of ``rule'' and
place additional reporting burdens on DCOs to submit documents that are
not ``rules.'' \36\ ICE stated that the Commission has not established
a proper basis for requiring such documents to be filed.\37\
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\34\ FIA/ISDA at 1.
\35\ CME Group at 3.
\36\ ICE at 2.
\37\ ICE at 2.
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The Commission is adopting as proposed the amendment to add
``margin methodology'' to the definition of ``rule.'' The addition of
``margin methodology'' is not an expansion of the definition of
``rule,'' but a clarification that a margin methodology, which
establishes a DCO's policies and procedures for the setting of margin
levels, is a ``stated policy'' of the DCO, and a ``stated policy'' is
already included in the definition of ``rule.'' The fact that DCOs have
been submitting such margin-related rules, including margin
methodologies, since 2011 demonstrates that the interpretation of the
definition to include margin methodology was understood by registered
DCOs generally.
The Commission proposed to amend the definition ``terms and
conditions'' by removing the following two items from the scope of the
definition such that the items to be removed will no longer be treated
as terms and conditions, and adding the items to the categories of
rules that may be implemented without certification pursuant to the
notification processes in Sec. 40.6(d). With respect to a contract for
the purchase or sale of a commodity for future delivery or an option on
such a contract or an option on a commodity (other than a swap), the
Commission proposed to remove ``payment or collection of commodity
option premiums or margins'' from Sec. 40.1(j)(1)(xi)). With respect
to a swap, the Commission proposed to remove
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``payment or collection of option premiums or margins'' from Sec.
40.1(j)(2)(xi)).
CME Group supported the proposed amendment to Sec. 40.1(j)(1)(xi)
and the corresponding change to Sec. 40.6(d)(2).\38\ CME Group
commented that this pair of changes will lower the burden on registered
entities while still providing sufficient notice to the Commission.\39\
The Commission received no comments objecting to the proposed deletions
from Sec. 40.1 or to the corresponding additions to Sec. 40.6(d)(2).
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\38\ CME Group at 3.
\39\ Id.
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The Commission is adopting these changes as proposed. The
Commission continues to believe that registered entities should be able
to submit rules or rule amendments governing the payment or collection
of these premiums or margins through weekly notices to the Commission
pursuant to Sec. 40.6(d)(2) as this will lower the burden for
registered entities and still provide sufficient notice to the
Commission given the fact that these rules and rule amendments are
general in substance.\40\
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\40\ The Commission notes that these rules and rule amendments
do not include details regarding the models used to calculate the
premiums or margins.
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B. Sec. 40.2--Listing Products for Trading by Certification
1. Amendments to the Cover Sheet Requirement and the Filing Format and
Manner Requirements in Sec. Sec. 40.2(a)(3)(i), 40.3(a)(2), 40.5(a)(2)
and 40.6(a)(7)(i), and Appendix D
The NPRM proposed to remove the requirement to submit a cover sheet
when filing a product submission or a rule submission (along with
related references) from Sec. Sec. 40.2(a)(3)(i), 40.3(a)(2),
40.5(a)(2) and 40.6(a)(7)(i), and appendix D to part 40. Given the
development and evolution of the Commission's online portal for the
filing of rule and product submissions (and the fact that the cover
sheet information required by Appendix D is now entered by registered
entities via the portal and processed and stored in the Commission's
online systems), the cover sheet itself is now unnecessary. The
Commission received no comments on these proposed changes.\41\
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\41\ ICE requested an alternative process to enable them to
submit a single filing that would cover multiple new contracts. See
ICE at 3. The reason that each contract must be submitted through a
separate filing is not a regulatory requirement, but rather a
technical limitation and is thus not addressed herein. The
Commission acknowledges that a private citizen suggested: (i) that
more information be provided regarding the portal to ensure
registered entities and market participants know how to use the
portal; (ii) the Commission provide templates for registered
entities and market participants to use as models for their part 40
submissions; and (iii) the Commission ensure the portal is user-
friendly, reliable and secure. Ravnitzky at 1. The Commission
clarifies that only registered entities (and not market
participants) submit filings pursuant to Part 40 through the portal
and that no changes are being made to the portal through this
rulemaking. If registered entities have questions about using the
portal, Commission staff remain available to answer their questions.
The content required to be included in a submission is addressed in
the relevant section of Part 40.
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Accordingly, the Commission is revising Sec. Sec. 40.2(a)(3)(i),
40.3(a)(2), 40.5(a)(2) and 40.6(a)(7)(i), and appendix D, each as
proposed, to remove the cover sheet requirement and related references.
As revised, appendix D will continue to specify the information that
must be entered by a registered entity as part of the filing process,
and the Commission will continue to use such information as part of its
processing and review of submissions.
Additionally, the Commission proposed to amend appendix D to
require a SEF or DCM when submitting a new product to indicate whether
the product to be listed is a ``referenced contract'' as such term is
defined in Sec. 150.1 and as is described in appendix C to part 150.
By way of background, the Commission's amendments to part 150 of the
Commission's regulations (position limits) that became effective on
March 15, 2021 introduced the term ``referenced contract'' and
incorporated the term ``referenced contract'' into the definition of
``terms and conditions'' in part 40.\42\ As a result, before listing a
new contract for trading, a DCM or SEF must determine whether a new
contract to be listed is a referenced contract pursuant to part
150.\43\ To facilitate market participants' compliance with position
limits, Commission staff maintain an accessible workbook of all
referenced contracts that are currently listed on DCMs and SEFs. The
proposed amendment would better enable Commission staff to consider
whether new contracts to be listed should be added to the workbook in a
timely, efficient manner and to review such submissions.
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\42\ See 86 FR 3236, 3307 (January 14, 2021) Position Limits for
Derivatives (adding the definition of ``referenced contract'' to
Sec. 150.1 and incorporating the term referenced contract into
Sec. Sec. 40.1(j)(1)(vii) and (j)(2)(vii). See also Appendix C to
Part 150-Guidance Regarding the Definition of Referenced Contract.
Generally, the term ``referenced contract'' as used for purposes of
Federal position limits in part 150 and as defined in Sec. 150.1
means either a futures contract or an option on a futures contract
whose settlement price is determined by reference, directly or
indirectly, to the price of one of 25 physically-settled core
referenced futures contracts enumerated in Sec. 150.2, or a swap
that qualifies as an ``economically equivalent swap'' (as such term
is defined in Sec. 150.1) to any of the 25 physically-settled core
referenced futures contracts enumerated in Sec. 150.2.
\43\ See Sec. Sec. 40.1(j)(1)(vii) and (j)(2)(vii), 40.2 and
40.3.
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CME Group stated it supports this proposed amendment, noting that
CME Group Exchanges identify products as referenced contracts when
submitting new products, and it would be prudent for this to be a
uniform practice across all DCMs and SEFs.\44\ The Commission believes
that the identification of new products as referenced contracts as part
of the filing process will enable the Commission to more efficiently
process and review submissions of new contracts that are referenced
contracts. The Commission is adopting the amendment as proposed to
require a SEF or DCM when submitting a new product to indicate whether
the product to be listed is a ``referenced contract.''
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\44\ CME Group at 3.
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Finally, as a related matter, the Commission is amending as
proposed Sec. Sec. 40.2(a)(1), 40.3(a)(1), 40.5(a)(1) and 40.6(a)(1)
to remove the reference to the ``Secretary of'' the Commission. The
Commission also proposed to delegate the Commission's authority to
specify the format and manner of filing under these regulations to the
Directors of the Division of Clearing and Risk and the Division of
Market Oversight by adding proposed Sec. 40.7(e). CME Group supported
this delegation, noting that their DCMs, DCO and SEF collectively
submit hundreds of filings each calendar year and that they are
confident that the division heads will endeavor to make the filing
formats as uniform as possible.\45\ No other comments were received on
the proposed changes described in this paragraph. The Commission is
delegating the authority to specify the format and manner of filing
under Sec. Sec. 40.2(a)(1), 40.3(a)(1), 40.5(a)(1) and 40.6(a)(1) to
the Directors of the Division of Clearing and Risk and the Division of
Market Oversight by adopting Sec. 40.7(e) as proposed.
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\45\ CME Group at 3.
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2. Amendments to Sec. 40.2(a)(3)(ii)
As noted in the NPRM, both Sec. 40.2(a)(3)(ii) and Sec.
40.3(a)(3) describe a requirement to submit as part of a self-
certification or a voluntary submission for Commission approval,
respectively, the rules that set forth a contract's terms and
conditions. The two provisions use similar, but slightly different,
language.\46\ Given that the two
[[Page 88598]]
provisions use slightly different words, but are both intended to
require that the DCM or SEF include a copy of the rules that set forth
the contract's terms and conditions when submitting a self-
certification or a voluntary submission for Commission approval,
respectively, the Commission is amending the text of Sec.
40.2(a)(3)(ii) as proposed to mirror the text used in Sec. 40.3(a)(3).
With this amendment, both provisions will use the same language for
consistency and will avoid any potential misreading that the prior
differences in language between the two provisions were intended to
signify a difference in substance. The Commission received no comments
on these proposed changes.
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\46\ Regulation Sec. 40.2(a)(3)(ii) requires the self-
certification to include ``a copy of the product's rules including
all rules related to its terms and conditions.'' Regulation Sec.
40.3(a)(3) says substantively the same thing, but using different
words (requiring the voluntary submission for Commission approval of
a product to include ``a copy of the rules that set forth the
contract's terms and conditions'').
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3. Amendments to Sec. 40.2(a)(3)(v)
Section 5c(c)(1) of the Act and Sec. 40.2(a)(2)(iv) require a DCM
or SEF that elects to list a new contract or other instrument for
trading through the self-certification process to provide to the
Commission a written certification that the new contract or instrument
complies with the Act and the Commission's regulations thereunder prior
to listing the product for trading. Regulation Sec. 40.2(a)(3)(v)
requires the DCM or SEF to submit a concise explanation and analysis of
the product and its compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations
thereunder.\47\ Regulation Sec. 40.2(a)(3)(v) further requires that
the concise explanation and analysis must (1) be accompanied by
supporting documentation, or (2) incorporate the information contained
in such documentation, with appropriate citations to data sources.
Additionally, Sec. 40.2(a)(2)(vi) requires the DCM or SEF to certify
that it posted on its website a notice of the pending product
certification and a copy of the product submission.\48\
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\47\ When reviewing a DCM's product self-certification submitted
pursuant to Sec. 40.2, Commission staff typically look to
understand how the product complies with Sec. Sec. 38.200 and
38.201 in connection with DCM Core Principle 3; Sec. Sec. 38.250
through 38.258 in connection with DCM Core Principle 4; Sec. 38.300
and 301, Sec. Sec. 150.2 and 150.5 in connection with DCM Core
Principle 5; Sec. Sec. 38.400 and 38.401 in connection with DCM
Core Principle 7; and Sec. Sec. 38.450 and 451 in connection with
DCM Core Principle 8. Generally, a DCM will address the majority of
these core principle obligations and Commission regulations (such as
the DCM's rules that establish surveillance, compliance and
enforcement practices and procedures that apply to the trading and
activity on all of the DCM's products as required by Sec. Sec.
38.250 and 38.251) by concisely referencing rules that the DCM
already has implemented that will apply to the trading of the new
product. For core principle obligations and Commission regulations
that require compliance that is tailored to reflect the product's
characteristics and its underlying commodity, Commission staff
typically look at how a product complies with Sec. Sec. 38.200 and
38.201 in connection with DCM Core Principle 3; Sec. 38.252 (for
physical-delivery contracts) or Sec. 38.253 (for cash-settled
contracts) in connection with DCM Core Principle 4; and Sec. Sec.
38.300, 38.301, 150.2 and 150.5 (position limits and accountability)
in connection with DCM Core Principle 5. To the extent a product's
characteristics require additional tailored compliance (e.g.,
protections of markets and market participants from abusive
practices in compliance with DCM Core Principle 12 and Sec. Sec.
38.650 and 38.651, and adopting price limits or trading halts to
limit periods of extreme price volatility in the contract in
compliance with DCM Core Principle 4 and Sec. 38.255), Commission
staff will look to understand how the product will comply in light
of the product's unique characteristics. When reviewing a SEF's
product self-certification submitted pursuant to 40.2, Commission
staff typically look to understand how the product complies with
Sec. Sec. 37.300 and 37.301 in connection with SEF Core Principle
3; Sec. Sec. 37.400 through 37.408 in connection with SEF Core
Principle 4; Sec. Sec. 37.600, 37.601, 150.2 and 150.5 in
connection with SEF Core Principle 6; and Sec. Sec. 37.900 and
37.901 in connection with SEF Core Principle 9. Generally, a SEF
will address the majority of these core principle obligations and
Commission regulations (such as the SEF's rules that establish
surveillance, compliance and enforcement practices and procedures
that apply to the trading and activity on all of the SEF's products
as required by Sec. Sec. 37.400 and 37.401) by concisely
referencing rules that the SEF already has implemented that will
apply to the trading of the new product. For core principle
obligations and Commission regulations that require compliance that
is tailored to reflect the product's characteristics and its
underlying commodity, Commission staff typically look at how a
product complies with Sec. 38.300 and 38.301 in connection with SEF
Core Principle 3, 37.402 (for physical-delivery swaps) or 37.403
(for cash-settled swaps) in connection to SEF Core Principle 4,
Sec. Sec. 37.600 and 37.601, 150.2 and 150.5 (position limits and
accountability) in connection with SEF Core Principle 6. To the
extent a product's characteristics require additional tailored
compliance (e.g., adopting price limits or trading halts to limit
periods of extreme price volatility in the contract in compliance
with SEF Core Principle 4 and Sec. 37.405), Commission staff will
look to understand how the product will comply in light of the
product's unique characteristics.
\48\ As noted in Sec. 40.2(a)(2)(vi), the DCM or SEF may redact
information that it seeks to keep confidential from the documents
published on its website, but must be republished consistent with
any determination made pursuant to Sec. 40.8(c)(4). See also DCM
Core Principle 4 and Sec. 38.401 that require a DCM, among other
things, to have procedures, arrangements and resources for
disclosing to the Commission, market participants, and the public
dissemination of information pertaining to new product listings, new
rules, rule amendments or other changes to previously-disclosed
information on the DCM's website.
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As noted in the NPRM and as further discussed below, staff has
observed a trend of new product certifications that do not include
sufficient information on the underlying commodity, particularly for
contracts on new commodities (e.g., rare earth metals). To ensure that
a DCM or SEF's certification submission includes certain basic
explanation and analysis concerning the product and its compliance with
the Act and Commissions regulations thereunder, including the
applicable core principles, the Commission proposed the following
changes to Sec. 40.2(a)(3)(v).
Specifically, the Commission proposed to amend the text to include
references to the ``terms and conditions'' of the product and to ``the
underlying commodity'' to reiterate the Commission's intent that Sec.
40.2(a)(3)(v) requires an explanation and analysis of the product's
underlying commodity, as well as both the product's terms and
conditions, and the product's compliance with the applicable provisions
of the Act, including core principles, and the Commission's regulations
thereunder. The Commission also proposed to add the words ``that is
complete with respect to'' the product's terms and conditions, the
underlying commodity, and the product's compliance with applicable
provisions of the Act, including core principles, and the Commission's
regulations thereunder to ensure that, although the explanation be
concise, it nevertheless has to analyze and explain the underlying
commodity and how and why the contract's terms and conditions comply
with the applicable core principles. This is not intended to expand or
otherwise alter the scope of the explanation or analysis required in
the current regulation.
Some commenters supported the proposed amendments to Sec.
40.2(a)(3)(v), and some commenters objected. Specifically, ISDA and FIA
supported the proposed amendments, stating that they welcome the
additional requirements for registered entities to provide ``complete''
information regarding a new product's terms and conditions under Sec.
40.2.\49\ ISDA and FIA noted they have observed the emergence of new
asset classes over the last decade such as cryptocurrency products
supporting the evolution of digital assets or environmental and carbon
products to support the green transition, and that it is critical that
CFTC staff have access to all relevant information in its review of new
product submissions.\50\
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\49\ FIA/ISDA at 1.
\50\ Id.
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Better Markets also commented in support of the proposed
amendments, calling them (including the requirement to include
additional details about the product's underlying commodity) a much-
needed enhancement.\51\ Better Markets stated the amendments
``acknowledge a recurring issue faced by Commission staff--the absence
of sufficient information in product
[[Page 88599]]
submissions to fulfill the Commission's regulatory obligations.'' \52\
Better Markets characterized the amendments as requiring registered
entities to provide ``a comprehensive explanation of a new product's
terms and conditions'' . . . that is ``exhaustive in nature, covering
the product's terms and conditions and, critically, its adherence to
the applicable provisions of the CEA, including the core principles and
the Commission's regulations.'' \53\ Better Markets further stated that
by ``mandating comprehensive information about new products, including
their underlying commodities, these amendments bolster market
integrity, protect the interests of market participants, and ensure
that the Commission can effectively and thoroughly evaluate
compliance.'' \54\
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\51\ Better Markets at 4.
\52\ Better Markets at 2.
\53\ Better Markets at 2-4.
\54\ Better Markets at 4.
---------------------------------------------------------------------------
A16z requested that the Commission provide guidance on how market
participants can simultaneously satisfy the requirements to be
``complete'' while also being ``concise''.\55\ Cboe stated that the
word ``complete'' should not be included in the product certification
provisions, and, if it is included, Cboe requests, at a minimum, that
the Commission clarify that the standard of completeness will be
applied in a sensible and reasonable manner.\56\ Cboe stated that
product certifications should focus on key points, as reflected by the
inclusion of the word ``concise'' in the current and proposed
regulatory language which describes the explanation and analysis that
is required to be included. Cboe stated that it is important that the
application of the product certification provisions focuses on
requiring a concise description of what is relevant with respect to the
applicable product in determining what information should be included
instead of completeness for the sake of completeness which can lead to
the inclusion of unneeded and irrelevant information.
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\55\ A16z at 6.
\56\ Cboe suggested the Commission can achieve the same outcome
of requiring pertinent information to be included in product
certification filings by using the word ``of'' instead of the phrase
``that is complete with respect to.'' Cboe stated it believes that
the inclusion of the word ``complete'' can lead to the possibility
that this standard will be applied in a prescriptive, inconsistent,
and unreasonable manner (which would in turn undermine the utility
of the product certification process for registered entities, market
participants, and the Commission; delay the ability to implement
products and rule enhancements that benefit the market; and inhibit
innovation and competition). Cboe further stated the concept of
completeness is inherently ambiguous and could be applied in a
rigid, onerous, arbitrary, and/or subjective manner.
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Coinbase opposed the proposed amendments to Sec. 40.2(a)(3) and
stated they ``believe the proposed completeness standard ``lacks
clarity and would significantly alter the existing process for
certification under Regulation Sec. 40.2.'' \57\ Coinbase stated that
the proposed revision is ``unnecessarily burdensome in what it would
require a DCM to provide to evidence compliance with the CEA and
Commission regulations'' and is thus ``contrary to the policies
embedded in CEA section 5c(c) that, prior to certification, the burden
of evaluating a contract for compliance is with the DCM (not the
Commission).'' \58\ Coinbase stated that CEA section 5c mandates that
the Commission rely upon a DCM's ``judgment as to the level of
information and analysis to include in a product certification to
explain and analyze concisely the new product, including an explanation
of the terms and conditions of the contract or the spot market for the
underlying commodity where they DCM considers appropriate.'' \59\
Coinbase further stated that the standard could ``significantly expand
a DCM's regulatory costs for preparing certified product filings'' \60\
and could ``cause other adverse consequences including, but not limited
to, unnecessarily limiting and delaying the availability of a process
for listing of derivatives contracts quickly after expending the time,
effort and diligence to develop the product in the highly competitive
global derivatives market.'' \61\ Coinbase further noted that the
proposed amendment ``would leave little daylight between what a DCM
would submit in a certified filing compared to a new product filed
voluntarily for CFTC review and approval under CFTC Regulation Sec.
40.3.'' \62\
---------------------------------------------------------------------------
\57\ Coinbase at 6.
\58\ Coinbase at 6.
\59\ Coinbase at 6.
\60\ Coinbase at 6.
\61\ Coinbase at 11.
\62\ Coinbase at 8.
---------------------------------------------------------------------------
Coinbase stated that the NPRM provides ``only modest
justification'' and ``does not cite any concerns that DCMs are abusing
the certification procedure by certifying non-compliant products.''
\63\ Coinbase further noted that the changes are not in response to any
statutory amendments, and that staff have not articulated any
significant market failure or rationale that necessitates changes
beyond those incorporated as a result of the 2011 amendments to part
40.\64\ Coinbase noted it generally accepts the Commission's position
that it is appropriate to impose some standard on a registered entity
to explain in the filing the basis for its compliance with the CEA and
CFTC regulations, but Coinbase believes the Commission should not move
away from the standards adopted in 2011.\65\
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\63\ Coinbase at 7.
\64\ Coinbase at 5.
\65\ Coinbase at 6. Coinbase also stated that ``[a]s required by
statute, the Commission should continue to rely upon a DCM's
judgment as to the level of information and analysis to include in a
product certification to explain and analyze concisely the new
product, including an explanation of the terms and conditions of the
contract or the spot market for the underlying commodity where the
DCM considers appropriate.'' For a discussion of the difference
between what must be submitted under Sec. Sec. 40.2(a)(3)(v) and
40.3(a)(4), see the discussion below in section II.C.1.
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The Commission has considered the comments received in response to
the proposed amendments to Sec. 40.2(a)(3)(v). In response to the
comment that the statute mandates that the Commission rely upon a DCM's
``judgment as to the level of information and analysis to include in a
product certification to explain and analyze concisely the new
product,'' \66\ the Commission notes that while a DCM has reasonable
discretion in establishing the manner in which the DCM complies with
Sec. 40.2(a)(3)(v),\67\ the DCM is nonetheless required to provide the
information, explanation and analysis required by Sec. 40.2(a)(3)(v)
when self-certifying a product pursuant to Sec. 40.2. For those DCMs
and SEFs that submit written certifications that satisfy the current
standards when filing Sec. 40.2 submissions, the changes being made to
Sec. 40.2(a)(3)(v) should not expand their regulatory costs for
preparing certified product filings.
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\66\ Coinbase at 6.
\67\ See CEA section 5(d)(1)(B).
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Relatedly, and in response to the request for additional
justification for the amendments to Sec. 40.2(a)(3)(v), the Commission
is expanding upon the statement in the NPRM that staff have observed a
trend of new product certifications that do not include sufficient
information on the underlying commodity, particularly for contracts on
new commodities (e.g., rare earth metals). The Commission has
experienced numerous instances of registered entities certifying that
their product complies with the Act and applicable regulations and
submitting only cursory supporting analyses, evidence or documentation,
which is not consistent with the current
[[Page 88600]]
requirement in Sec. 40.2(a)(3)(v).\68\ When the Commission requested
additional information, the Commission has on numerous occasions
experienced delays in receiving certain requested information,
suggesting that supporting analyses had not been prepared by registered
entities prior to certifying compliance.\69\
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\68\ Coinbase's letter quoted a statement made by Commission
staff in 2018 in Advisory 18-14 that ``the existing self-
certification process has worked well. Typically, exchanges reach
out to Commission staff in advance of launching a new contract . . .
[a] lengthy engagement is not unusual for products that may
implicate complex issues.'' Coinbase at 7. The Commission notes that
while the Commission continues to believe it is helpful for both the
registered entity and the Commission when exchanges reach out prior
to self-certifying new products under Sec. 40.2, it is not required
by law and it does not always happen. Additionally, even when
registered entities elect to engage informally with staff prior to
submitting Sec. 40.2 filings, separate and apart from such
engagement, the Sec. 40.2 filings must stand independently, provide
the Commission with a concise explanation and analysis with respect
to the product's terms and conditions, the underlying commodity, and
the product's compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations
thereunder, and explain to the Commission and the public how and why
the new contract is in compliance. See also DCM Core Principle 4 and
Sec. 38.401 that require, among other things, that a DCM have
procedures, arrangements and resources for disclosing to the
Commission, market participants, and the public information
pertaining to new product listings, new rules, rule amendments or
other changes to previously-disclosed information on the DCM's
website.
\69\ The Commission has experienced this challenge before. In
2011, when the Commission adopted the ``concise explanation and
analysis'' requirement that applies today, the Commission provided
the following insight into why it adopted this requirement then--
stating that the Commission has encountered numerous instances in
which registered entities provided only cursory supporting analyses
for their product submissions or, in certain cases, failed to
document the evidentiary basis for their certifications altogether.
The Commission also has experienced undue delays in receiving
certain requested information, suggesting that supporting analyses
had not been prepared by the registered entities as of the time of
request. Without prompt receipt of supporting information, the staff
must expend significant resources and time to replicate existing
analyses or to otherwise independently establish a product's
compliance with applicable law. In addition, the staff frequently
has found it necessary to contact registered entities for additional
guidance on product submissions. To address these problems, final
Sec. 40.2(a)(3)(v) facilitates the staff's review of new products
subsequent to certification while discouraging unsupported
certification of products in the first instance. 2011 Final Rule at
44780.
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By adding the word ``complete'' to Sec. 40.2, the Commission is
not intending to create a standard that is comparable to a new product
filed voluntarily for CFTC review and approval under Sec. 40.3. That
is, when a DCM or SEF voluntarily submits a product for Commission
review and approval pursuant to Sec. 40.3, the Commission is tasked
with reviewing the information submitted for the product and using that
information to determine whether the product would violate the Act or
the Commission's regulations.\70\ By contrast, when a DCM or SEF elects
to submit a product pursuant to Sec. 40.2, the DCM or SEF must certify
that the product complies with the Act and the Commission's regulations
thereunder.\71\
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\70\ See Sec. 40.3(a) and (b). As noted below in section
II.C.1, when a DCM, SEF or DCO is requesting that the Commission
review the product for Commission approval pursuant to Sec. 40.3,
the Commission needs more information for Sec. 40.3 submissions
than for Sec. 40.2 submissions--hence the inclusion of the word
``concise'' in Sec. 40.2 and the omission of the word ``concise''
in Sec. 40.3. Specifically, pursuant to Sec. 40.3, the Commission
needs to receive complete information regarding the product's terms
and conditions, the commodity underlying the product, and the
product's compliance with applicable provisions of the Act
(including core principles) and the Commission's regulations to
understand and assess whether the terms and conditions of the
product comply with the Act (including core principles) and the
Commission's regulations.
\71\ By contrast, for Sec. 40.2 self-certification submissions,
the DCM or SEF needs to submit concise information regarding the
product and the commodity underlying the product that explains the
terms and conditions of the product (as defined in Sec. 40.1) and
how the DCM or SEF views the terms and conditions of the product as
compliant with the Act and the Commission's regulations.
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The products offered for trading by registered entities vary
widely, and the applicable statutory and regulatory requirements that
apply to any particular product thus also vary widely. Each registered
entity should be familiar with the statutory and regulatory
requirements that apply for a particular product, and therefore should
be able to determine what information is reasonable and appropriate for
the submission to demonstrate compliance with these requirements when
preparing a Sec. 40.2 submission.
Prior to the DCM or SEF self-certifying that a product complies
with the Act and Commission regulations thereunder, the DCM or SEF must
complete its diligence on the product and its terms and conditions, on
the underlying commodity, and on ensuring the product complies with the
applicable provisions of the Act, including core principles, and the
Commission's regulations thereunder.\72\ The DCM or SEF must have also
established proper risk management and supervisory oversight prior to
listing the product for trading, such as the adoption of price limits
or trading halt provisions when deemed necessary by the DCM or SEF to
limit the impact of periods of extreme price volatility.\73\ The DCM or
SEF relies upon its own diligence, risk management and supervisory
oversight when it self-certifies that the product complies with
applicable provisions of the Act, including core principles, and the
Commission's regulations thereunder.\74\
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\72\ See CEA sections 5 and 5h, and parts 37 and 38 of the
Commission's regulations. See also note 47.
\73\ See id. When a DCM or SEF deems it necessary to adopt price
limit or trading halt provisions for its new product to limit the
impact of periods of extreme price volatility in the contract,
Commission staff typically look for an explanation of the price
limit or trading halt provisions to understand how the DCM will
comply with Sec. 38.255 in connection with DCM Core Principle 4, or
how the SEF will comply with Sec. 37.405 in connection with SEF
Core Principle 4.
\74\ This means that a DCM should have completed research on the
underlying commodity (including delivery points if physically
delivered commodity and underlying cash price series if cash
settled) and how the contract complies with the core principles. All
this should be completed as part of developing the contract prior to
listing. See note 47.
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Currently, and as amended herein, DCMs and SEFs must provide a
written certification that the product to be listed complies with
applicable provisions of the Act, including core principles, and the
Commission's regulations thereunder.\75\ The DCM or SEF must include a
concise explanation and analysis of the underlying commodity, the terms
and conditions of the contract and the compliance of the contract with
applicable provisions of the Act, including applicable core principles
and Commission regulations.\76\ Cursory or conclusory explanations will
not suffice.\77\
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\75\ Regulation Sec. 40.2(a)(3)(iv).
\76\ Regulation Sec. 40.2(a)(3)(v). The DCM or SEF must also
either include the documentation the DCM or SEF relied upon to
establish its basis for compliance with applicable law, or
incorporate the information contained in such documentation, with
appropriate citations to data sources. See Sec. 40.2(a)(3)(v).
\77\ See 2011 Final Rule at 44780. When adopting the requirement
that a DCM provide a ``concise explanation and analysis'' pursuant
to Sec. 40.2(a)(3)(v) to self-certify a new product, the Commission
described the required ``concise explanation and analysis'' of the
certified product--and its compliance with applicable law in the
2011 Final Rule--as ``necessary for the Commission's review of a new
product certification.''
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The Commission is thus adding the word ``complete'' to Sec.
40.2(a)(3)(v) to confirm that it is essential that the DCM or SEF
include a concise explanation and analysis (including the supporting
information and citations or together with the accompanying
documentation) that explains how and why the contract's terms and
conditions comply with the applicable core principles and regulations,
including how the terms and conditions reflect the cash market of the
underlying commodity. This is a fact-specific endeavor that is
dependent on the circumstances surrounding the contract and the
underlying commodity.
Given the tremendous breadth and variability of products and
contracts that can be listed on CFTC regulated markets, it is not
possible for the Commission to state definitively all of
[[Page 88601]]
the core principles and regulations that are relevant for each
particular contract. However, the Commission notes that for any
contract to be listed for trading on a DCM or a SEF, it is relevant for
the DCM or SEF to analyze how the contract is not readily susceptible
to manipulation in compliance with DCM Core Principle 3 or SEF Core
Principle 3, respectively.\78\ For any contract to be listed for
trading on a DCM or a SEF, it is also relevant for the DCM or SEF to
analyze how the contract complies with DCM Core Principle 5 or SEF Core
Principle 6, respectively,\79\ which relate to the adoption by the DCM
or SEF of position limits or position accountability for speculators,
as is necessary and appropriate, to reduce the potential threat of
market manipulation or congestion (especially during trading in the
delivery month) in the contract.
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\78\ CEA sections 5(d)(3) and 5h(f)(3).
\79\ CEA sections 5(d)(5) and 5h(f)(6).
---------------------------------------------------------------------------
In response to comments, the Commission reiterates it does not view
the amended provision as altering what is intended to be the existing
standard or process of complying with Sec. 40.2(a)(3)(v). The
Commission clarifies in response to a comment received \80\ that the
``complete'' explanation and analysis required by Sec. 40.2(a)(3)(v)
is intended to be concise and is not intended to be exhaustive in
nature.\81\ The Commission also does not believe that the requirements
in the amended provision to provide evidence of compliance with the CEA
and Commission regulations are unnecessarily burdensome.\82\
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\80\ See Better Markets at 2-4.
\81\ The Commission retains the authority in Sec. 40.2(b) to
obtain additional evidence, information or data that may be
beneficial to the Commission in conducting a due diligence
assessment of the filing and the registered entity's compliance with
any applicable requirements of the Act or the Commission's
regulations or policies thereunder.
\82\ Regulation Sec. 40.2 (a)(3)(v) already requires that the
explanation and analysis be accompanied by the documentation relied
upon to establish the basis for compliance with applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources. For a discussion of costs,
see the Cost Benefit Considerations section below.
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Additionally, the Commission notes that, as proposed in the NPRM
and as adopted herein, Sec. 40.2(a)(3)(v) retains the word
``concise.'' In response to the request that the Commission provide
guidance regarding how a DCM or SEF would satisfy the ``complete''
requirement while also being ``concise,'' the Commission notes that the
explanation and analysis required under amended Sec. 40.2(a)(3)(v)
should explain and analyze the product's terms and conditions, the
underlying commodity, and how the product complies with applicable law
and is not necessarily required to be lengthy in order to be
``complete.'' Moreover, the explanation and analysis incorporates
information that should already be reviewed or collected by registered
entities. To the extent that registered entities may be unclear about
how to apply these standards in a given submission, they are invited to
engage with staff in advance of self-certifying the product.
When a DCM or SEF files a product self-certification submission
with the Commission pursuant to Sec. Sec. 40.2, 40.2(a)(3)(vi)
requires the DCM or SEF to post a copy of its Sec. 40.2 submission on
its website, including a copy of the rules that set forth the
contract's terms and conditions as required by Sec. 40.2(a)(3)(ii) as
well as the concise explanation and analysis that is complete with
respect to the contract's terms and conditions, the underlying
commodity, and the product's compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder as required by Sec. 40.2(a)(3)(v).\83\ By including this
information in the Sec. 40.2 submission, the DCM or SEF makes the
information accessible to market participants and the public. Access to
the information enables market participants to make educated choices
when selecting products to trade and platforms on which to trade these
products.
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\83\ See also DCM Core Principle 7 (Availability of General
Information) and implementing Sec. Sec. 38.400(a) and 38.401.
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4. Guidance on Compliance With Sec. Sec. 40.2 and 40.3
In appendix C of part 38, the Commission offers general guidance
that a DCM or SEF can use to demonstrate that a contract the DCM or SEF
certifies or submits for voluntary Commission approval (pursuant to
Sec. 40.2(a) or Sec. 40.3, respectively) is not readily susceptible
to manipulation.\84\ Additionally, staff has offered guidance to help
DCMs and SEFs understand how DCMs and SEFs might elect to demonstrate
compliance with the part 40 regulations when listing contracts on novel
commodities (such as the guidance regarding digital commodities in CFTC
Staff Advisory No. 18-14) for trading. Recently, the Commission
proposed non-binding Commission Guidance Regarding the Listing of
Voluntary Carbon Credit Derivative Contracts.\85\
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\84\ 17 CFR part 38, appendix C. Guidance set forth in appendix
B to part 38 states that a DCM may use the appendix C Guidance as
guidance in meeting DCM Core Principle 3 for new product listings.
17 CFR part 38, appendix B, Core Principle 3 Guidance. For a
discussion of the differences between Sec. Sec. 40.2(a) and 40.3,
see below at section II.C.1.
\85\ Commission Guidance Regarding the Listing of Voluntary
Carbon Credit Derivative Contracts; Request for Comment, 88 FR 89410
(December 27, 2023).
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In the NPRM, the Commission included two specific product examples
(one in each of two common categories of contracts) regarding the
explanation and analysis that should be provided--one for a physically-
settled futures contract on copper and another for a cash-settled
futures contract on a stock index price series.\86\ The examples are
intended to show how a DCM or SEF may use the guidance provided in
appendix C to part 38 to develop the concise explanation and analysis
to submit with a product self-certification filing. A16z supported the
inclusion of the two examples provided in the NPRM,\87\ and requested
the Commission add an example focused on a digital asset.\88\ A16z
suggested that the Commission explicitly state it will not treat the
self-certification of digital assets products and rules differently
from other commodities.\89\ A16z stated that the NPRM appears to reject
CFTC Staff Advisory 18-14 (``Advisory 18-14'') because the NPRM
identifies activities that would be sufficient to meet the proposed
rules for self-certification, but would not meet Advisory 18-14.\90\
Cboe commented that appendix C to part 38 is guidance and should
continue to apply as guidance.\91\
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\86\ NPRM at 61436.
\87\ No other comments were received in response to the two
specific product examples provided in the NPRM.
\88\ A16z at 6.
\89\ A16z at 2.
\90\ Specifically, A16z stated that an entity complying with
appendix C to part 38 would satisfy the proposed completeness
standard, but Advisory 18-14 addresses more than appendix C (such as
an information sharing agreement with any underlying spot markets).
A16z at 2-4. A16z suggested the Commission make explicit that the
Commission is not adopting 18-14. A16z at 4.
\91\ Cboe at 3.
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In response to these comments, the Commission notes that part 40
and the amendments adopted in this Final Rule are designed to apply
across the many different types of products that are traded on DCMs and
SEFs, cleared by DCOs and reported to SDRs. A product's compliance, and
demonstration of compliance, is a fact and circumstances specific
analysis. Regardless of the underlying asset class of a product being
listed for trading, when a DCM or SEF submits a new derivatives product
via certification, the terms and conditions of the product should be
designed to reflect the relevant commodity characteristics used by
market
[[Page 88602]]
participants transacting in the cash market for that commodity as well
as cash-market practices for pricing and delivering that commodity, as
applicable.\92\
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\92\ See definition of terms and conditions in Sec. 40.1, CEA
sections 5(d)(3) and 5h(f)(3). See also explanation of Core
Principle 3 in appendix C to part 38.
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Appendix C to part 38 is intended to assist registered entities in
developing new products (including due diligence, compliance, and
documentation thereof). The guidance is not altered by the amendments
adopted in this Final Rule. The Commission agrees that Appendix C to
part 38 is and remains guidance. The Commission is including below the
two illustrative examples provided in the NPRM that show what
information a DCM or SEF should include in the explanation and analysis
portion of its self-certification for a product it intends to list for
trading pursuant to Sec. 40.2. While the Commission will not at this
time provide additional examples for other asset classes generally in
this Final Rule, the Commission notes that the examples provided are
intended to serve as representative samples of what information an
exchange should include in a self-certification. However, the
Commission notes that each product is unique and may raise novel issues
that require additional analysis or explanation not provided in the
examples below. In this sense, digital assets will not be treated
differently than the other commodities writ large, because the
diversity of other commodities already requires a case by case
determination of what an exchange should include in a self-
certification. Staff remain available to answer any questions as DCMs
and SEFs contemplate novel products and are uncertain of their
compliance obligations.\93\
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\93\ Including new examples could create a logical outgrowth
problem under the Administrative Procedures Act.
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A DCM or SEF would satisfy the first sentence of Sec.
40.2(a)(3)(v) with respect to Core Principle 3 by concisely explaining
how the concepts described in appendix C to part 38 are addressed for
the contract.\94\ Appendix C to part 38 provides guidance on the
quality standards that should be defined for the underlying commodity
in the contract's terms and conditions for a futures contract.\95\ The
quality standards used should reflect those used in transactions in the
commodity in normal cash marketing channels and comply with those
industry established standards.\96\
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\94\ For a product a DCM or SEF elects to submit for Commission
review and approval, the DCM or SEF would satisfy the first sentence
of Sec. 40.3(a)(4) with respect to Core Principle 3 by explaining
how the concepts described in appendix C to part 38 are addressed
for the contract. As noted above, more information is needed for a
40.3 filing in order for the Commission to make an independent
assessment to decide whether to approve the product than is required
to understand the compliance diligence completed by a DCM or SEF in
connection with their 40.2 self-certification filing of a new
product.
\95\ See Appendix C to part 38, paragraph (b)(2)(i)(A) for
physically-settled contracts and paragraph (c)(4)(i)(A) for cash-
settled contracts.
\96\ See id.
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To improve the understanding of the level of detail expected by the
Commission, the discussion below addresses two common categories of
contracts and provides two specific product examples that illustrate
what would meet the standard articulated in Sec. 40.2(a)(3)(v) of ``a
concise explanation and analysis that is complete with respect to the
product's terms and conditions, the underlying commodity, and the
product's compliance with applicable provisions of the Act, including
core principles, and the Commission's regulations thereunder.''
Generally, as noted above, when listing a cash settled or
physically settled contract on a commodity, the contract must comply
with, among any other relevant provisions, DCM Core Principles 3 and
5,\97\ SEF Core Principles 3 and 6,\98\ and part 150. To be a complete
and concise explanation and analysis of compliance with those
requirements, the explanation and analysis the DCM or SEF submits
describing the characteristics of the contract's underlying commodity
pursuant to Sec. 40.2(a)(3)(v) should include characteristics such as
the deliverable commodity's grade, quality and deliverable supply, as
applicable, as well as the other applicable contract characteristics
described in appendix C to part 38. Appendix C to part 38 provides
guidance on the quality standards that should be defined for the
underlying commodity in the contract's terms and conditions for a
physically-settled futures contract.\99\ The quality standards used
should reflect those used in transactions in the commodity in normal
cash marketing channels and comply with those industry established
standards.\100\
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\97\ CEA section 5(d)(3) and (5).
\98\ CEA section 5h(f)(3) and (6).
\99\ Appendix C to part 38, paragraph (b)(2)(i)(A).
\100\ See id. Appendix C also provides that regardless of the
type of commodity underlying the contract, the DCM or SEF's
explanation and analysis should describe the cash market for the
underlying commodity and how the contract's terms and conditions:
reflect the cash market transactions in the underlying commodity;
meet the risk management needs of prospective users; and promote
price discovery of the underlying commodity. Appendix C to part 38,
paragraph (a).
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As a specific example for a physically-settled futures contract,
when listing a physically settled futures contract on copper, the DCM
should specify the acceptable standard of copper that is eligible for
delivery on the physically-settled futures contract.\101\ Today, an
acceptable quality standard for copper in the cash market is Grade 1
Electrolytic Copper Cathodes (full plate or cut) that conforms to the
latest chemical and physical specifications adopted by the American
Society for Testing and Materials for Grade 1 Electrolytic Copper
Cathodes (B115-00 or its latest revision). If a DCM lists a physically
settled futures contract on Grade 1 Electrolytic Copper Cathodes, the
only quality of copper allowed for delivery at the settlement of the
futures contract would be copper of the quality that meets this
industry-set standard, and as a result, the price of the futures
contract would reflect the price of only this kind of copper. Moreover,
for a physically-settled futures contract on Grade 1 Electrolytic
Copper Cathodes, the DCM should provide its analysis of the estimated
deliverable supply of the copper meeting the contract specifications
located at the delivery facilities identified by the DCM for the
contract, along with the DCM's explanation and analysis explaining how
the estimated deliverable supply was used to set an exchange-set
speculative position limit in accordance with DCM Core Principle 5 and
Sec. 150.5.\102\
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\101\ See Appendix C to part 38, paragraph (b)(2)(i)(A). When
listing a cash settled futures contract on copper, the DCM should
specify the acceptable standard of copper that underlies the cash
price series or the physically-settled futures referenced price used
for cash settlement purposes. See Appendix C to part 38, paragraph
(c)(4)(i)(A).
\102\ See Sec. 150.5(b)(1), part 38, Sec. 38.201 Additional
sources for compliance. Appendix C to part 38.
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Throughout the life of the futures contract up until the time of
expiration, copper located in a DCM-approved warehouse of the quality
specified in the contract would be eligible to be warranted by the
warehouse for delivery on the contract. The price of the physical
copper (Grade 1 Electrolytic Copper Cathode) to which the futures
contract settles and the price of the physically settled futures
contract on Grade 1 Electrolytic Copper Cathode should match--or
converge--at the expiration date. The convergence demonstrates that the
futures contract accurately reflects the cash price of the underlying
commodity and compliance with DCM Core Principle 3 (that the contract
is not readily susceptible to manipulation).
[[Page 88603]]
Similarly, when listing a cash-settled contract based on an
excluded commodity, the explanation and analysis the DCM or SEF submits
describing the characteristics of the contract's underlying commodity
should include characteristics such as the rate, index methodology, and
pricing source, as applicable, as well as other applicable
characteristics described in Appendix C to part 38.\103\ Appendix C to
part 38 provides guidance on the cash settlement price calculation for
a cash-settled futures contract.\104\ Appendix C provides that the
cash-settlement price series used by a DCM or SEF to settle a cash-
settled contract should be reflective of the underlying cash-market of
the commodity, and that price series should be publicly available,
timely and reliable.\105\ The DCM or SEF should include this
information in its explanation of how the product complies with the
applicable provisions of the Act, including core principles, and the
Commission's regulations thereunder.
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\103\ See Appendix C to part 38, paragraphs (a) and (c).
\104\ For example, when listing a cash settled futures contract
on the S&P 500 Index, the DCM's contract specifications should
describe the index and its methodology.
\105\ See Appendix C to part 38, paragraphs (a) and (c).
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As a specific product example for a cash-settled excluded
commodity, when listing a cash-settled futures contract on a stock
index price series, such as the S&P 500 (a stock index of large
capitalization stocks listed on U.S. stock exchanges), the DCM should
specify how the cash settlement price based on the S&P 500 Index is
reflective of the underlying cash-market, and how that price series is
reliable, publicly available and timely.\106\ The DCM should describe
how the S&P 500 Index price series is reflective of the underlying cash
market of domestic large capitalization stocks by describing the
methodology for constructing and maintaining the S&P 500 Index.\107\
The DCM should describe how the S&P 500 Index is considered by industry
as an accurate and reliable index of large capitalization stocks by
describing how the index is used as a benchmark for measuring the
movements of the U.S. stock exchanges.\108\ The DCM should describe how
frequently the index is calculated and where it is disseminated to the
marketplace to describe how the index is publicly available and
timely.\109\ Moreover, for a cash-settled futures contract on the S&P
500, the DCM should provide its analysis of trading in S&P 500 futures
or similar index futures and explain how this analysis was used to set
an exchange-set position limit or position accountability level in
accordance with DCM Core Principle 5 and Sec. 150.5.\110\
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\106\ See CEA Sections 5(d)(3), Sec. Sec. 38.200 and 201, and
appendix C to part 38, paragraphs (c)(3)(iv) and (v).
\107\ See CEA section 5(d)(3), Sec. Sec. 38.200 and 201, and
appendix C to part 38, paragraph (a)(2).
\108\ See CEA section 5(d)(3), Sec. Sec. 38.200 and 201, and
appendix C to part 38, paragraph (a)(2).
\109\ See CEA section 5(d)(3), Sec. Sec. 38.200 and 201, and
appendix C to part 38, paragraph (a)(2).
\110\ See Sec. 150.5(b)(1), part 38, Sec. 38.201 Additional
sources for compliance. Appendix C to part 38.
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While this rulemaking does not provide an example specifically for
contracts on digital assets, the examples above for cash-settled
contracts and physically-settled contracts are applicable for contracts
on digital assets that are cash-settled or physically-settled, just as
the examples provide guidance on contracts on agricultural, energy,
metals, and financial commodities that are cash-settled or physically-
settled. Appendix C to part 38 provides guidance on the relevant
characteristics of the underlying commodity and contract terms and
conditions that should be considered when the DCM or SEF is explaining
how and why a contract is not readily susceptible to manipulation in
compliance with Core Principle 3. Appendix C to part 38 also provides
guidance on the estimated deliverable supply on the underlying
commodity that should be considered when the DCM or SEF is explaining
how and why a contract complies with DCM Core Principle 5 or SEF Core
Principle 6 (Position Limits or Accountability).
5. Differences Between Sec. Sec. 40.2 and 40.6
In addition to the comments noted above regarding Sec. 40.2,
Better Markets commented that the NPRM ``doesn't adequately address the
discrepancy in the way the Commission reviews self-certified products
in CFTC Regulation Sec. 40.2 as compared to the way it reviews self-
certification of rules in CFTC Regulation Sec. 40.6.'' \111\ Better
Markets requested a 10-business day review for products certified under
Sec. 40.2 (and noted in support of this request that the U.S
Securities and Exchange Commission adopted a 10-business day period for
products to be listed on security-based swap execution facilities), and
to expand the stay in Sec. 40.2(c) \112\ to mirror Sec. 40.6(c)(1)
\113\ and allow the Commission to postpone the certification of a
product when that product introduces novel or complex issues
necessitating extended analysis or is accompanied by inadequate
explanation.\114\
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\111\ Better Markets at 2.
\112\ Pursuant to Sec. 40.2(c), the Commission ``may stay the
listing of a contract [certified pursuant to Sec. 40.2(a)] during
the pendency of Commission proceedings for filing a false
certification or during the pendency of a petition to alter or amend
the contract terms and conditions pursuant to Section 8a(7) of the
Act.'' The analogous stay language for rules is set forth in Sec.
40.6(c)(4). Pursuant to Sec. 40.6(c)(4), the Commission ``may stay
the effectiveness of an implemented rule during the pendency of
Commission proceedings for filing a false certification or during
the pendency of a petition to alter or amend the rule pursuant to
section 8a(7) of the Act.''
\113\ Regulation Sec. 40.6(c)(1) states in relevant part that
the Commission ``may stay the certification of a new rule or rule
amendment submitted pursuant to [40.6(a)] . . . on the grounds that
the rule or rule amendment presents novel or complex issues that
require additional time to analyze, the rule or rule amendment is
accompanied by an inadequate explanation or the rule or rule
amendment is potentially inconsistent with the Act or the
Commission's regulations thereunder.''
\114\ Better Markets at 5-7.
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By contrast, Coinbase stated that the Commission lacks statutory
authority to reject or stay a self-certified submission for a product
and suggested the proposed change to Sec. 40.2(a)(3)(v) would create
procedural confusion by incorrectly implying the Commission has this
authority if it determines the registered entity did not satisfy the
proposed prescriptive standard.\115\ Coinbase and A16z pointed to the
differences in statutory text that apply to self-certified products and
self-certified rules.\116\ A16z urged the Commission to reconsider its
``rationale and authority for more extensive product self-
certifications'' given the differences in statutory documentation
requirements between product and rule self-certifications.\117\
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\115\ Coinbase at 2 and 6.
\116\ A16z further noted that ``5c(c) has extensive provisions
for the Commission to review and stay certifications of rules, but
it has no similar provisions for products . . . If these statutory
differences do not suggest that the CFTC lacks the authority to
require extensive disclosures as part of the ``written
certification'' of a product, at a minimum they suggest that a
product self-certification should be materially more limited than a
rule self-certification.''
\117\ A16z at 5.
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In response to those comments, the Commission notes that CEA
section 5c(c)(2) and (3) provide for a 10 business day review period
for rules and rule amendments that are self-certified and a process to
stay the certification of a rule or rule amendment that has novel or
complex issues that require additional time to analyze, an inadequate
explanation by the
[[Page 88604]]
submitting registered entity, or a potential inconsistency with the CEA
or Commission regulations.\118\ By contrast, the CEA does not provide
for a 10 business day review period or an analogous stay process for
products that are self-certified. Consistent with these statutory
differences, for self-certified products, the Commission did not
propose in the NPRM, and is not adopting, either a 10-business day
review period or a stay process analogous to Sec. 40.6(c)(1).
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\118\ A private citizen stated that the NPRM does not define
what constitutes a novel or complex issue, or how the Commission
would determine if a submission is inconsistent with the CEA or the
Commission's regulations, and suggested that the Commission better
define what constitutes a novel or complex issue, and how the
Commission would determine if a submission is inconsistent with the
CEA or the Commission's regulations. Ravnitzky at 1-2. Given that
the Commission did not propose amendments to these standards, the
Commission is not positioned to address them herein.
---------------------------------------------------------------------------
In response to the comment suggesting that the Commission
reconsider its ``rationale and authority for more extensive product
self-certifications given the differences in statutory documentation
requirements for product self-certification versus rule self-
certifications'' and the comment stating that the statutory differences
suggest that a product self-certification should be materially more
limited than a rule self-certification, the Commission notes that it is
rational that the Commission needs more documentation or information at
the time a new product filing is initially submitted pursuant to Sec.
40.2 and all the terms and conditions of the new product are
established than at the time a filing is submitted to amend the terms
or conditions of an existing product pursuant to Sec. 40.6. As
discussed above, the second sentence of existing Sec. 40.2(a)(3)(v)
requires that the explanation and analysis submitted to support a
product self-certification ``either be accompanied by the documentation
relied upon to establish the basis for compliance with applicable law,
or incorporate information contained in such documentation, with
appropriate citations to data sources.'' The Commission notes it did
not propose, and is not adopting, any amendments to the second sentence
in Sec. 40.2(a)(3)(v).
By contrast, Sec. 40.6(a)(7)(v) does not include this
documentation requirement. In the 2011 Final Rule, the Commission
stated that it elected not to adopt a documentation requirement in
Sec. 40.6(a)(7)(v) for initial rule submissions because section 5c(c)
of the Act provides staff with ten business days to review new rules
and rule amendments and, if necessary, authorizes staff to prevent them
from becoming effective until staff receives adequate information from
the submitting entity.\119\ As noted therein, the Commission's staff
may request additional information at any time during the applicable
rule review period pursuant to existing Sec. 40.6(a)(8). The
Commission further stated that registered entities therefore should
have sufficient incentives to provide adequate explanations of new
submissions under Sec. 40.6 without the provision of actual
documentation.\120\
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\119\ 2011 Final Rule at 44782.
\120\ 2011 Final Rule at 44782.
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C. Sec. 40.3--Voluntary Submission of New Products for Commission
Review and Approval
1. Amendments to Sec. 40.3(a)(4)
Regulation Sec. 40.3(a)(4) requires that when a DCM, SEF or DCO
voluntarily submits a new product for Commission review and approval
prior to its listing for trading or accepting the product for clearing,
the DCM, SEF or DCO must send the Commission ``an explanation and
analysis of the product and its compliance with applicable provisions
of the Act, including core principles, and the Commission's regulations
thereunder.'' As noted in the NPRM, staff relies primarily on the
explanation and analysis provided pursuant to this requirement to
analyze the compliance of a product submitted for review and approval
by the Commission, including the explanation and analysis of the
commodity underlying the product.
The Commission proposed to amend Sec. 40.3(a)(4) to clarify that
the regulation requires an explanation and analysis ``that is complete
with respect to the product's terms and conditions, the underlying
commodity and the product's compliance with the applicable provisions
of the Act, including core principles, and the Commission's regulations
thereunder.'' \121\ As noted in the NPRM, this amendment is intended to
ensure the Commission receives adequate information regarding the
product and the commodity underlying the product to analyze the
compliance of the product's terms and conditions with the applicable
provisions of the Act, including core principles, and the Commission's
regulations thereunder.
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\121\ While the Commission is amending the regulation to include
the word ``complete,'' the Commission notes that the `explanation
and analysis' requirement in Sec. 40.3(a)(4) does not include the
qualifier that the submission be 'concise' for the same reasons
discussed below in footnote 144.
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ISDA and FIA supported the additional requirements for registered
entities to provide ``complete'' information regarding a new product's
terms and conditions under Sec. 40.3.\122\ ISDA and FIA stated that it
is critical that CFTC staff have access to all relevant information in
its review of new product submissions, including for new asset classes
such as cryptocurrency products supporting the evolution of digital
assets or environmental and carbon products to support the green
transition.\123\
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\122\ FIA/ISDA at 1.
\123\ FIA/ISDA at 1.
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A16z suggested the final rule would benefit from a more fulsome
explanation of the requirements necessary to satisfy the completeness
standard under Sec. 40.3, or alternatively, further clarification
regarding what factors could make a submission incomplete under Sec.
40.3 (and what additional activity, burden, and costs are necessary to
comply with the new rule to help stakeholders understand what
additional information, if any, the Commission requires).\124\ A16z
requested that the Commission provide an example of how the new
language in Sec. 40.3(a)(4) applies to digital assets.\125\
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\124\ A16z at 7. A16z referenced note 47 in the NPRM and stated
that ``We are left only with a statement that the Commission
requires ``a more detailed explanation'' without any further
exposition about what additional details are required.''
\125\ A16z at 6.
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In response to the request for a more fulsome explanation, the
Commission notes by way of background that when a DCM, SEF or DCO
voluntarily requests that the Commission approve a new product pursuant
to CEA section 5c(c) and Sec. 40.3, the standard of review that the
Commission applies in reviewing the product is set forth in Sec.
40.3(b). Regulation Sec. 40.3(b) states that ``[t]he Commission shall
approve a new product unless the terms and conditions of the product
violate the Act or the Commission's regulations.'' \126\ As noted above
and in the NPRM, the amendment to Sec. 40.3(a)(4) is intended to
ensure the Commission receives adequate information regarding the
product and the commodity underlying the product to analyze whether the
terms and conditions of the product submitted for voluntary Commission
review and approval violate the CEA or Commission regulations.
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\126\ See also CEA section 5c(c)(5)(B).
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Because the DCM, SEF or DCO is requesting that the Commission
review the product for Commission approval pursuant to Sec. 40.3, the
Commission needs more information for Sec. 40.3
[[Page 88605]]
submissions than for Sec. 40.2 submissions--hence the inclusion of the
word ``concise'' in Sec. 40.2 and the omission of the word ``concise''
in Sec. 40.3. Specifically, pursuant to Sec. 40.3, the Commission
needs to receive complete information regarding the product's terms and
conditions, the commodity underlying the product, and the product's
compliance with applicable provisions of the Act (including core
principles) and the Commission's regulations to understand and assess
whether the terms and conditions of the product comply with the Act
(including core principles) and the Commission's regulations.\127\ The
products offered for trading and clearing by registered entities vary
widely, and the applicable statutory and regulatory requirements that
apply to any particular product thus also vary widely. Each registered
entity should be familiar with the statutory and regulatory
requirements that apply for a particular product, and therefore should
be able to determine what information is reasonable and appropriate for
the submission to demonstrate compliance with these requirements.\128\
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\127\ By contrast, as discussed above, for Sec. 40.2 self-
certification submissions, the Commission needs to receive a concise
explanation and analysis that is complete with respect to the
product's terms and conditions, the underlying commodity, and the
product's compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations
thereunder.
\128\ As registered entities contemplate selecting to submit new
products for voluntary Commission review and approval pursuant to
Sec. 40.3 in the future, Staff remain available to review drafts of
the Sec. 40.3 filings and to offer feedback on what, if any,
additional information would be required in order for a submission
to be ``complete.''
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In response to the request for a digital asset example, the
Commission notes it will not at this time provide guidance specifically
for digital assets, but that registered entities are always welcome to
reach out to staff if they have any questions regarding how the
regulations apply to products they are contemplating.\129\
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\129\ Including new examples could create a logical outgrowth
problem under the Administrative Procedures Act.
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The Commission is adopting the amendments to Sec. 40.3(a)(4) as
proposed.
2. Amendments to Sec. 40.3(a)(10)
Regulation Sec. 40.3(a)(10) provides that when a DCM, SEF or DCO
voluntarily submits a contract for Commission approval, Commission
staff may request additional evidence, information or data
demonstrating that the contract meets, initially or on a continuing
basis, the requirements of the Act, or other requirement for
designation or registration under the Act, or the Commission's
regulations or policies thereunder. As noted in the NPRM, Sec.
40.3(a)(10) required the registered entity to provide the requested
information by the open of business two business days after the date
Commission staff made such request, or at the conclusion of such
extended period agreed to by Commission staff after timely receipt of a
written request from the registered entity.
In the NPRM, the Commission proposed to remove the two business day
deadline from Sec. 40.3(a)(10) and replace it with ``the time
specified by the Commission staff'' to reflect the fact that the two
business day deadline is often not practical and that the amount of
time a DCM, SEF or DCO needs to respond depends on the nature and scope
of the requested information. The Commission received no comments on
this proposed amendment and is amending Sec. 40.3(a)(10) as proposed.
3. Amendments to Sec. Sec. 40.3(c), 40.3(d) and 40.3(f)
The Commission is reorganizing and amending paragraphs (c) and (d)
of Sec. 40.3, which address the Commission's review and determination
(i.e., approval or non-approval) of products submitted for Commission
approval. More specifically, to enhance the readability of Sec.
40.3(c), the Commission is reorganizing Sec. 40.3 as proposed so that
all of the provisions that may affect the length of the review period
of a product submitted for Commission approval pursuant to Sec. 40.3
appear together in Sec. 40.3(c).\130\ The Commission is reorganizing
Sec. 40.3(d) as proposed to address the Commission's determination,
including: approval through the passage of the applicable review
period; and non-approval.
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\130\ The Commission proposed and is adopting these changes to
enhance readability and address some confusion regarding the Sec.
40.3 process. The Commission also proposed, and is adopting, changes
to reorganize Sec. 40.5 to enhance readability and, in general,
proposed, and is adopting, parallel structural changes to Sec. Sec.
40.3 and 40.5 for consistency.
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As noted in the NPRM, Sec. 40.3(c) provides that all products
submitted for Commission approval under Sec. 40.3(c) shall be deemed
approved by the Commission 45 days after receipt by the Commission, or
at the conclusion of an extended period as provided under Sec.
40.3(d), ``unless notified otherwise within the applicable period;''
provided that the conditions set forth in Sec. 40.3(c)(1) and (2) are
satisfied. The Commission is moving the notification language from the
introductory paragraph of Sec. 40.3(c) to Sec. 40.3(d)(1). The
Commission is replacing the phrase ``unless notified otherwise within
the applicable period'' (which provides a vague reference to the
notification involved) with the phrase ``unless the Commission issues a
notice of non-approval to the registered entity under paragraph (d)(2)
of this section within the applicable review period.''
In addition, the Commission proposed to amend the condition in
Sec. 40.3(c)(2) (which the Commission is moving to Sec. 40.3(c)(4))
that must be met for the deemed approval to be effective. The condition
in Sec. 40.3(c)(2) requires that the submitting entity does not amend
the terms or conditions of the product or supplement the request for
approval, except as requested by the Commission or for correction of
typographical errors, renumbering or other non-substantive revisions,
during that period. Any voluntary, substantive amendment by the
submitting entity will be treated as a new submission under this
section.\131\ In the NPRM, the Commission proposed to revise this
condition such that any substantive amendment or supplementation by the
submitting entity, including an amendment or supplementation requested
by the Commission, would be treated as a new submission under Sec.
40.3.
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\131\ As noted in the NPRM, one example of a substantive
amendment would be changes in the delivery grade or characteristics
of the underlying commodity for a physically settled contract that
may affect estimated deliverable supply and thus position limits for
the contract. Another example would be a change in the price
reference series of a new cash-settled contract that settles to a
Price Reporting Agency source (``PRA''). Most PRAs have various
series on the same commodity that differ from each other depending
on characteristics such as geographical location of commodity
transaction or commodity quality characteristics. PRA methodologies
for the same commodity can differ between PRAs. If an amendment
changes a PRA as the source, the underlying methodology for the
price series would need to be examined to determine if it is not
readily susceptible to manipulation.
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The Commission received two comment letters responding to proposed
Sec. 40.3(c)(4). CME Group opposed the proposed amendment, noting that
the ``Commission presumably understands the basis for its requested
change or changes so it should not need an additional . . . 45-day
review period . . . to review the changes it has asked for.'' \132\
Coinbase disagreed with the review period restarting ``under
circumstances when [the Commission] has also determined that the DCM's
original filing satisfies the requirements of Regulation Sec.
40.3(a).'' \133\
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\132\ CME Group at 4.
\133\ Coinbase at 10. Coinbase further stated that ``Presumably,
Commission staff will have carefully reviewed and analyzed the
original complete submission before asking the DCM to take such
action and this is no compelling reason why it should need a new 45-
day window to complete its review of a submission with which it
should already be familiar. If the new product raises novel or
complex issues, the Commission has clear authority under the rule to
extend the review period up to an additional 45 days . . . and to
extend the review period further if the DCM agrees. Building in an
arbitrary extension mechanism that could ensnare a DCM in a chain of
potentially endless restarts of the clock flies in the face of the
timing certainty that CEA section 5c(c)(4) is designed to provide to
DCMs. The justification offered . . . does not warrant this dramatic
change to Regulation Sec. 40.3.'' Id.
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[[Page 88606]]
The Commission considered the comments received on the proposed
amendments to Sec. 40.3(c)(4) and is revising the amendments to Sec.
40.3(c)(4) such that the review period will not be restarted as a
result of a DCM, SEF or DCO making an amendment or supplement in
response to a Commission request. Specifically, as revised and adopted,
Sec. 40.3(c)(4) will provide that ``[a]ny amendment or supplementation
made by the registered entity to the submission will be treated as the
filing of a new submission under this section and be subject to the
initial 45-day review period in accordance with paragraph (c)(1) of
this section, unless the amendment or supplementation is requested by
the Commission or is made for correction of typographical errors,
renumbering or other non-substantive revisions.'' \134\ As revised and
adopted, Sec. 40.3(c)(4) is not substantively different than current
Sec. 40.3(c)(2).
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\134\ To effectuate this change, the Commission is removing the
sentence currently in Sec. 40.3(c)(2) that states ``Any voluntary,
substantive amendment by the submitting entity will be treated as a
new submission under this section.'' This sentence is redundant and
its removal makes Sec. 40.3(c)(4) more consistent with the
analogous provision for rules submitted for Commission approval
(Sec. 40.5(c)(4)).
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The Commission also proposed to amend Sec. 40.3(d)(1) (which the
Commission proposed to move to Sec. 40.3(c)(2)) to provide that the
Commission may extend the initial 45 day review period for a product
approval request for up to an additional 45 days if the submission is
incomplete or the requestor does not respond completely to Commission
questions in a timely manner. As noted in the NPRM, the Commission has
the authority to extend its review of a request for rule approval under
Sec. 40.5 if the submission is incomplete or the requestor does not
respond completely to Commission questions in a timely manner,\135\ and
the Commission believes having the same ability to extend reviews of
voluntary requests for product approval under Sec. 40.3 will better
enable the Commission to review those products. The Commission received
no comments on this proposed amendment, and is adopting the amendment
as proposed.
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\135\ See Sec. 40.5(d)(1) (which is being moved to Sec.
40.5(c)(2)). Under both current Sec. 40.5(d)(1) and final Sec.
40.5(c)(2), the timely manner standard is dependent upon the facts
and circumstances. The Commission proposed, and is adopting, the
same timely manner standard for Sec. 40.3(d)(1).
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The Commission is adopting Sec. 40.3(c)(5) as proposed to extend
the review period under Sec. 40.3(c)(1) when the review period would
end on a day that is not a business day to instead end on the next
business day.\136\ In addition, the Commission is moving text from
Sec. 40.3(d)(1) to Sec. 40.3(c)(2) and revising the text to permit an
additional extension of up to 45 days. By way of background, Sec.
40.3(d)(1) provided that the Commission may extend the review period
for an additional 45 days if the product raises novel or complex issues
that require additional time for analysis. Under current Sec. 40.3(c)
and (d)(1), the initial 45-day review period and the 45-day extended
review period could not exceed the 90 days permitted by section
5c(c)(4)(C) of the CEA,\137\ absent agreement by the requestor to a
further extension.\138\ To ensure that the total review period will not
extend beyond 90 days after the request is submitted under the amended
regulations, the Commission is changing as proposed the extended review
period from ``[a]n additional 45 days'' under Sec. 40.3(d)(1) to ``up
to an additional 45 days'' in amended Sec. 40.3(c)(2).\139\ The
Commission received no comments on these proposed changes.
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\136\ The Commission is revising the header of Sec. 40.3(c)
from ``Forty-five day review'' to ``Commission review'' to reflect
the fact that the review period may be extended beyond forty-five
days due to adjustments so that the review period ends on a business
day.
\137\ Section 5c(c)(4)(C) of the Act reads in pertinent part
that ``the Commission shall take final action on the request not
later than 90 days after submission of the request, unless the
person submitting the request agrees to an extension of the time
limitation established under this paragraph.''
\138\ Because an extension to which a registered entity may
agree under final Sec. 40.3(c)(3) is not required to be a specified
number of days, Commission staff can ensure that the extended period
ends on a business day.
\139\ For example, if the end of the initial 45-day review
period would fall on a Saturday, it would be extended by Sec.
40.3(c)(5) to Monday, the next business day, for a total of 47 days.
Any additional extension under Sec. 40.3(c)(2) could not exceed 43
days (47 + 43 = 90).
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The Commission also is making explicit in Sec. 40.3(c)(3) as
proposed that the Commission may at any time extend its review period
for any period of time (including beyond the 90-day review period),
provided that it does so with the written agreement of the registered
entity.\140\
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\140\ Regulation Sec. 40.3(d)(2) provided the Commission with
authority to extend the review period with the written agreement of
the registered entity. The amendment in Sec. 40.3(c)(3) is intended
to ensure it is clear that the authority also applies during any
extended review period.
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Additionally, the Commission is redesignating Sec. 40.3(f)(1) as
Sec. 40.3(e)(1) and making the proposed amendments to this provision.
Regulation Sec. 40.3(f)(1) provided that ``[n]otification to a
registered entity under paragraph (e) of this section of the
Commission's determination not to approve a product does not prejudice
the entity from subsequently submitting a revised version of the
product for Commission approval or from submitting the product as
initially proposed pursuant to a supplemented submission.'' The
Commission is amending the text by replacing the word ``prejudice''
with ``prevent'', replacing the words ``pursuant to'' with ``in'',
adding the phrase ``the revised or supplemented submission will be
reviewed without prejudice'' at the end, and inserting two commas to
help avoid any confusion as to the effect of the non-approval. Also,
the changes to the section will improve consistency with Sec. Sec.
40.5(e)(1) and 40.6(c)(5)(i). The Commission received no comments on
these proposed changes.
Finally, the Commission is redesignating Sec. 40.3(f)(2) as Sec.
40.3(e)(2) and adopting the proposed amendments to this provision.
Specifically, Sec. 40.3(f)(2) provided that notification to a
registered entity under paragraph (e) of this section of the
Commission's refusal to approve a product shall be presumptive evidence
that the entity may not truthfully certify under Sec. 40.2 that the
same, or substantially the same, product does not violate the Act or
the Commission's regulations thereunder. The Commission is amending the
text as proposed by replacing the words ``refusal'' with
``determination not'', and replacing the words ``does not violate the
Act'' with ``complies with the Act.'' The Commission believes these
amendments will have the effect of increasing clarity and provide
consistency with Sec. Sec. 40.2(a)(3)(iv) and 40.5(f)(2) (which the
Commission is renumbering as Sec. 40.5(e)(2)). The Commission received
no comments on these proposed changes.
D. Sec. 40.4--Amendments to Terms or Conditions of Enumerated
Agricultural Products
1. Clarification Regarding Scope of Sec. 40.4 and Materiality Under
Sec. 40.4
Regulation Sec. 40.4(a) requires a DCM to submit rule changes that
would materially change a term or condition of a contract on an
agricultural product enumerated in section 1a(9) of the CEA
[[Page 88607]]
with open interest for Commission approval under the procedures of
Sec. 40.5. The Commission notes that Sec. 40.4(a) applies strictly to
rules that materially change a product's economic terms and conditions,
and does not apply to other rules. To ensure this requirement is clear,
the Commission is adding the word ``product's'' to the text of Sec.
40.4(a) to modify ``term or condition'' as used therein and replacing
the words ``should not be submitted under this section'' in Sec.
40.4(b) with the words ``are not required by this section to be
submitted for Commission approval under the procedures of Sec. 40.5,''
each as proposed. The Commission did not receive any comments
responding to any of the amendments proposed to Sec. 40.4.
By way of background, as noted in the NPRM, when a registered
entity submits a change to any terms or conditions of a contract on an
agricultural product enumerated in section 1a(9) of the CEA with open
interest, the DCM's assessment of materiality affects whether the
registered entity must submit the change for Commission approval under
Sec. 40.5 (as is required for material changes). A DCM may file a
change that falls within any of the four types of discrete changes
enumerated in Sec. 40.4(b)(1) through (4) through self-certification
pursuant to Sec. 40.6(a) or notice filing pursuant to Sec. 40.6(d),
as applicable.\141\ For any other rule that the DCM believes to be non-
material, Sec. 40.4(b)(5) sets forth a process for the DCM to
implement the change through self-certification pursuant to Sec.
40.6(a). In order for a DCM to self-certify the change, Sec.
40.4(b)(5) requires the DCM to make a non-materiality filing and
explain why it considers the rule change to be ``non-material.''
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\141\ Regulations 40.4(b)(1) through (4) state that the changes
covered therein are not material. Thus, a DCM filing a change under
Sec. 40.4(b)(1) through (4) is not required to file a non-
materiality explanation. In addition to the Sec. 40.6(a) self-
certification process and the Sec. 40.6(d)(2) notice filing process
(which the Commission is re-designating as Sec. 40.6(d)), if
applicable, a DCM may also place a non-material rule change into
effect without certification or notice to the Commission if the
conditions enumerated in Sec. 40.6(d)(3) (which the Commission is
re-designating as Sec. 40.6(e)) are satisfied.
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To assist a DCM in assessing and explaining whether a change to the
terms and conditions of a contract on an agricultural product
enumerated in section 1a(9) of the CEA that has open interest is a
material change (and thus must be filed under Sec. 40.5 pursuant to
Sec. 40.4(a)) or is non-material (and thus can be implemented through
the Sec. 40.6(a) self-certification process, the Sec. 40.6(d) notice
process or the Sec. 40.6(e) process (as applicable), all in accordance
with Sec. 40.4(b)(5)), the Commission is adding an appendix E to part
40 as proposed and including therein the criteria that the Commission
generally considers as evidence that an enumerated agricultural product
rule change is non-material under Sec. 40.4(b)(5) as proposed.
Specifically, appendix E to part 40 provides that a non-material
change: should not affect a reasonable trader's decision to enter into,
or maintain, a position; should not affect a reasonable trader's
decision to make or take delivery on the contract or to exercise an
option on the contract; and should not have an effect on the value of
existing positions, including, but not limited to, a change affecting
the price of the contract due to a change in the commodity quality
characteristics of the existing contract, a change to the size of the
existing contract, or a change to a cost of effecting delivery for the
existing contract. The Commission did not receive any comments
responding to the proposal of new appendix E to part 40.
2. Additional Amendments to Sec. 40.4(b)
The Commission is adopting the proposed amendments to Sec.
40.4(b)(1) through (5) to enhance the readability, consistency and
clarity of this regulatory text. Specifically, the Commission is
clarifying that the intent of Sec. 40.4(b) is to convey that the rules
and rule amendments identified as non-material are not required to be
submitted for Commission approval under the procedures of Sec. 40.5.
The Commission is replacing the word ``changes'' in each of Sec.
40.4(b)(1) through (4) with ``rules or rule amendments'' so that the
text of paragraphs (b)(1) through (4) use the same language as the text
used in the introductory paragraph of Sec. 40.4(b). Additionally, the
Commission is replacing the word ``if'' in each of Sec. 40.4(b)(1),
(3) and (4) with the words ``provided that they are'' to clarify (and
avoid confusion) that the implementation specified in the applicable
paragraph (Sec. 40.4(b)(1), (3) and (4)) is a condition that must be
satisfied in order to rely upon Sec. 40.4(b)(1), (3) or (4), as
applicable. None of these amendments is intended to alter the substance
of Sec. 40.4.
The Commission is removing the reference to ``changes in no
cancellation ranges'' in Sec. 40.4(b)(3) as proposed. As discussed
below in section II.F.4, the Commission is amending Sec. 40.6(d) to
allow a registered entity to file rules and rule amendments governing
changes in no cancellation ranges pursuant to the notification
procedures of Sec. 40.6(d). By filing rules and rule amendments
governing no cancellation ranges pursuant Sec. 40.6(d), such rules and
rule amendments would be non-material pursuant to Sec. 40.4(b)(1),
making the current language ``changes in no cancellation ranges'' in
Sec. 40.4(b)(3) redundant and unnecessary.
Additionally, to enhance readability of Sec. 40.4(b)(5), the
Commission is moving from Sec. 40.4(b)(5)(iii) to Sec. 40.4(b)(5)(i)
the text requiring that a rule or rule amendment filed under Sec.
40.4(b)(5) be submitted pursuant to the procedures of Sec. 40.6(a),
and is deleting redundant text in Sec. 40.4(b)(5)(iii). The Commission
is adding text to Sec. 40.4(b)(5)(ii) to provide that when a DCM
provides an explanation as to why it considers the rule ``non-
material,'' the DCM shall, if applicable, include a previously approved
rule or rule amendment that is, in substance, the same as the subject
non-material rule or rule amendment. The Commission believes the copy
of the previously approved rule or rule amendment will provide market
participants with context and background that will be helpful
information in understanding the subject rule or rule amendment and why
it is non-material.
E. Sec. 40.5--Voluntary Submission of Rules for Commission Review and
Approval
1. Reorganization and Clarification of Sec. 40.5
The Commission is reorganizing and clarifying Sec. 40.5, which
addresses the submission by registered entities of requests for
Commission approval of new rules and rule amendments and the
Commission's review of such rules and rule amendments. As amended,
paragraphs (a) and (b) of Sec. 40.5 remain largely unchanged, with the
exception of the conforming amendments previously discussed \142\ and
the two changes discussed below. FIA and ISDA stated that they are
generally supportive of all the clarifications, enhancements and
reorganizations of Sec. 40.5.\143\
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\142\ The amendments include the removal of references to a
cover sheet, dormant rules, and submission to the Secretary of the
Commission.
\143\ FIA/ISDA at 1.
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The Commission proposed to clarify that Sec. 40.5(a)(5) requires
an explanation and analysis ``that is complete with respect to'' the
operation, purpose, and effect of the proposed rule or rule amendment
and its compliance with applicable provisions of the Act, including
core principles and the Commission's regulations thereunder for the
same reasons the language regarding completeness was proposed in
Sec. Sec. 40.2(a)(3)(v), 40.3(a)(4), and 40.6(a)(7)(v). As noted in
note 47 of the
[[Page 88608]]
NPRM, the ``explanation and analysis'' requirement in Sec. 40.5(a)(5),
like the ``explanation and analysis'' requirement in Sec. 40.3(a)(4),
does not include the qualifier that the submission be ``concise.''
\144\ A16z suggested that more explanation is required regarding what
additional information is needed for the explanation and analysis to be
``complete'' in the absence of the concise language.\145\ A16z
referenced note 47 in the NPRM and suggested further explanation is
required than the statement that the Commission requires ``a more
detailed explanation.'' \146\
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\144\ See NPRM at 61439. See also the 2011 Final Rule at 44782
(stating ``The Commission notes that the `explanation and analysis'
requirement in final Sec. 40.5(a)(5) does not include the qualifier
that the submission be `concise.' The Commission requires registered
entities to provide a more detailed explanation and analysis of
rules voluntarily submitted for Commission approval under the
provisions of Sec. 40.5.'').
\145\ A16z at 7.
\146\ Id.
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In response to the request for additional explanation, the
Commission notes by way of background that pursuant to CEA section
5c(c)(5)(A) and Sec. 40.5(b), the Commission shall approve a new rule
or rule amendment of a registered entity that the registered entity
submits for Commission approval pursuant to CEA section 5c(c)(4) and in
accordance with Sec. 40.5 unless the rule or rule amendment is
inconsistent with the Act or the Commission's regulations. For the
Commission to review a new rule or rule amendment of a registered
entity for voluntary approval pursuant to this standard, the Commission
needs to understand the rule or rule amendment and the operation,
purpose, and effect of the rule or rule amendment. As noted above and
in the NPRM, the amendment to Sec. 40.5(a)(5) is intended to ensure
the Commission receives adequate information regarding the rule or rule
amendment to analyze whether the rule or rule amendment submitted for
voluntary Commission review and approval is inconsistent with the Act
or the Commission's regulations.
Because the registered entity is requesting that the Commission
review the rule or rule amendment for Commission approval pursuant to
Sec. 40.5, the Commission needs more information for Sec. 40.5
submissions than for Sec. 40.6 submissions--hence the inclusion of the
word ``concise'' in Sec. 40.6 and the omission of the word ``concise''
in Sec. 40.5. Specifically, pursuant to Sec. 40.5, the Commission
needs to receive an explanation and analysis that is complete with
respect to operation, purpose, and effect of the proposed rule or rule
amendment and its compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations thereunder,
to understand and assess whether the rule is inconsistent with the CEA
or the Commission's regulations. The rules and rule amendments
implemented by registered entities vary widely, and the statutory and
regulatory requirements that apply to any particular rule or rule
amendment thus also vary widely. Each registered entity should be
familiar with the statutory and regulatory requirements that apply for
a particular rule or rule amendment, and therefore should be able to
determine what information is reasonable and appropriate for the
submission to demonstrate compliance with these requirements. The
Commission is amending Sec. 40.5(a)(5) as proposed to clarify that
this regulation requires an explanation and analysis ``that is complete
with respect to'' the operation, purpose, and effect of the proposed
rule or rule amendment and its compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder.
Regulation Sec. 40.5(a)(6) provides that the registered entity
shall certify that it posted a notice on its website of the pending
rule with the Commission. To clarify that the reference to the
``pending rule'' in Sec. 40.5(a)(6) is intended to refer to the
request of the registered entity for approval by the Commission of the
new rule or rule amendment, the Commission is amending the text of
Sec. 40.5(a)(6) as proposed by replacing the words ``pending rule with
the Commission'' with the words ``a notice of its request for
Commission approval of the new rule or rule amendment.'' The amended
language will also use language that is consistent with Sec.
40.3(a)(9).\147\ No comments were received in response to the proposed
amendments to Sec. 40.5(a)(6).
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\147\ The Commission also is eliminating the word ``which'' from
the second sentence of Sec. 40.5(a)(6) to improve clarity and
readability.
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The Commission proposed to amend Sec. 40.5(c) and (d), which
address the Commission's review and determination (i.e., approval or
non-approval) of new rules and rule amendments. To enhance readability,
the Commission is reorganizing Sec. 40.5 so that all of the provisions
that may affect the length of the review period of a rule submitted for
Commission approval pursuant to Sec. 40.5 appear together in Sec.
40.5(c)--with the exception of expedited approval (which is moving to
Sec. 40.5(d)(2)).\148\ The Commission is adding Sec. 40.5(c)(6), as
proposed, to extend the review period under Sec. 40.5(c)(1) \149\ when
the review period would end on a day that is not a business day to
instead end on the next business day.\150\ The Commission is moving the
text from Sec. 40.5(d)(1) to Sec. 40.5(c)(2)) and revising the text
to permit an additional extension of up to 45 days. No comments were
received in response to any of the proposed amendments to Sec. 40.5(c)
or (d).
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\148\ The Commission is making these changes to enhance
readability and address some confusion regarding the Sec. 40.5
process. Changes to Sec. 40.5(d)(2) are discussed below.
\149\ Because an extension to which a registered entity may
agree under Sec. 40.5(c)(3) is not required to be a specified
number of days, Commission staff can ensure that the extended period
ends on a business day.
\150\ The Commission is revising the header of Sec. 40.5(c)
from ``Forty-five- day review'' to ``Commission review'' to reflect
the fact that, pursuant to Sec. 40.5(c)(6), the review period may
be extended beyond forty-five days due to adjustments so that the
review period ends on a business day.
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By way of background, Sec. 40.5(d)(1) (which the Commission is
moving to Sec. 40.5(c)(2)) provides that the Commission may extend the
review period for an additional 45 days if the proposed rule raises
novel or complex issues that require additional time for review or is
of major economic significance, the submission is incomplete or the
requestor does not respond completely to Commission questions in a
timely manner. Under Sec. 40.5(c) and (d)(1), the initial 45-day
review period and the 45-day extended review period could not exceed
the 90 days permitted by section 5c(c)(4)(C) of the CEA, absent
agreement to a further extension by the registered entity that
requested the review. To ensure that the total review period will not
extend beyond 90 days after the request is submitted under the amended
regulations, the Commission is adopting the proposed change to the
extended review period under Sec. 40.5(c)(2), from ``an additional 45
days'' to ``up to an additional 45 days.'' For example, if the end of
the initial 45-day review period would fall on a Saturday, and is
extended by Sec. 40.5(c)(6) to Monday, the next business day, for a
total of 47 days, any additional extension under Sec. 40.5(c)(2) could
not exceed 43 days (47 + 43 = 90).
The other changes the Commission is adopting to the regulatory text
in Sec. 40.5(c) are non-substantive and are not intended to alter the
length of time the Commission has to review a rule submitted for
Commission approval under Sec. 40.5(a).\151\ As part of these non-
[[Page 88609]]
substantive amendments, the Commission is making explicit in Sec.
40.5(c)(3) that the Commission may at any time extend its review period
for any period of time, provided that it does so with the written
agreement of the registered entity.\152\
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\151\ The Commission is adding descriptive language into Sec.
40.5(c)(5) to provide the reader with context to better understand
the interaction of the provisions in Sec. Sec. 40.4(b)(5) and
40.5(c)(5). The descriptive language added to Sec. 40.5(c)(5) is
consistent with current Sec. 40.5(c)(2). For a discussion of the
materiality determination under Sec. 40.4(b)(5), see Section II.D
above.
\152\ Regulation Sec. 40.5(d)(2) provides the Commission
authority to extend the review period with the written agreement of
the registered entity. The amendment in Sec. 40.5(c)(3) will ensure
it is clear that the authority also applies during any extended
review period.
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The Commission is reorganizing Sec. 40.5(d) to address the
Commission's determination with respect to a proposed rule or rule
amendment, including: approval through the passage of the applicable
review period; expedited approval; and non-approval. The Commission is
renumbering Sec. 40.5(g), which addresses expedited approval of a
proposed rule or rule amendment, as Sec. 40.5(d)(2) and amending it to
remove the limitations that expedited approval may be used only for
``changes to'' a proposed rule or a rule amendment, and the changes to
the proposed rule or rule amendment may only be approved through
expedited approval if they are consistent with ``standards approved or
established by the Commission.'' The Commission is also removing the
condition that ``the Commission may, at any time, alter or revoke the
applicability of such a notice to any particular product or rule
amendment.'' \153\ The Commission believes that the quoted text that
these amendments will remove is not necessary or could be misconstrued
in connection with the ability of the Commission to approve proposed
rules and rule amendments that are consistent with the CEA and
Commission regulations on an expedited basis.\154\ The Commission is
also renumbering Sec. 40.5(f), which addresses the impact of non-
approval, as Sec. 40.5(e). No comments were received in response to
any of proposed Sec. 40.5(e).
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\153\ The Commission is unaware of ever using this condition.
\154\ The Commission is also replacing the word ``under'' with
``in compliance with'' in Sec. 40.5(d)(1) to clarify that
consideration for approval is contingent upon complying with the
requirements of Sec. 40.5(a).
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The text of Sec. 40.5(f)(1), which the Commission is renumbering
as Sec. 40.5(e)(1), provides that ``[n]otification to a registered
entity under paragraph (d)(3) of this section does not prevent the
registered entity from subsequently submitting a revised version of a
proposed rule or rule amendment for Commission review and approval, or
from submitting the new rule or rule amendment as initially proposed in
a supplemented submission; the revised submission will be reviewed
without prejudice.'' The revisions or supplements under current Sec.
40.5(f)(1) and new Sec. 40.5(e)(1) must provide a substantive basis to
treat the revised rule or supplemented submission differently from the
previously submitted rule. To clarify that ``[n]otification to a
registered entity'' means a notification of non-approval by the
Commission, the Commission is amending this text by adding the words
``of the Commission's determination not to approve a new rule or rule
amendment''. The Commission also is adding the words ``or
supplemented'' to the text to clarify that supplemented submissions are
``reviewed without prejudice.'' \155\ The Commission believes this will
help avoid potential confusion and make the section more consistent
with final Sec. 40.5(e)(2) (which was previously Sec. 40.5(f)(2)).
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\155\ The Commission additionally is non-substantively amending
Sec. 40.5(f)(1) to include two new commas. The Commission believes
this will improve readability and reduce the risk of confusion.
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Regulation Sec. 40.5(f)(2), which the Commission is renumbering as
Sec. 40.5(e)(2), provides that notification to a registered entity
under paragraph (d)(3) of this section of the Commission's
determination not to approve a proposed rule or rule amendment is
presumptive evidence that the entity may not truthfully certify the
same, or substantially the same, proposed rule or rule amendment under
Sec. 40.6(a). To clarify that certification under Sec. 40.6(a) is
referring to the certification that the rule or rule amendment complies
with the CEA and the Commission's regulations, the Commission is
amending the text to add ``complies with the Act and the Commission's
regulations thereunder'' and to move ``under Sec. 40.6(a)'' to earlier
in the text. The Commission believes these changes will enhance clarity
and improve context.\156\
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\156\ These changes also make this language consistent with the
corresponding language in Sec. Sec. 40.3 and 40.5.
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F. Sec. 40.6--Self-Certification of Rules
1. Amendments to 40.6(a)
Regulation Sec. 40.6(a) sets forth the submission requirements for
rule certifications under CEA section 5c(c)(1). The Commission is
adopting various non-substantive amendments to Sec. 40.6(a) as
proposed. The non-substantive amendments include: revising the
introductory text of Sec. 40.6(a), including the header, to better
reflect the content of the regulation; moving the requirements for
delisting of products that do not have any open interest from the
introductory text to a new Sec. 40.6(a)(9); and revising the header
and ordering of Sec. 40.6(a)(6) to better reflect its purposes.\157\
The Commission also is removing references to dormant rules, the
submission cover sheet, and the Secretary of the Commission, as
previously discussed, and is correcting the reference to the statutory
definition of the term ``commodity'' in Sec. 40.6(a)(5) from ``section
1a(4) of the Act'' to ``section 1a(9) of the Act.''
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\157\ The Commission also is amending Sec. 40.6(a)(6)(ii) by
adding the words ``or may be submitted pursuant to Sec. 40.5'' to
clarify that new rules or rule amendments that establish standards
for responding to an emergency may be either certified pursuant to
Sec. 40.6(a) or submitted for Commission approval pursuant to Sec.
40.5.
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FIA and ISDA stated that they are generally supportive of all the
clarifications, enhancements and reorganizations of Sec. 40.6
regarding the Commission's review and approval of new rules and
amendments submitted by DCOs.\158\
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\158\ FIA/ISDA at 1.
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The Commission proposed to replace the word ``of'' in Sec.
40.6(a)(7)(v) with the words ``that is complete with respect to'' such
that this condition, as amended, reads as follows: ``A concise
explanation and analysis that is complete with respect to the
operation, purpose, and effect of the proposed rule or rule amendment
and its compliance with applicable provisions of the Act, including
core principles, and the Commission's regulations thereunder.''
As the Commission articulated in 2011, like the explanation and
analysis required for new product submissions that are self-certified
under Sec. 40.2, the explanation and analysis of certified rules or
rule amendments ``should be a clear and informative--but not
necessarily lengthy--discussion of the submission, the factors leading
to the adoption of the rule or rule amendment, and the expected impact
of the rule or rule amendment on the public and market participants.''
\159\ Similar to the discussion above in section II.B.3 regarding the
explanation and analysis that must accompany new contract submissions
under Sec. 40.2, the Commission has found that some new rule
submissions, while being concise, have not provided adequate
information to enable the Commission to complete its analysis of the
compliance of the rules or rule amendments with
[[Page 88610]]
applicable provisions of the Act, including core principles, and the
Commission's regulations.\160\ The Commission proposed to add the words
``that is complete with respect to'' to Sec. 40.6(a)(7)(v) to ensure
that, although the explanation be concise, it nevertheless must address
the operation, purpose, and effect of the proposed rule or rule
amendment and its compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations.\161\
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\159\ 2011 Final Rule at 44782-44783.
\160\ See NPRM at 61440.
\161\ Id.
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In response to the proposed amendments to Sec. 40.6(a)(7)(v), A16z
requested that the Commission provide guidance on how market
participants can simultaneously satisfy the requirements to be
``complete'' while also being ``concise''.\162\ Cboe stated that the
word ``complete'' should not be included, and if it is, Cboe requests
at a minimum that the Commission clarify that the standard of
completeness will be applied in a sensible and reasonable manner.\163\
Cboe stated that rule certifications should focus on key points, as
reflected by the inclusion of the word ``concise'' in the current and
proposed regulatory language which describes the explanation and
analysis that is required to be included.\164\ Cboe stated that it is
important that the application of the rule certification provisions
focuses on requiring a concise description of what is relevant with
respect to the applicable rule in determining what information should
be included instead of completeness for the sake of completeness which
can lead to the inclusion of unneeded and irrelevant information.\165\
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\162\ A16z at 6.
\163\ Cboe at 2-3. Cboe suggested the Commission can achieve the
same outcome of requiring pertinent information to be included in
rule certification filings by using the word ``of'' instead of the
phrase ``that is complete with respect to.'' Cboe stated it believes
that the inclusion of the word ``complete'' can lead to the
possibility that this standard will be applied in a prescriptive,
inconsistent, and unreasonable manner (which would in turn undermine
the utility of the rule certification process for registered
entities, market participants, and the Commission; delay the ability
to implement rule enhancements that benefit the market; and inhibit
innovation and competition). Cboe further stated that the concept of
completeness is inherently ambiguous and could be applied in a
rigid, onerous, arbitrary, and/or subjective manner.
\164\ Cboe at 3.
\165\ Id.
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The Commission has considered the comments received in response to
the proposed amendments to Sec. 40.6(a)(7)(v). The Commission notes
that prior to a registered entity self-certifying that a rule or rule
amendment complies with the Act and Commission regulations thereunder,
the registered entity must complete its diligence on the rule or rule
amendment to ensure the rule or rule amendment complies with the
applicable provisions of the Act, including core principles, and the
Commission's regulations thereunder.\166\ The registered entity relies
upon its own diligence when it self-certifies that the rule or rule
amendment complies with applicable provisions of the Act, including
core principles, and the Commission's regulations thereunder. The
submitted explanation and analysis is necessary for the Commission's
review of a rule certification and should allow the Commission to
understand the operation, purpose, and effect of the rule or rule
amendment and how the registered entity views the rule or rule
amendment as compliant with the Act and Commission regulations
thereunder.
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\166\ See CEA sections 5, 5b, 5h and 21, and parts 37, 38, 39
and 49 of the Commission's regulations.
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In response to the request that the Commission provide guidance
regarding how a registered entity would satisfy the ``complete''
requirement while also being ``concise,'' the Commission notes that as
it articulated in the 2011 Final Rule, ``[a] ``concise explanation and
analysis'' should be a clear and informative--but not necessarily
lengthy--description of the product or rule and its implications for
compliance with applicable law.'' \167\ As revised to include
``complete,'' the Commission continues to believe that the concise
explanation and analysis required under amended Sec. 40.6(a)(7)(v)
should be a clear and informative description of the rule and its
compliance with applicable law and is not necessarily required to be
lengthy in order to be ``complete.'' The registered entity must include
explanation and analysis of the operation, purpose, and effect of the
proposed rule or rule amendment and its compliance with applicable
provisions of the Act, including core principles, and the Commission's
regulations thereunder. Cursory or conclusory explanations will not
suffice.
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\167\ 2011 Final Rule at 44787.
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The Commission is thus adding the word ``complete'' to Sec.
40.6(a)(7)(v) as proposed to confirm that it is essential that the
registered entity include a concise explanation and analysis of the
operation, purpose, and effect of the rule or rule amendment and how
and why the rule or rule amendment complies with the applicable core
principles and regulations. The term ``complete'' is intended to denote
the scope of the explanation and analysis. A complete explanation and
analysis in scope will cover all core principles and the Commission's
regulations thereunder that are relevant to the specific rule or rule
amendment. The core principles and regulations that apply to a
particular rule or rule amendment vary depending on the facts and
circumstances surrounding the rule or rule amendment.
As noted in the NPRM, the introductory text to Sec. 40.6(a)
includes a provision that was intended to enable a registered entity to
delist, or withdraw a certification of, a product that does not have
any open interest immediately upon a submission provided that the
submission complied with the submission and certification requirements
in Sec. 40.6(a)(1), (2) and (7).\168\ Because the introductory
provision has not been well understood, the Commission proposed to
clarify it by moving it and adding an explicit statement into the
regulatory text. The Commission received no comments on these proposed
changes and is adopting these changes as proposed. Specifically, new
Sec. 40.6(a)(9) explicitly states that a new rule or a rule amendment
that delists, or withdraws the certification of, a product that does
not have any open interest may become effective immediately upon the
filing of the submission, provided that the submission is made in
compliance with Sec. 40.6(a)(1), (2) and (7).
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\168\ NPRM at 61440 (quoting the 2011 Final Rule at 44783 as
stating that the Commission, in consideration of comments from both
CME and OCX, has determined to amend Sec. 40.6(a) to make rules
delisting or withdrawing the certification of products effective
upon submission to the Commission. The Commission agrees that such
submissions should be exempt from the 10-business-day review period
in order to avoid complicating the delisting of the product by
providing market participants an opportunity to enter into contracts
between the time period of submission and the effective date of the
rule.).
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2. Amendments to Sec. 40.6(b)
Regulation Sec. 40.6(b) sets forth the Commission's review period
for a rule certification under Sec. 40.6(a). The regulation provides
the Commission with a 10-business day review period after which the
rule is deemed certified, unless the rule is stayed by the Commission
during the review period. The Commission proposed to amend Sec.
40.6(b) to provide that any substantive amendment or supplementation of
the rule submission will be deemed a new submission and restart the 10-
business day review period, unless the amendment or supplementation is
made for correction of typographical errors,
[[Page 88611]]
renumbering or other non-substantive revisions. Under proposed Sec.
40.6(b), a substantive amendment or supplementation of a rule
submission made in response to a Commission request would be deemed a
new submission.
CME Group and ICE commented on proposed Sec. 40.6(b) and stated
that the review period should not be restarted for amendments requested
by the Commission.\169\ CME Group noted that the ``Commission
presumably understands the basis for its requested change or changes so
it should not need an additional . . . 10-day review period . . . to
review the changes it has asked for.'' \170\ Additionally, ICE
requested Sec. 40.6(b) be amended to provide for no restarting of the
review period for amendments or supplemental filings made with the
consent of Commission Staff.\171\
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\169\ CME Group at 3-4; ICE at 2-3.
\170\ CME Group at 4.
\171\ ICE at 3.
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The Commission considered the comments received on the proposed
amendments to Sec. 40.6(b) and is revising the amendments to Sec.
40.6(b) to provide that the review period will not be restarted for
amendments or supplements requested by the Commission. Specifically, as
revised and adopted, Sec. 40.6(b) will provide that any amendment or
supplementation made by the registered entity to the submission will be
treated as the filing of a new submission under this section and be
subject to the initial 10-business day review period in accordance with
paragraph (b)(1) of this section, unless the amendment or
supplementation is requested by the Commission or is made for
correction of typographical errors, renumbering or other non-
substantive revisions. The Commission notes that it retains the
authority to stay a certification of a new rule or rule amendment
submitted pursuant to Sec. 40.6(a) if, among other reasons, the
certification is accompanied by an inadequate explanation, or is
potentially inconsistent with the Act or the Commission's regulations
thereunder.
3. Amendments to Sec. 40.6(c)
Regulation Sec. 40.6(c), together with sections 5c(c)(2) and (3)
of the Act, set forth the Commission's procedures for staying a
submission pursuant to Sec. 40.6(a). The Commission is adding the
phrase ``and can be implemented'' to Sec. 40.6(c)(3) as proposed in
order to make clear that upon the expiration of a stay (without
Commission objection), the registered entity may opt to implement the
rule at a later time.\172\
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\172\ The Commission also is changing the reference in Sec.
40.6(c)(3) from ``proposed certification'' to ``certification.''
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The Commission is amending Sec. 40.6 by adding a new Sec.
40.6(c)(5) as proposed to address the effect of a Commission objection
to a rule submitted pursuant to Sec. 40.6(a). The provision is based
on the similar provision in Sec. 40.5(f) (which is being moved to
Sec. 40.5(e)). Regulation Sec. 40.6(c)(5)(ii) as amended provides
that a Commission objection to a rule certification pursuant to Sec.
40.6(c)(3) is presumptive evidence that the entity may not truthfully
certify that the same, or substantially the same, rule complies with
the Act and the Commission's regulations. As adopted, Sec.
40.6(c)(5)(i) provides that a Commission objection does not, however,
prevent the registered entity from subsequently submitting a revised or
supplemented version of the proposed rule or rule amendment for review
and approval or for certification. The revisions or supplements under
new Sec. 40.6(c)(5)(i) must provide a substantive basis to treat the
revised rule differently from the previously submitted rule. The
Commission received no comments in response to the proposed changes to
Sec. 40.6(c).
4. Amendments to Sec. 40.6(d)
Regulation Sec. 40.6(d)(2) sets forth various categories of rules
that may be implemented by a registered entity without certification,
provided that the registered entity complies with the weekly
notification requirements in Sec. 40.6(d)(1). The Commission proposed
to add the following new categories of rules to Sec. 40.6(d)(2):
updates to email addresses or other contact information that market
participants use to submit block trades; amendments to existing trading
months; with respect to a contract for the purchase or sale of a
commodity for future delivery or an option on such a contract or an
option on a commodity (other than a swap), payment or collection of
commodity options premiums or margins and changes to no cancellation
ranges; and with respect to a swap, payment or collection of option
premiums or margins. The Commission believes that these categories are
not substantive for compliance purposes and to the extent rules are
addressing these categories, such rules need not be subject to self-
certification and Commission review requirements of Sec. 40.6(a).
ICE and CME Group stated that they support the amendments proposed
to Sec. 40.6(d)(2).\173\ Cboe stated that it is unclear regarding what
is meant by the requirement to submit weekly notifications of rule
amendments for an amendment to existing trading months in connection
with proposed Sec. 40.6(d)(2)(ix).\174\ Cboe stated that ``If this
provision is referencing an amendment to a DCM's or SEF's rule
provisions regarding its contract listing parameters, Cboe agrees that
these amendments should be able to be made through a weekly
notification of rule amendments.'' \175\ In response to Cboe's comment,
the Commission notes that an amendment to existing trading months in
connection with Sec. 40.6(d)(2)(ix) (as proposed and as amended)
includes an addition or removal of contract month listings, provided
that they are within the exchange's existing listing rule.\176\
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\173\ CME Group at 3; ICE at 2.
\174\ Cboe at 3-4.
\175\ Cboe at 4.
\176\ For example, if a DCM has a quarterly listing cycle of
three years for a contract (March, June, September and December),
the DCM could elect to add the nearest two serial listing months on
a rolling basis where an additional serial month is listed once a
preceding serial month expires (e.g. April and May in between March
and June; then July and August in between June and September).
However, the DCM could not expand the quarterly listing cycle beyond
the nearest three years through Sec. 40.6(d)(2)(ix).
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As discussed above in section II.A.5, the Commission believes that
registered entities should be able to submit rules or rule amendments
governing the payment or collection of commodity options premiums or
margins and option premiums or margins (which are currently within the
definition of terms and conditions in Sec. 40.1) through weekly
notices to the Commission pursuant to Sec. 40.6(d)(2)(xiii) as these
rules or rule amendments are generally operational rather than economic
in nature and this change will lower the burden for registered entities
and still provide sufficient notice to the Commission. The Commission
also believes that registered entities should be able to submit rules
or rule amendments that change no cancellation ranges or amend existing
trading months through weekly notices to the Commission pursuant to
Sec. 40.6(d)(2) as this will lower the burden for registered entities
to implement such changes and still provide sufficient notice to the
Commission. The Commission is adopting the amendments to Sec.
40.6(d)(2) as proposed.
Regulation Sec. 40.6(d)(3) set forth various categories of rules
that may be implemented without certification or notice to the
Commission. The Commission is renumbering Sec. 40.6(d)(3) as Sec.
40.6(e) and making corresponding
[[Page 88612]]
non-substantive numbering changes to the paragraphs of the
regulation.\177\ The Commission is amending Sec.
40.6(d)(3)(ii)(v)(E)(1) (which is redesiganted as Sec.
40.6(e)(2)(v)(A)) to add the words ``per contract'' so that it reads
``Are less than $1.00 per contract; or'' to be consistent with the
corresponding provision in Sec. 40.6(d)(2)(v)(A).
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\177\ The Commission believes the current numbering is
inconsistent with the introductory text of Sec. 40.6(d).
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The Commission also requested comment on whether there are other
categories of rules that should be added to Sec. 40.6(d)(2) or (3).
ICE requested the Commission also amend Sec. 40.6(d)(2) to allow a DCM
to promptly implement changes to price and volatility control mechanism
levels in response to prevailing market conditions through the Sec.
40.6(d)(2) weekly notice process.\178\ ICE specifically listed the
following metrics it would like to be able to change through weekly
notices to promptly address disorderly market conditions or mitigate
disruptions: maximum order size, reasonability limit levels, price
bands, circuit breaker trigger levels, and the duration of a market
pause in periods of heightened market volatility.\179\ Because these
suggested additions have not been included in a proposal on which the
public has had the opportunity to provide comment, the Commission
cannot consider adopting them here, but the Commission may consider
proposing them in a future rulemaking.
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\178\ ICE at 2.
\179\ Id.
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Cboe requested that the Commission clarify that DCMs and SEFs may
list additional contract listings for a product subsequent to the
initial contract listings for that product without any rule submission
to the Commission, provided that the additional contract listings are
within the parameters of the contract previously established through a
rule or product submission to the Commission.\180\ Cboe suggested the
Commission effectuate this change by expanding the scope of new Sec.
40.6(e)(2)(viii) to include the subsequent listing of trading months
which are within the currently established cycle of trading
months.\181\ Because these suggested additions have not been included
in a proposal on which the public has had the opportunity to provide
comment, the Commission cannot consider adopting them here, but the
Commission may consider proposing them in a future rulemaking.
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\180\ Cboe at 4.
\181\ Id. The Commission clarifies that it did not propose any
substantive changes to Sec. 40.6(d)(3)(ii)(H)--which is being
redesignated as Sec. 40.6(e)(2)(viii).
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Eurex Clearing recommended that the Commission expand the
categories of rules covered by Sec. 40.6(d)(3) to include rules and
rule changes that are unrelated to the DCO's activities that are
subject to the Commission's oversight.\182\ This proposed category
would cover a DCO rule or rule change that: (i) applies to any product
class for which it provides clearing services that is outside the scope
of the DCO's order of registration with the Commission; (ii) does not
affect any product class cleared within the scope of the DCO's order of
registration with the Commission; and (iii) does not affect the DCO's
general operations.\183\ Because this suggested addition has not been
included in a proposal on which the public has had the opportunity to
provide comment, the Commission cannot consider adopting it here, but
the Commission may consider proposing it in a future rulemaking.
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\182\ Eurex at 2-3.
\183\ Id.
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G. Sec. 40.7--Delegations
1. Amendments to Sec. 40.7
Regulation Sec. 40.7 sets forth delegations of the Commission's
authority to take various actions under the provisions of part 40. In
the NPRM, the Commission proposed to amend Sec. 40.7 to enhance the
regulation's clarity and utility and to add three new delegations.
The Commission is amending the text of Sec. 40.7(a)(5) as
proposed, which delegates the Commission's authority to determine if a
proposed rule is material under Sec. 40.4(b)(5). The amendments
streamline and simplify the text of the regulation by eliminating text
that is not relevant to the delegation and an inconsistent reference to
Sec. 40.6(d).\184\
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\184\ Regulation Sec. 40.7(a)(5) provides that if the
Commission determines that a rule submitted by a DCM pursuant to
Sec. 40.4(b)(5) is not material, the rule ``may be reported
pursuant to the provisions of Sec. 40.6(d).'' However, Sec.
40.4(b)(5) itself provides that if a rule is deemed not material
pursuant to the regulation, it may be filed pursuant to Sec.
40.6(a).
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The Commission is amending Sec. 40.7(b)(3) as proposed by adding
the words ``or relate to'' to clarify that this delegation includes
authority to approve rules or rule amendments of a registered entity
that relate to, but do not establish or amend, speculative limits or
position accountability provisions.\185\
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\185\ The delegation is not intended to and does not affect any
substantive authority including, for example, the Commission's
authority to bring an enforcement action based on a person's
violation of a registered entity's position limit rules pursuant to
CEA section 4a(e).
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The Commission proposed to delegate under proposed Sec.
40.7(a)(1)(iv) and (v) the authority in proposed Sec. Sec. 40.3(c)(3)
and 40.5(c)(3) to extend the applicable review period set forth in
Sec. Sec. 40.3(c) and 40.5(c), respectively, for the period of time
agreed to in writing by the registered entity. The Commission did not
receive any comments on the proposed amendments to Sec. Sec.
40.3(c)(3) and 40.5(c)(3). The Commission has determined not to adopt
the two delegations proposed as Sec. 40.7(a)(1)(iv) and (v) at this
time.
Finally, as discussed above, the Commission is adopting Sec.
40.7(e) to delegate the Commission's authority to specify the format
and manner of filing under these regulations to the Directors of the
Division of Clearing and Risk and the Division of Market Oversight, as
proposed. CME Group commented in support of this delegation, noting
that their DCMs, DCO and SEF collectively submit hundreds of filings
each calendar year and that they are confident that the heads of the
Divisions will endeavor to make the filing formats as uniform as
possible.\186\ Given that technology is used for the Commission to
receive submissions from the registered entities under these
regulations and the speed at which technology evolves, the Commission
believes it is useful for staff to have the ability to specify the
format and manner of filings under these regulations to facilitate the
regulations remaining current with technological advances that
registered entities and the Commission may use in the future.
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\186\ CME Group at 3.
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H. Sec. 40.10--Special Certification Procedures for Submission of
Rules by SIDCOs
1. Definition of ``Materiality'' in Sec. 40.10
Regulation Sec. 40.10(a), which implements section 806(e) of the
Dodd-Frank Act, requires a SIDCO to provide notice to the Commission
not less than 60 days in advance of any proposed change to its rules,
procedures, or operations that could ``materially affect the nature or
level of risks presented'' by the SIDCO. ``Materially affect the nature
or level of risks presented'' is further defined in Sec. 40.10(b). The
Commission proposed to revise this definition to provide greater
specificity regarding the types of changes that would require advance
notice under Sec. 40.10(a), including, but not limited to, material
changes to the SIDCO's default management plan or default rules or
procedures under Sec. Sec. 39.16 or 39.35, program of risk analysis
and oversight
[[Page 88613]]
required under Sec. 39.18, or recovery and wind down plans required
under Sec. 39.39; the adoption of a new or materially revised margin
methodology; the establishment of a cross-margining program or similar
arrangement with another clearing organization; and material changes to
its approach to the stress testing required under Sec. Sec.
39.13(h)(3), 39.36(a), or 39.36(c).
FIA and ISDA supported the revised definition, noting that the non-
exhaustive list provides useful guidance to SIDCOs as to when proposed
changes require advance notice.\187\ The Commission did not receive any
comments opposing the change.
---------------------------------------------------------------------------
\187\ FIA/ISDA at 1.
---------------------------------------------------------------------------
The Commission is adopting the amendment to Sec. 40.10(b) as
proposed. As the Commission noted in the NPRM, the ``may include, but
are not limited to'' language means that the examples listed in the new
definition are not exhaustive, and a proposed change that is not
specifically mentioned nevertheless may be subject to advance notice if
it meets the standard in Sec. 40.10(a).
FIA and ISDA also noted that the Commission should provide a public
comment period under Sec. 40.10 when a SIDCO submits a rule for
Commission review that the Commission believes raises novel or complex
issues.\188\ FIA and ISDA noted this would align the Sec. 40.10
process for SIDCOs with the self-certification process for all
registered entities in Sec. 40.6. The Commission notes that the
statutory bases for these processes are different; Sec. 40.6(c)
codifies the requirement in section 5c(c)(3)(C) of the CEA for public
comment when the Commission determines to stay a rule certification,
while Sec. 40.10 codifies section 806(e) of the Dodd-Frank Act, which
does not provide for public comment. Further, the change that FIA and
ISDA suggest would be outside the scope of this final rule. The
Commission notes that even if Commission regulations do not require a
public comment period, the Commission may still request public comment
if the Commission determines it is appropriate, as it has done in the
past.\189\
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\188\ FIA/ISDA at 1-2.
\189\ See, e.g., ``CFTC Seeks Public Comment on Proposed Changes
to Chicago Mercantile Exchange Inc. Rules Regarding Direct Funding
Participants,'' at https://www.cftc.gov/PressRoom/PressReleases/7661-17.
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2. SIDCO Submission Under Sec. 40.10 of Rules Otherwise Required To Be
Submitted Under Sec. 40.5
The Commission is adopting as proposed new Sec. 40.10(i), which
requires that where any provision of the Commission's regulations
requires a DCO to file rules for approval under Sec. 40.5, a SIDCO
would be required instead to file those rules under Sec. 40.10, if the
rules could materially affect the nature or level of risks presented by
the SIDCO. Without this change, a requirement for DCOs to file rules
pursuant to Sec. 40.5 could be misinterpreted as relieving a SIDCO
from having to file those same rules pursuant to Sec. 40.10, or as
creating a duplicative requirement for SIDCOs to submit rules under
both Sec. Sec. 40.5 and 40.10. The Commission did not receive any
comments on this aspect of the proposal.
3. Technical Corrections to Sec. 40.10
The Commission proposed to revise the first sentence of Sec.
40.10(a), which references ``[a] registered [DCO] that has been
designated by the Financial Stability Oversight Council as a
systemically important [DCO],'' to refer to the definition of
``systemically important derivatives clearing organization'' in Sec.
39.2. The Commission also proposed to revise Sec. 40.10(d) and (h)(3)
to remove references to ``the purposes of the Dodd-Frank Act'' that are
no longer necessary. The Commission did not receive any comments on
these proposed changes. The Commission is adopting these technical
amendments as proposed.
I. Technical Correction to Authority Section of Part 40
The Commission is removing as proposed the reference to section 7a
of the CEA, which was repealed by the Dodd-Frank Act,\190\ from the
authority section for part 40.
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\190\ Public Law 111-203, title VII, section 734(a), July 21,
2010, 124 Stat. 1718 (2010).
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires agencies to consider
whether the rules they issue will have a significant economic impact on
a substantial number of small entities and, if so, provide a regulatory
flexibility analysis with respect to such impact.\191\ The Commission
has previously established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its regulations
on small entities in accordance with the RFA.\192\ The amendments to
part 40 set forth herein impact DCMs, DCOs, SEFs and SDRs. The
Commission has previously determined that DCMs,\193\ DCOs,\194\
SEFs,\195\ and SDRs \196\ are not small entities for purposes of the
RFA. Therefore, the Chairman, on behalf of the Commission, pursuant to
5 U.S.C. 605(b), hereby certifies that the amended rules will not have
a significant economic impact on a substantial number of small
entities.
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\191\ 5 U.S.C. 601 et seq.
\192\ Policy Statement and Establishment of ``Small Entities''
for purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr.
30, 1982).
\193\ Id. at 18618, 18619.
\194\ New Regulatory Framework for Clearing Organizations, 66 FR
45604, 45609 (Aug. 29, 2001).
\195\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476, 33548 (June 4, 2013).
\196\ Swap Data Repositories, 75 FR 80898, 80926 (Dec. 23,
2010).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any ``collection of
information,'' as defined by the PRA. 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 displays a currently valid control
number from the Office of Management and Budget (``OMB''). The PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by Federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
Federal Government. The PRA applies to all information, regardless of
form or format, whenever the Federal Government is obtaining, causing
to be obtained, or soliciting information, and includes required
disclosure to third parties or the public, of facts or opinions, when
the information collection calls for answers to identical questions
posed to, or identical reporting or recordkeeping requirements imposed
on, ten or more persons.
The final rulemaking modifies an existing collection of information
previously approved by OMB, for which the Commission has received OMB
control number 3038-0093, part 40, Provisions Common to Registered
Entities (OMB Collection 3038-0093) (``part 40 Information
Collection'').'' \197\ The responses to this collection are mandatory.
The Commission is revising
[[Page 88614]]
its total burden estimates for this clearance to reflect the final
rulemaking. The part 40 Information Collection encompasses the
reporting burdens associated with Sec. Sec. 40.2 and 40.3 (product
submissions); Sec. Sec. 40.5 and 40.6 (rule submissions); and Sec.
40.10 (SIDCO submissions).\198\ The Commission received two comments on
its burden analysis under the PRA in the proposal.\199\ These comments
and the Commission's response are discussed below.
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\197\ For the previously approved estimates for OMB Collection
3038-0093, see ICR Reference No. 202312-3038-001, (conclusion date
Feb. 9, 2024), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202312-3038-001.
\198\ Id.
\199\ A16z at 7-8; Coinbase at 8. The A16z comment noted an
apparent inconsistency between the CBC and PRA analyses in the NPRM,
in that the PRA recognized a cost associated with the completeness
requirement for product and rule submissions under part 40, but the
CBC did not. As discussed in note 74 of the NPRM, the amendments
clarify the Commission's expectations for the content of
submissions, which some registered entities had not been meeting in
their recent filings. See NPRM at 61443 n.74. Although the
Commission views the amendments as clarifying filing requirements
rather than new requirements, for practical PRA purposes, the
amendments will increase some registered entities' reporting burden
compared to their current inadequate filing practices. However,
relative to the baseline of what registered entities already should
be doing, the burden has not changed. The A16z comment regarding the
relationship between the PRA burden estimate and the CBC cost
estimate is also addressed in the CBC analysis in section
III.C.4(c)(ii) and III.C.4(e)(ii) below. Because A16z did not make
any specific comments about the PRA estimates, but only noted an
apparent inconsistency with the CBC, the Commission has not made any
changes to its PRA estimates in response to the A16z comment.
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Burden Estimates
The amendments to Sec. Sec. 40.2(a)(3)(v), 40.3(a)(4), 40.5(a)(5),
and 40.6(a)(7)(v) require registered entities to provide complete
information.
For the amendments addressing Sec. Sec. 40.2, 40.3, 40.5, and
40.6, the Commission is retaining its PRA burden estimates discussed in
the NPRM. As discussed in the NPRM, the Commission anticipates that
these amendments are likely to modestly increase the reporting burden
for registered entities, although some registered entities are already
providing the information required under the final rule.\200\
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\200\ Some registered entities have been providing the required
level of detail in their part 40 filings. They will not experience
an increased burden as compared to their current practices. For PRA
purposes however, the Commission's burden estimates are spread
across all reporting entities covered by part 40.
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Accordingly, the Commission estimates the revised information
collection burdens for the part 40 Information Collection associated
with the final rule as follows:
Product Submissions (Sec. Sec. 40.2 and 40.3)
Under Sec. Sec. 40.2 and 40.3 as finalized, product submissions
will be required include complete information. While this is not
intended to expand or otherwise alter the scope of the explanation or
analysis required in the current regulation, the Commission
conservatively estimates some reporting entities may expend some
additional time to ensure the completeness of their submissions. The
number of respondents remains 70. The Commission estimates that the
amendments to Sec. Sec. 40.2(a)(3)(v) and 40.3(a)(4) may add an
additional average 1 hour of burden (for a new total of 22 hours). As
set out in the previously approved part 40 Information Collection, the
Commission estimates that reporting entities are likely to submit on
average an aggregate of 848 reports annually.
One commenter stated that the proposed revision to Sec. 40.2
``could significantly expand a DCM's regulatory costs for preparing
certified product filings.'' \201\ Although this commenter did not
expressly reference the Commission's PRA burden estimates, the
Commission is addressing this comment here as part of its PRA burden
analysis. As stated above in section II.B.3 above, the Commission does
not anticipate that the new requirement for ``complete'' Sec. 40.2
submissions will constitute a significant expansion in regulatory costs
because the registered entities, through their due diligence, will have
already collected the information that they will now provide in their
Sec. 40.2 filings. Additionally, the new submissions do not
necessarily need to be lengthy. Thus, the Commission continues to
estimate an increase of one burden hour per product filing, averaged
across all filers.
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\201\ Coinbase at 8, 11.
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Accordingly, the aggregate annual estimate for the reporting burden
associated with product submissions (Sec. Sec. 40.2 and 40.3), as
amended by the final rules, is as follows:
Estimated number of respondents: 70.
Estimated number of reports per respondent: 12.\202\
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\202\ The 3-year average of total responses for Sec. Sec. 40.2
and 40.3 submissions combined was 848 responses, calculated by
taking the annual total submissions received under Sec. Sec. 40.2
and 40.3 combined from all entities and averaging them for the years
of 2020, 2021 and 2022. The estimated number of reports per
respondent is calculated as 848 responses divided by 70 respondents
(848 responses/70 respondents = 12 responses per respondent).
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Average number of hours per report: 22.\203\
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\203\ The aggregate number of hours per report for Sec. Sec.
40.2 and 40.3 adds 1 hour to the existing burden estimate of 21
hours, for a total of 22.
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Estimated gross annual reporting burden (hours): 18,480.\204\
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\204\ The estimated gross annual reporting burden (hours) is
calculated by multiplying the estimated number of respondents times
the estimated number of reports per respondent times the average
number of hours per report (70 respondents x 12 reports per
respondent x 22 hours per report = 18,480 hours).
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Rule Submissions (Sec. Sec. 40.5 and 40.6)
Under Sec. 40.6 as finalized, rule submissions will be required to
include complete information to enable the Commission to perform its
analysis of the submissions. While this is not intended to expand or
otherwise alter the scope of the explanation or analysis required in
the current regulation, the Commission conservatively estimates some
reporting entities may expend some additional time to ensure the
completeness of their submissions. The number of respondents remains
70. Although the final rulemaking only increases reporting burden for
Sec. 40.6 submissions,\205\ the Commission averages Sec. Sec. 40.5
and 40.6 for PRA purposes. Based on an updated review of recent
submission data from 2020-2022, the Commission estimates that
respondents submit on average 1,412 reports per year. Further, the
Commission estimates that each respondent will spend approximately 2.5
hours to prepare and submit the required reports. Accordingly, the
aggregate annual estimate for the reporting burden is as follows:
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\205\ While the amendments require that Sec. 40.5 submissions
provide an explanation and analysis that is complete with respect to
the operation, purpose, and effect of the proposed rule or rule
amendment, Sec. 40.5 submissions are very infrequent (an average of
5 per year over the past 3 years) and most submissions already
provide considerable detail. Accordingly, the Commission anticipates
that the requirement that such submissions be ``complete'' will not
result in a measurable increase in filing burdens associated with
Sec. 40.5 submissions.
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Estimated number of respondents: 70.\206\
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\206\ The estimated number of 70 respondents includes 16 active
DCMs, 23 registered SEFs, 15 registered DCOs, 5 provisionally
registered SDRs, plus pending applications for those entities.
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Estimated number of reports per respondent: 20.\207\
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\207\ As noted above, the amendment increases the burden only
for Sec. 40.6 filings (and not for Sec. 40.5 filings). However,
the Commission aggregates Sec. Sec. 40.5 and 40.6 for PRA purposes.
The 3-year average of total responses for Sec. Sec. 40.5 and 40.6
submissions combined was 1,412 responses, calculated by taking the
annual total submissions received under Sec. Sec. 40.5 and 40.6
combined from all entities and averaging them for the years of 2020,
2021 and 2022. The estimated number of reports per respondent is
calculated as 1,412 responses divided by 70 respondents (1,412
responses/70 respondents = 20 responses per respondent).
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[[Page 88615]]
Average number of hours per report: 2.5.\208\
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\208\ The aggregate number of hours per report for Sec. Sec.
40.5 and 40.6 adds 0.5 hours to the existing burden of 2 hours per
report, for a total of 2.5.
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Estimated gross annual reporting burden (hours): 3,500.\209\
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\209\ The estimated gross annual reporting burden (hours) is
calculated by multiplying the estimated number of respondents times
the estimated number of reports per respondent times the average
number of hours per report (70 respondents x 20 reports per
respondent x 2.5 hours per report = 3,500 hours).
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SIDCO Submissions (Sec. 40.10)
The Commission is retaining its existing burden estimates for SIDCO
submissions under Sec. 40.10 because the burden for SIDCO submissions
is unaffected by the amendments. Section 40.10(a) requires a SIDCO to
provide notice to the Commission not less than 60 days in advance of
any proposed change to its rules, procedures, or operations that could
``materially affect the nature or level of risks presented'' by the
SIDCO. The Commission is revising the definition of ``materially affect
the nature or level of risks presented'' in Sec. 40.10(b), but does
not anticipate that this clarification will alter submission
requirements for SIDCO filers, increase the burdens associated with
such filings, or affect the frequency or number of such filings.
Accordingly, the Commission is retaining the burden estimates adopted
under Sec. 40.10, as approved by OMB during the most recent renewal of
OMB Collection 3038-0093.\210\
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\210\ See supra n.197. As set out in the NPRM and the PRA
renewal, the estimated gross annual reporting burden for SIDCO
submissions under Sec. 40.10 is 100 hours, which is calculated by
multiplying the estimated number of respondents times the estimated
number of reports per respondent times the average number of hours
per report (2 respondents x 1 report per respondent per year x 50
hours per report = 100 hours per year).
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The Commission believes that the other changes to reporting in the
final rule will not increase the burden on the registered entities, and
in some cases, may reduce reporting burden. The Commission anticipates
that the following changes will not result in any increase in reporting
burden:
Dormancy (Sec. 40.1). Registered entities are no longer required
to make submissions to revive dormant rules or products under
Sec. Sec. 40.2, 40.3, 40.5, or 40.6, other than when required to do so
in connection with reinstating a dormant registered entity's
registration or designation. Accordingly, the change does not add any
burden on registered entities, but may reduce burdens.
Margin methodology rules (Sec. Sec. 40.1, 40.5, 40.6, 40.10). This
provision adds ``margin methodology'' to the definition of ``rule'' and
thus requires the corresponding rule submissions. However, registered
entities already have been submitting margin-related rule changes under
the current requirements. The change only clarifies existing filing
requirements and does not add new reporting burdens.
Terms and conditions; weekly notification (Sec. Sec. 40.1, 40.2,
and 40.6(d)(2)). The changes to the definition of ``terms and
conditions'' remove certain categories of information, such as payments
and collections of certain margins and premiums that registered
entities must submit to the Commission as part of their rule
submissions under Sec. 40.6(a). Instead, the information will be filed
as rules under the less burdensome weekly notification requirements of
Sec. 40.6(d)(2). Contact information for block trades and amendments
to ``no cancellation ranges'' will also be added to the less-burdensome
weekly notification category under Sec. 40.6(d)(2).
Cover sheet (Sec. Sec. 40.2, 40.3, 40.5, 40.6 and appendix D). The
final rulemaking will remove the requirement for filers to submit a
cover sheet. The Commission's electronic portal now collects the
required information and generates a cover-sheet automatically,
allowing the cover-sheet requirement to be removed and reducing burden
to the registered entities.
Time period for submitting additional materials for product
approvals (Sec. 40.3(a)(10)). The final rule will provide Commission
staff greater flexibility to set deadlines for submission of any
additional information requested by the Commission for voluntary
product approval by registered entities. Currently, the regulation
requires an initial two-business-day limit after the Commission
requests the information. The greater staff discretion to set more
flexible deadlines may reduce the need for registered entities to
submit extension requests, thereby reducing their burden.
Non-materiality criteria (Sec. 40.4(b)(5)). This provision will
provide guidance to registered entities about the non-materiality
determination required for certain products. It will not change the
submission requirements, but rather help registered entities understand
Commission requirements for their submissions. The Commission
anticipates that these clarifications are likely to reduce burden for
reporting entities by providing more specificity about submission
requirements.
Materiality; submission of related rules (Sec. 40.4(b)(5)(ii)).
The final rulemaking requires that non-materiality submissions include
a copy of a previously approved rule or rule amendment that is, in
substance, the same as the subject non-material rule or rule amendment
that supports non-materiality. This could impose additional research,
information collection, and filing burdens. However, according to
Commission data, fewer than one non-materiality submission is made
annually. Accordingly, the Commission anticipates that this requirement
is unlikely to impose any material increase in reporting burden for
covered entities.
Resubmission (Sec. 40.6(c)(5)(ii)). This provision describes how
an objection by the Commission to a registered entity's certification
of a proposed rule or rule amendment would affect any future filings by
the registered entity of the proposed rule or rule amendment to which
the Commission objected. Because objections are infrequent, the
Commission anticipates that the burden of this provision is unlikely to
result in increased burden for reporting entities.
Materiality standard (Sec. 40.10(b)). Under the amendments, the
definition ``materially affect the nature or level of risks presented''
for SIDCO rule submissions will be revised to provide more useful
guidance to registered entities. This change will not affect the
reporting burden.
SIDCO submission under Sec. 40.10 of rules otherwise required to
be submitted under Sec. 40.5. This amendment will clarify filing
requirements, but will not result in a substantive change to filing
obligations. The Commission also anticipates that this clarification
may reduce burden by eliminating mistaken duplicate filings.
``Referenced contract'' data element (Appendix D). Submissions for
new products will include a new structured data element in the online
portal indicating whether the product is a ``referenced contract.''
This information will be the same as the ``reference contract''
determination set out in Sec. 150.1 and appendix C to part 150.
Accordingly, this is a non-substantive revision that will have de
minimis impact on reporting burden.
C. Cost Benefit Considerations
1. CEA Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before issuing regulations under the
CEA.\211\ By its terms, section 15(a) does not require the Commission
to quantify the costs and
[[Page 88616]]
benefits of a new rule or to determine whether the benefits of the
adopted rule outweigh its costs. Rather, section 15(a) requires the
Commission to ``consider the costs and benefits'' of a subject rule.
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\211\ 7 U.S.C. 19(a).
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Section 15(a) further specifies that the costs and benefits of the
Commission's regulations shall be evaluated in light of five broad
areas of market and public concern: (1) protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. Collectively, these five factors are referred to herein
as section 15(a) factors and they are addressed below. In conducting
its analysis, the Commission may, in its discretion, give greater
weight to any one of the five enumerated areas of concern and may
determine that, notwithstanding its costs, a particular rule is
necessary or appropriate to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the Act.
In this release, the Commission is adopting amendments that may
impose costs. Some of the amendments, however, are format,
organizational, and non-substantive changes, which will have no costs.
The Commission has endeavored to assess the expected costs and benefits
of the amendments in quantitative terms, including PRA related costs,
where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable amendments in
qualitative terms.
2. Statutory and Regulatory Background
Part 40 of the Commission's regulations implements section 5c(c) of
the CEA and requirements and procedures for registered entities,
including DCMs, DCOs, SEFs, SDRs, and SIDCOs, to submit their rules and
products to the Commission prior to implementing rules, listing
products for trading, or accepting products for clearing. Part 40
generally provides two means for registered entities to submit rules
and products to the Commission. There is a self-certification process
and a Commission-approval process.\212\
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\212\ See Sec. Sec. 40.2 through 40.6.
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With two exceptions, the Commission last amended the part 40
regulations in 2011.\213\ After years of experience with registered
entities following the processes set forth in the part 40 regulations,
the Commission is adopting amendments to clarify, simplify, and enhance
the utility of the part 40 regulations for registered entities and the
Commission. Changes include amendments to: Sec. 40.1 to simplify the
determination of whether a registered entity is deemed dormant and to
remove the terms ``dormant rule'' and ``dormant contract or dormant
product''; Sec. Sec. 40.2, 40.3, 40.4, 40.5 and 40.6 and appendix D to
part 40 to reflect the development, evolution and use of the
Commission's online portal for the filing of rule and product
submissions; Sec. Sec. 40.2, 40.3, 40.5 and 40.6 to confirm that the
registered entity must include a complete explanation and analysis when
submitting its product or rule filing; add a new appendix E to part 40
to provide guidance regarding criteria the Commission considers as
evidence that an enumerated agricultural product rule is non-material;
Sec. Sec. 40.5 and 40.6 to reorganize and enhance the regulations'
utility; and Sec. 40.7 to delegate certain authorities of the
Commission to the Director of the Division of Clearing and Risk and the
Director of the Division of Market Oversight. The Commission also is
amending Sec. 40.10 to provide meaningful guidance to SIDCOs regarding
filing instructions for rules that could materially affect the nature
or level of risks presented by the SIDCO.
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\213\ See 2011 Final Rule; Repeal of the Exempt Commercial
Market and Exempt Board of Trade Exemptions, 80 FR 59575 (October 2,
2015); and Position Limits for Derivatives, 86 FR 3236 (January 14,
2021).
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3. Baseline
The Commission identified and considered the benefits and costs of
the proposed amendments relative to a baseline standard of those
generated by the current statutory and regulatory framework, i.e., the
status quo. The baseline for the Commission's consideration of the
costs and benefits of this rulemaking is the existing statutory and
regulatory framework applicable to DCMs, DCOs, SDRs, and SEFs, in 17
CFR part 40. Current part 40 provides substantive and procedural
regulatory requirements for the submission of registered entities'
self-certifications, and requests for approval, of new products for
trading and clearing and of new rules and rule amendments. Current part
40 also establishes guidelines for the Commission's review and
processing of registered entities' submissions. Current part 40
regulations explain what information must be made publicly available in
relation to the application to become a DCM, DCO, SDR, or SEF, and when
registered entities file submissions for new products, new rules and
rule amendments. There are also special requirements for certain rules
submitted by SIDCOs.
The Commission notes that this cost-benefit consideration is based
on its understanding that the derivatives market regulated by the
Commission functions internationally with: (1) transactions that
involve U.S. entities occurring across different international
jurisdictions; (2) some entities organized outside of the United States
that are registered with the Commission; and (3) some entities that
typically operate both within and outside the United States and that
follow substantially similar business practices wherever located. Where
the Commission does not specifically refer to matters of location, the
discussion of costs and benefits below refers to the effects of the
regulations on all relevant derivatives activity, whether based on
their actual occurrence in the United States or on their connection
with, or effect on U.S. commerce.\214\
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\214\ See, e.g., 7 U.S.C. 2(i).
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4. Amendments
a. Amendments to Sec. 40.1 Regarding Dormant Registered Entities,
Products, Contracts, and Rules
The Commission is amending its regulations to simplify the
calculation of how long a registered entity is inactive and when the
period of inactivity results in a DCM, DCO, SDR or SEF being deemed
dormant. The amendments to the definitions currently located in Sec.
40.1(c) through (f) will conform the wording of these sections across
the different types of registered entities such that any registered
entity would be considered dormant if it is inactive for a period of
365 calendar days, provided that a DCM, DCO or SEF will not become
dormant during the 1,095 calendar days following the entity's initial
and original order of designation or registration, as applicable. The
amendments replace the current regulatory text that measures time
periods in months with language that measures the equivalent time in
calendar days and the amendments provide for consistent, clear start
and end dates for measuring inactivity in connection with dormancy
status.
In addition, the Commission is removing from Sec. 40.1 the
definitions and related requirements for the following terms: ``dormant
contract or dormant product,'' and ``dormant rule,'' respectively. As
amended, the rules of a dormant DCM, dormant SEF, dormant DCO, or
dormant SDR will still need to
[[Page 88617]]
be approved and the products will still need to be self-certified or
approved in connection with the entity being reinstated as a DCM, SEF,
DCO or SDR, respectively, but a DCM, SEF, DCO or SDR that is not
dormant will no longer need to certify, or seek approval, of a
particular rule or product that was already approved or certified
solely due to a lack of implementation of the rule or inactivity of the
particular product.
i. Benefits
The Commission believes that the changes to the part 40 dormancy
regulations will benefit registered entities by helping registrants
interpret dormancy period requirements consistently across the relevant
registration types and more readily identify when dormancy applies.
Additionally, there is a cost-savings because the removal of the terms
``dormant contract or dormant product,'' and ``dormant rule'' and the
associated requirements will remove the administrative and compliance
burdens of tracking whether a product or rule has become dormant and
the potential costs of recertifying (or obtaining approval of) a
dormant contract, product, or rule.\215\ The Commission also believes
that the amendments to the dormancy regulations are beneficial because
it is unlikely that the changes will present concerns regarding market
integrity or safety. As explained above, a registered entity
implementing a contract, product, or rule has a continuing obligation
to ensure that the rule complies with the CEA and the Commission's
regulations thereunder.
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\215\ See Cboe at 2 (``Additionally, deleting the concepts of a
dormant product and rule will reduce compliance costs for market
participants and oversight costs for the Commission.'')
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ii. Costs
The Commission believes that registered entities will not incur any
increased costs related to the amendments to the current dormancy
regulations in part 40. Regarding the potential for a cost related to
the reduction of market oversight, based on experience with dormant
products and rules to date, the Commission believes that deleting the
definitions will result in little, if any, cost to regulatory oversight
because the Commission has observed that registrants typically manage
products with no trading activity or inactive rules and the Commission
is not aware of any market disruptions resulting from the inactivity of
products or rules.\216\
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\216\ See Cboe at 2 (stating ``In light of the benefits to be
derived from eliminating the concepts of a dormant contract or
product and dormant rule and that doing so will not result in any
reduction in market integrity or safety, the Commission should
remove these concepts from Commission regulations.'').
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b. Amendments to the Definitions of Rule and Terms and Conditions in
Sec. 40.1
The Commission is amending the definition of the term ``rule'' in
Sec. 40.1(i) by including ``margin methodology'' in the list of
specific items that are considered a ``rule,'' thereby making explicit
what is already understood by current DCOs as implicitly included in
the definition and codifying the current practice of DCOs submitting
margin methodologies as rules to the Commission. The Commission also is
amending the definition of the term ``terms and conditions'' in current
Sec. 40.1(j) by removing from the list of terms that are considered
``terms and conditions'' payments or collections of certain premiums or
margins from current Sec. 40.1(j)(1)(xi) and (j)(2)(xi). The
Commission is adding the payments or collections of such premiums or
margins, as well as changes to the no cancellation ranges, to the
categories of rules that may be submitted without certification in a
weekly notice filing pursuant to Sec. 40.6(d)(2).
i. Benefits
The Sec. 40.6(d) process permits a registered entity to implement
a rule immediately and without self-certification provided that the
entity files a summary notification within a week of the rule
amendment. The Commission believes that by adding margin methodology to
the list of items considered a rule, the Commission is making it clear
what type of information is considered a rule and codifying a current
practice. The amendments to the definition of ``terms and conditions''
will reduce compliance burdens for registered entities for rule
amendments that address payments or collections of certain premiums or
margins and changes to the no cancellation ranges as these could be
filed through a weekly notification pursuant to Sec. 40.6(d)(2), which
is a less burdensome, less costly process than through the current
process of filing under Sec. 40.6(a).
ii. Costs
The Commission believes that the amendment to the definition of
``rule'' to state explicitly that ``margin methodology'' is included in
the definition will make the term consistent with the current DCO
practice and understanding of implicit requirements and therefore will
not place any additional cost or burden on registered entities that
submit rules to the Commission under part 40.
The Commission does not expect registered entities to incur any
additional costs or burdens related to the changes to the definition of
``terms and conditions'' because the amendments reduce the number of
items of information registered entities must submit to the Commission
under Sec. 40.6(a).
c. Amendments to Sec. Sec. 40.2 and 40.3 Regarding Instructions for
Self-Certification and Approval of Products
The Commission is amending Sec. Sec. 40.2 and 40.3 to update
Commission processes and filing instructions for registered entities'
submission of products to the Commission. Amendments to Sec. Sec.
40.2(a)(1) and 40.3(a)(1) will remove references to the Commission
Secretary. To reflect the fact that registered entities now file
submissions through the Commission's portal and a cover sheet is no
longer necessary, changes to Sec. Sec. 40.2(a)(3) and 40.3(a)(2)
remove the references to a cover sheet and replace them with a
requirement directing registered entities to provide the information
required by appendix D to part 40.
Changes to Sec. 40.2(a)(3)(v) specify that a registered entity's
concise explanation and analysis of a product must be complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with the CEA and associated
regulations. Changes to Sec. 40.3(a)(4) state that a registered
entity's explanation and analysis of a product must be complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with the CEA and associated
regulations.
The amendments to Sec. 40.3(a)(10) eliminate the two-business day
deadline for registered entities to respond to Commission staff
requests for additional information with respect to product approval
requests under Sec. 40.3 and grant Commission staff authority to set
response deadlines.
Amendments to Sec. 40.3(c) concern the length of the review
period. The amendments to Sec. 40.3(c) will permit the Commission to
extend for an additional 45 days if the submission is incomplete or if
the registered entity doesn't respond completely to Commission
questions in a timely manner. The Commission also is amending Sec.
40.3(c)(5) to provide that if an initial 45-day review period ends on a
non-business day, such review is extended to the next business day.
[[Page 88618]]
i. Benefits
The Commission believes the removal of the reference to the
Secretary in the regulations is beneficial because the deletion
modernizes the regulation and makes it consistent with current
practices and technologies. For example, submitting entities no longer
send submissions to the Commission's Secretary because they upload
documents to the Commission's portal. The Commission believes that the
elimination of the cover sheet requirement under Sec. Sec. 40.2 and
40.3 removes redundancy because the online portal requires registered
entities to input the same information that is required on the
coversheet. The amendments to Sec. 40.2(a)(3)(v) should help achieve
improved regulatory effectiveness of the self-certification processes
by resulting in all (rather than just some) registered entities
explaining how and why their products comply with the Act and
Commission's regulations, thereby enabling the Commission to more
effectively complete its analysis of compliance and allowing market
participants to understand the products being listed for trading.\217\
The Commission believes that amending Sec. 40.3(a)(10) to eliminate
the two business day deadline for responding to Commission request for
additional information and granting Commission staff the authority to
set a deadline based on the nature of the requested information may
provide more flexibility to registered entities to respond and better
enable the Commission to manage its resources and conduct more
effective oversight over registered entities. The changes to Sec.
40.3(c)(2) that the Commission may extend the initial 45-day review
period for up to an additional 45 days if the submission is incomplete
or if the registered entity doesn't respond completely to Commission
questions in a timely manner will also encourage registered entities to
be precise and consult with Commission staff regarding any questions
when preparing Sec. 40.3 submissions.
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\217\ In the NPRM, the Commission misplaced the following
comment in the ``Costs'' section: ``In general, the proposed
amendments to Sec. Sec. 40.2 and 40.3 will provide greater
specificity, leaving less room for regulatory ambiguity, improve the
quality of submissions, and reduce any administrative costs register
entities might incur when determining what information must be
submitted to the Commission for a product self-certification or
product approval request.'' NPRM at 61447-448. The Commission
recognizes that the location of the sentence in the NPRM's ``Cost''
section might have caused confusion and should have been placed in
the benefits discussion. See a16z at 8 (noting that ``it is not
clear how this point is a cost of the Proposed Rules. . . .'').
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ii. Costs
The Commission believes that, relative to the existing Sec. Sec.
40.2 and 40.3, amending Sec. Sec. 40.2 and 40.3 to expressly
articulate that registered entities must provide a ``complete''
analysis regarding their product submissions will not measurably
increase compliance costs. As mentioned above, after the Commission
amended part 40 in 2011, registered entities submitted explanations and
analyses when self-certifying products that were sufficient, meaning
that the explanations and analyses demonstrated to the Commission that
the products complied with the CEA and associated regulations. Over
time, however, the Commission observed a trend of receiving new product
certifications that were incomplete. Accordingly, while the Commission
foresees no cognizable costs relative to the baseline, it does
acknowledge that, as a practical matter, registered entities that have
in the past failed to file complete analyses of their products, will
likely have increased burdens related to preparing complete Sec. 40.2
self-certification submissions moving forward.\218\ The amendments to
Sec. 40.3 enabling the Commission to extend the 45-day review period
as a result of the submission being incomplete or the entity not
responding completely to Commission questions in a timely manner may
cause registered entities to incur costs related to the offering of
products submitted for voluntary Commission approval if the extended
review period affects product-launch dates.
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\218\ a16z suggested that the Commission reevaluate its position
on the costs and benefits associated with the Commission`s
instruction to registered entities to file ``complete'' analyses,
after noting an apparent discrepancy in the NPRM between the PRA
estimates and the cost-benefit discussion of the same amendments.
a16z at 7-8. The Commission acknowledges tension between the NPRM's
respective PRA and CBC analyses. To address this, the Commission
clarifies that while the explicit addition of ``completeness'' to
Sec. Sec. 40.2 and 40.3 is not intended to expand or otherwise
alter the scope of the explanation or analysis required in the
current regulation--therefore not engendering additional costs
relative to the baseline--as a practical matter, some reporting
entities now may expend additional time to ensure their submissions'
compliance. More specifically, registered entities that provided
incomplete information under the current provision will likely incur
modest costs of one hour per filing associated with the new
amendment to ensure their submissions are ``complete'' pursuant to
Sec. Sec. 40.2 and 40.3, as also set out in the PRA section. For a
discussion on PRA burden estimates, see section III.B, herein.
Another commenter, Coinbase, asserts that ``expanded information and
analysis requirements on registered entities for certified product
filings will impose significant, unnecessary regulatory costs on
DCMs. It can be time consuming and costly to prepare lengthy,
detailed filings. . . .'' Coinbase at 8. As explained in section
II.B.3. above, the Commission believes that a complete explanation
is clear and informative, but not necessarily lengthy; and the
information to be provided leverages due diligence conducted by the
registered entity prior to certification.
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d. Amendments to Sec. 40.4 and Appendix E to Part 40, Regarding Terms
or Conditions for Enumerated Agricultural Products
Regulation Sec. 40.4 requires DCMs to submit a rule or rule
amendment for Commission approval if the rule or rule amendment affects
a contract on an enumerated agricultural product and would materially
change a term or condition of the contract for a delivery month with
open interest. The Commission is adding appendix E to part 40 to
provide guidance to DCMs regarding criteria that the Commission
considers as evidence that an enumerated agricultural product rule
change is non-material. The Commission also is amending Sec.
40.4(b)(5)(ii) to provide that when a DCM explains why it considers a
rule ``non-material'' pursuant to Sec. 40.4(b)(5), the DCM will, if
applicable, include a copy of a previously approved rule or rule
amendment that is, in substance, the same as the non-material rule or
rule amendment.
i. Benefits
The Commission believes that appendix E to part 40 will aid DCMs in
determining whether a change to terms and conditions is material.
Specifically, the guidance offered in appendix E should reduce
uncertainties and enable DCMs to more efficiently determine whether a
change is material. Additionally, by directing DCMs to include a copy
of a previously approved rule or rule amendment with submissions to the
Commission pursuant to Sec. 40.4(b)(5)(ii), the Commission believes
this effort will provide market participants with context and
background that will help them understand the current rule or rule
amendment and why it is non-material.
ii. Costs
The Commission anticipates appendix E to part 40 might cause DCMs
to incur a one-time compliance cost related to understanding Appendix
E's guidance for assessing whether a rule is material. The Commission
believes that DCMs will incur costs related to researching and
collecting previously approved rules or rule amendments for submissions
to the Commission.
[[Page 88619]]
e. Amendments to Sec. Sec. 40.5, 40.6, and 40.10 Regarding Filing
Instructions for Rules
The Commission is updating processes and outlining submission
procedures for a registered entity to voluntarily submit its rules for
Commission approval and for a registered entity to self-certify that
its rules comply with the Act and Commission regulations. Amendments to
Sec. Sec. 40.5(a)(1) and 40.6(a)(1) remove references to the
Commission Secretary. Amendments to Sec. Sec. 40.5(a)(2) and
40.6(a)(7)(i) remove the references to the cover sheet and replace
these with references to the ``information required by Appendix D'' to
part 40.
The amendments to Sec. Sec. 40.5(a)(5) and 40.6(a)(7) describe the
scope of the explanation and analysis that registered entities must
submit by adding that the explanation and analysis needs to also be
``complete'' and explain the rule or rule amendment, its operation,
purpose and effect and how and why it complies with the Act and the
Commission's regulations thereunder. The Commission is moving certain
language from the introductory paragraph of Sec. 40.6(a) to become
Sec. 40.6(a)(9) and to state more clearly therein that a new rule or a
rule amendment that delists, or withdraws the certification of, a
product that does not have any open interest may become effective
immediately upon the filing of the submission, provided that the
submission is made in compliance with Sec. 40.6(a)(1), (2) and (7). In
addition, the amendments in Sec. 40.6(b)(2) provide that if a
registered entity amends or supplements its initial rule submission
under Sec. 40.6(a), the Commission will treat the amendment as a new
submission and restart the Commission's 10-day review period, unless
the amendments or supplementation is requested by the Commission or is
for non-substantive revisions.
The amendments in Sec. 40.6(c)(5) make it clear that if the
Commission stays and ultimately objects to a rule certification, the
registered entity may re-submit a revised version or a supplemented
submission with a substantive basis for treating the revised rule
differently and that the revised or supplemented submission will be
reviewed without prejudice. In addition, the objection by the
Commission will be treated as presumptive evidence that the registered
entity may not truthfully certify that the same proposed rule or
substantially the same rule complies with CEA and the Commission's
regulations.
The amendments to Sec. 40.6(d)(2) expand the categories of rules
that may be implemented without a certification to include a number of
new categories of rules. The new categories include rule amendments
updating email addresses or contact information that market
participants use to submit block trades; rules amending existing
trading months; rules changing the price ranges within which a trade
will not be cancelled; and rules governing the payment or collection of
option premiums or margins.\219\ Registered entities may implement
rules within these categories by notifying the Commission of the rule
changes on a weekly basis pursuant to Sec. 40.6(d)(2). The amendments
to Sec. 40.6(d)(2) align with the Commission's removal of a subset of
the same categories of rules from the definition of ``terms and
conditions'' in Sec. 40.1.
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\219\ Regulation Sec. 40.6(d)(2)(xi) will allow registered
entities to submit rules to allow updates of email addresses and
contact information that market participants use to submit block
trades. Regulation Sec. 40.6(d)(2)(xii) will allow registered
entities to submit rules that make changes to no cancellation ranges
on contracts for the purchase or sale of a commodity for future
delivery or an option on such a contract or an option on a commodity
(other than a swap). Regulation Sec. 40.6(d)(2)(xiii) will allow
registered entities to submit rules that set or amend the payment or
collection of commodity options premiums or margins for the purchase
or sale of a commodity for future delivery or an option on such a
contract or an option on a commodity (other than a swap). Regulation
Sec. 40.6(d)(2)(xiii) will allow registered entities to submit
rules that set or amend the payments or collections of option
premiums or margins for a swap.
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For SIDCOs certifying rules that could materially affect the nature
or level of risks presented by the SIDCO, the Commission is revising
the definition in Sec. 40.10(b) to specify that changes that require
advance notice under Sec. 40.10 may include, but are not limited to,
material changes to the SIDCO's default management plan or default
rules or procedures under Sec. 39.16 or 39.35, program of risk
analysis and oversight required under Sec. 39.18, or recovery and wind
down plans required under Sec. 39.39; the adoption of a new or
materially revised margin methodology; the establishment of a cross-
margining program or similar arrangement with another clearing
organization; and material changes to its approach to the stress
testing required under Sec. 39.13(h)(3), 39.36(a), or 39.36(c).
Finally, the Commission is amending Sec. 40.10 to expressly state that
where any provision of the Commission's regulations requires a DCO to
file rules for approval under Sec. 40.5, a SIDCO will be required
instead to file those rules under Sec. 40.10, if the rules could
materially affect the nature or level of risks presented by the SIDCO.
i. Benefits
The Commission believes the removal of the reference to the
Secretary modernizes the regulation and makes it consistent with
current practices and technologies. Submitting entities no longer send
submissions to the Secretary with a cover sheet because they instead
file submissions through uploading documents to, and entering
information into, the Commission's portal. The Commission also believes
that the elimination of the cover sheet requirement in the text of
Sec. Sec. 40.5 and 40.6 removes redundancy because the online portal
requires registered entities to input into the online portal the same
information that is required on the cover sheet.
The Commission believes the amendments to Sec. 40.5(a)(5)
requiring complete submissions and Sec. 40.6(a)(7) stating that a
registered entity must provide a concise explanation and analysis that
is complete with respect to the operation, purpose, and effect of a
certified rule or rule amendment and its compliance with applicable
provisions of the Act, including core principles, and the Commission's
regulations thereunder should reinforce the need for registered
entities' filings to demonstrate such compliance. The amendments to
Sec. 40.6(a)(7) should help achieve improved regulatory effectiveness
of the rule self-certification processes by resulting in all (rather
than just some) registered entities demonstrating how and why their
rules comply with the Act and Commission's regulations, thereby
enabling the Commission to more effectively complete its analysis of
compliance. The amendment to Sec. 40.6(a)(9) will benefit registered
entities by providing certainty that a registered entity may
immediately delist, or withdraw a certification of, a product that does
not have any open interest upon making a Sec. 40.6(a) submission.
The amendments to Sec. 40.6(b)(2) that provide that the review
period of a rule restarts under circumstances that are enumerated
therein should encourage registered entities to be thorough when filing
their initial submissions. The amendments to Sec. 40.6(c)(5) provide
clarity regarding the impact of an objection by the Commission to a
registered entity's certification of a rule or rule amendment on the
grounds that the rule or rule amendment is inconsistent with the Act or
the Commission's regulations. Specifically, under the amendment, if a
registered entity wishes to resubmit through self-
[[Page 88620]]
certification a rule or rule amendment that the Commission objected to
on the grounds that the proposed rule or rule amendment is inconsistent
with the Act or the Commission's regulations, the registered entity
must first substantively change or supplement the proposed rule or rule
amendment to address the Commission's objection.
The amendments to Sec. 40.6(d)(2) to add new categories of rules
that may be implemented through a weekly notification to the Commission
will enable registered entities to more quickly implement rules that
fall within these new categories as the registered entity may implement
these rules immediately and file a weekly notification of any rule
amendments within a week of making such amendments. The process of
drafting a weekly notification is less involved than the process of
submitting rules pursuant to Sec. 40.6(a). Amendments to Sec.
40.10(b) should aid SIDCOs in making determinations regarding the type
of rules that must be submitted to the Commission under Sec. 40.10.
Addition of Sec. 40.10(i) also should eliminate potentially
duplicative regulatory filings under current Sec. 40.5, and, as a
result, SIDCOs will benefit from not having to dedicate administrative
efforts two times for similar submissions.
ii. Costs
The Commission believes that, relative to the existing Sec. Sec.
40.5(a) and 40.6(a)(7)(v), amending Sec. Sec. 40.5(a) and
40.6(a)(7)(v) to expressly articulate that registered entities submit
``complete'' rule analysis to the Commission concerning proposed rule
changes will not measurably increase compliance costs.\220\ As
mentioned above, there are registered entities that have filed
submissions and met the requirements under the rules in effect prior to
these amendments. It is unlikely that these registered entities will
incur costs as a result of the changes to the Sec. 40.6 rule-filing
instructions. However, some registered entities' Sec. 40.6(a)(7)
submission have been deficient, lacking a sufficient explanation of
rule or rule amendment, its operation, purpose and effect or how and
why it complies with the Act and the Commission's regulations
thereunder.\221\ Accordingly, while the Commission foresees no
cognizable costs relative to the baseline, it does acknowledge that, as
a practical matter, registered entities that previously have filed
deficient Sec. 40.6(a)(7)(v) submissions will likely incur some costs,
such as reporting burdens, related to preparing the preparation of
material with complete information regarding the compliance of rules or
rule amendments.
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\220\ As discussed in the Paperwork Reduction Act discussion
above, Sec. 40.5 submissions are infrequent, and most submitters
already provide considerable detail about their submissions.
Consequently, the Commission does not anticipate that the addition
of the term ``complete'' in Sec. 40.5 will practically impact
submitters.
\221\ As explained in the Paperwork Reduction Act discussion,
above, the Commission acknowledges a tension between the NPRM's
respective PRA and CBC analyses. To address this, the Commission
clarifies that while the explicit addition of ``completeness'' to
Sec. 40.6 (as well as Sec. 40.5) is not intended to expand or
otherwise alter the scope of the explanation or analysis required in
the current regulation--therefore not engendering additional costs
relative to the baseline--as a practical matter some reporting
entities now may expend additional time to ensure their Sec. 40.6
submissions' compliance. See a16z at 8 (noting that the NPRM's PRA
section identified an additional burden but the CBC section did
not). More specifically, as set out in the PRA analysis in section
III.B above, registered entities that provided incomplete
information under the current Sec. 40.6 will likely incur modest
costs of 0.5 hour per filing.
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The Commission does not believe that there are costs associated
with amendments to Sec. 40.5(d). The Commission does not believe that
there are costs associated with amendments to Sec. 40.6(b)(2) or
40.6(c)(5). The Commission believes that the changes to Sec. 40.10
will not place additional costs or burdens on SIDCOs because they
identify the types of submissions that SIDCOs must file under Sec.
40.10 and eliminate potential duplication in regulatory filings.
f. Amendments to Sec. 40.7 Regarding Delegation of Authority
The Commission is amending Sec. 40.7 to enhance the utility and
clarity of the regulation and add one new delegation. As discussed
above, the Commission is adding Sec. 40.7(e) to delegate the
Commission's authority to specify the format and manner of filing under
these regulations to the Directors of the Division of Clearing and Risk
and the Division of Market Oversight.
i. Benefits
The Commission believes that delegating authority to the Divisions
to specify format and manner of filing in Sec. 40.7(e) enhances
efficiency.
ii. Costs
The Commission expects that there will be no costs incurred by
registered entities by the amendments amending the authorities
delegated to Commission staff under part 40.
g. Amendments to Appendix D to Part 40
With the development and use of the Commission's online portal for
the filing of rule and product submissions, the Commission is amending
appendix D to part 40 that sets forth instructions to registered
entities on what information must be submitted together with part 40
filings. The Commission also is adding a new requirement that DCMs and
SEFs indicate when listing a new product whether the new product meets
the definition of ``referenced contract'' as defined in Sec. 150.1 and
described in appendix C to part 150 that is titled ``Guidance Regarding
the Definition of Reference Contract.'' \222\
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\222\ Refer to n.40 for a discussion on Part 150.
---------------------------------------------------------------------------
i. Benefits
The Commission believes that the amendments to appendix D to part
40 will provide several benefits. First, the changes describe and
modernize instructions. The text is consistent with the current
technological practice where registered entities upload product and
rule submissions using the Commission's online portal. Second, the
amendment to appendix D to part 40 will require DCMs and SEFs to
indicate as part of filing the submission whether a new product to be
listed meets the definition of a referenced contract, thereby alerting
Commission staff when contracts that may need to be added to the Staff
Workbook are being listed and enable the Commission to process and
review the submission more efficiently.
ii. Costs
The Commission expects that there will be negligible, if any, costs
incurred by registered entities with respect to the amendments to
modernize Appendix D as registered entities are already submitting the
covered rules and products using the portal. With regards to the
amendment that DCMs and SEFs indicate whether a new product to be
listed meets the definition of referenced contract, the Commission
notes that DCMs and SEFs will incur costs to make these indications.
These costs, however, will be negligible because DCMs and SEFs are
already making the analytical determinations as to whether contracts
are referenced contracts to meet their obligations under part 150 of
the Commission's regulations.
h. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits of the amendments to 17 CFR part 40 in light of
the following five broad areas of market and public concern identified
in section 15(a) of the CEA: protection of market participants and the
public; efficiency, competitiveness, and financial integrity of futures
markets; price discovery;
[[Page 88621]]
sound risk management practices; and other public interest
considerations.
Protection of market participants and the public: The Commission
believes that the changes to Sec. Sec. 40.2, 40.3, 40.5 and 40.6,
regarding the requirement for complete explanations and analysis for
product and rule submissions will help protect market participants and
the public by encouraging registered entities to submit complete and
informative filings for product and rule changes thereby explaining the
new product, rule or rule amendment and how and why the new product,
rule or rule amendment complies with the CEA and the Commission's
regulations.
Efficiency, competitiveness, and financial integrity of futures
markets: The improvements to the regulations providing for ``complete''
products and rules submissions better ensure that the Commission can
provide adequate oversight with minimal disruption to market
efficiency. The Commission has not identified any effect of the
regulations on innovation and competition.
Price discovery: The Commission has not identified any effect of
the regulations on price discovery.
Sound risk management practices: The Commission has not identified
any other effect of the regulations on sound risk management practices.
Other public interest considerations: The Commission has not
identified any effect of the regulations on other public interest
considerations.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to ``take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of this Act, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of this Act.'' \223\
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\223\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
has considered whether the amendments to part 40 are likely to have
anticompetitive effects, and if so, whether the amendments reflect the
least anticompetitive means of achieving the purposes of this Act.\224\
In doing so, the Commission considered the comments received addressing
competition.
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\224\ CEA Section 3(b).
---------------------------------------------------------------------------
The Commission received three comment letters that identified
potential effects on competition in connection with the proposed
addition of ``complete'' to Sec. 40.2(a)(3)(v) and one of these
letters identified potential effects on competition in connection with
the proposed addition of ``complete'' to Sec. 40.6(a)(6)(v).\225\
Better Markets stated that part 40 ensures that innovation takes place
within the boundaries of market integrity, transparency and the
protection of market participants, and provides a framework for the
Commission to engage with market participants, assess innovations, and
make informed decisions that contribute to the overall health and
competitiveness of the derivatives markets.\226\ Better Markets stated
that the proposed addition of ``complete'' to Sec. 40.2(a)(3) would
bolster market integrity, protect the interests of market participants
and ensure the Commission can effectively and thoroughly evaluate
compliance.\227\ Coinbase cautioned that adding ``complete'' to Sec.
40.2(a)(3) as proposed could unnecessarily limit and delay the
availability of a process to list contracts on its DCM after expending
the time, effort and diligence to develop the product in the highly
competitive global derivatives market.\228\ Cboe commented that if the
proposed addition of the word ``complete'' to Sec. Sec. 40.2(a)(3) and
40.6(a)(v) were applied in a prescriptive, inconsistent and
unreasonable manner, it would, among other things, inhibit innovation
and competition.\229\
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\225\ No other amendments proposed in the NPRM elicited comments
addressing competition.
\226\ Better Markets at 3.
\227\ Better Markets at 4.
\228\ Coinbase at 11.
\229\ Cboe at 2.
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The Commission agrees with Better Markets' view that the proposed
part 40 amendments--including, importantly, the addition of
``complete'' to Sec. 40.2(a)(3)--support the overall health and
competitiveness of derivatives markets. The proposed addition of
``complete'' should result in a better understanding of the product by
the Commission and market participants, that in turn should promote
innovation and competition. Further, the Commission does not construe
Coinbase's or Cboe's generalized warnings to raise compelling
anticompetitive concerns; neither comment asserts that, or articulates
a realistic theory as to how, the addition of ``complete'' to Sec.
40.2(a)(3)(v) or 40.6(a)(6)(v), would likely be anticompetitive--i.e.,
cause price increases or inhibit innovation--in a properly defined
relevant antitrust market to any consequential degree.
Accordingly, the Commission does not anticipate that the amendments
to part 40 of its regulations would promote or result in anti-
competitive consequences or behavior. Further, even accepting, for
argument's sake, that the requirement that a DCM or SEF submit a
concise explanation and analysis that is complete with respect to the
contract's terms and conditions, the underlying commodity, and the
product's compliance with applicable provisions of the Act, including
core principles, and the Commission's regulations could hamper
innovation to some unspecified degree, the Commission considers this
requirement minimal, warranted, necessary and the least anticompetitive
means to realize its critical core interests in market integrity,
transparency, and protection of market integrity. Similarly, even
accepting, for argument's sake, that the requirement that a registered
entity submit a concise explanation and analysis of a rule to be self-
certified that is complete with respect to the operation, purpose, and
effect of the proposed rule or rule amendment and its compliance with
applicable provisions of the Act, including core principles, and the
Commission's regulations could hamper innovation to some unspecified
degree, the Commission considers this requirement minimal, warranted,
necessary and the least anticompetitive means to realize its critical
core interests in market integrity, transparency, and protection of
market integrity.
List of Subjects
17 CFR Part 37
Banks, banking, Commodity futures, Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 38
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 40
Commodity futures, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 37--SWAP EXECUTION FACILITIES
0
1. The authority citation for part 37 continues to read as follows:
[[Page 88622]]
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
0
2. Amend appendix B by revising the first sentence of paragraph (a)(1)
under ``Core Principle 8 of Section 5h of the Act--Emergency
Authority'' to read as follows:
Appendix B to Part 37--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 8 of Section 5h of the Act--Emergency Authority
* * * * *
(a) * * *
(1) A swap execution facility should have rules that authorize
it to take certain actions in the event of an emergency, as defined
in Sec. 40.1 of this chapter. * * *
* * * * *
PART 38--DESIGNATED CONTRACT MARKETS
0
3. 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.
0
4. Amend appendix B by revising the third sentence of paragraph (C)(a)
under ``Core Principle 6 of Section 5(d) of the Act'' to read as
follows:
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 6 of Section 5(d) of the Act: * * *
* * * * *
(C) * * *
(a) * * * To address perceived market threats, the designated
contract market should have rules that allow it to take certain
actions in the event of an emergency, as defined in Sec. 40.1 of
this chapter, including: imposing or modifying position limits,
price limits, and intraday market restrictions; imposing special
margin requirements; ordering the liquidation or transfer of open
positions in any contract; ordering the fixing of a settlement
price; extending or shortening the expiration date or the trading
hours; suspending or curtailing trading in any contract;
transferring customer contracts and the margin or altering any
contract's settlement terms or conditions; and, where applicable,
providing for the carrying out of such actions through its
agreements with its third-party provider of clearing or regulatory
services. * * *
* * * * *
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
5. The authority citation for part 40 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376
(2010).
0
5. Revise Sec. 40.1 to read as follows:
Sec. 40.1 Definitions.
As used in this part:
Business day means the intraday period of time starting at 8:15
a.m. and ending at 4:45 p.m. Eastern Standard Time or Eastern Daylight
Savings Time, whichever is currently in effect in Washington, DC, on
all days except Saturdays, Sundays, and Federal holidays in Washington,
DC.
Dormant designated contract market means any designated contract
market on which no trading has occurred for a period of 365 days;
provided, however, no designated contract market shall be considered
dormant if its initial and original Commission order of designation was
issued within the preceding 1,095 days.
Dormant derivatives clearing organization means any derivatives
clearing organization registered pursuant to section 5b of the Act that
has not accepted for clearing any agreement, contract or transaction
that is required or permitted to be cleared by a derivatives clearing
organization under sections 5b(a) and 5b(b) of the Act, respectively,
for a period of 365 days; provided, however, no derivatives clearing
organization shall be considered dormant if its initial and original
Commission order of registration was issued within the preceding 1,095
days.
Dormant swap data repository means any registered swap data
repository on which no data has resided for a period of 365 days.
Dormant swap execution facility means any swap execution facility
on which no trading has occurred for a period of 365 days; provided,
however, no swap execution facility shall be considered dormant if its
initial and original Commission order of registration was issued within
the preceding 1,095 days.
Emergency means any occurrence or circumstance that, in the opinion
of the governing board of a registered entity, or a person or persons
duly authorized to issue such an opinion on behalf of the governing
board of a registered entity under circumstances and pursuant to
procedures that are specified by rule, requires immediate action and
threatens or may threaten such things as the fair and orderly trading
in, or the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and payment
of funds in connection with clearing and settlement by a derivatives
clearing organization, including:
(1) Any manipulative or attempted manipulative activity;
(2) Any actual, attempted, or threatened corner, squeeze,
congestion, or undue concentration of positions;
(3) Any circumstances which may materially affect the performance
of agreements, contracts, swaps or transactions, including failure of
the payment system or the bankruptcy or insolvency of any participant;
(4) Any action taken by any governmental body, or any other
registered entity, board of trade, market or facility which may have a
direct impact on trading or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of a registered entity.
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
advisory, terms and conditions, trading protocol, margin methodology,
agreement or instrument corresponding thereto, including those that
authorize a response or establish standards for responding to a
specific emergency, and any amendment or addition thereto or repeal
thereof, made or issued by a registered entity or by the governing
board thereof or any committee thereof, in whatever form adopted.
Terms and conditions means any definition of the trading unit or
the specific commodity underlying a contract for the future delivery of
a commodity or commodity option contract, description of the payments
to be exchanged under a swap, specification of cash settlement or
delivery standards and procedures, and establishment of buyers' and
sellers' rights and obligations under the swap or contract. Terms and
conditions include provisions relating to the following:
(1) For a contract for the purchase or sale of a commodity for
future delivery or an option on such a contract or an option on a
commodity (other than a swap):
(i) Quality and other standards that define the commodity or
instrument underlying the contract;
(ii) Quantity standards or other provisions related to contract
size;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
[[Page 88623]]
(iv) Trading hours, trading months and the listing of contracts;
(v) The pricing basis, minimum price fluctuations, and maximum
price fluctuations;
(vi) Any price limits, no cancellation ranges, trading halts, or
circuit breaker provisions, and procedures for the establishment of
daily settlement prices;
(vii) Speculative position limits, position accountability
standards, and position reporting requirements, including an indication
as to whether the contract meets the definition of a referenced
contract as defined in Sec. 150.1 of this chapter, and if so, the name
of either the core referenced futures contract or other referenced
contract upon which the new referenced contract submitted under this
part is based.
(viii) Delivery points and locational price differentials;
(ix) Delivery standards and procedures, including fees related to
delivery or the delivery process; alternatives to delivery and
applicable penalties or sanctions for failure to perform;
(x) If cash settled; the definition, composition, calculation and
revision of the cash settlement price or index;
(xi) [Reserved];
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option contract, the existence of
which is contingent upon those prices; and
(xiv) Any restrictions or requirements for exercising an option;
and
(2) For a swap:
(i) Identification of the major group, category, type or class in
which the swap falls (such as an interest rate, commodity, credit or
equity swap) and of any further sub-group, category, type or class that
further describes the swap;
(ii) Notional amounts, quantity standards, or other unit size
characteristics;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
(iv) Trading hours and the listing of swaps;
(v) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the swap including, as applicable, the
accrual start dates, termination or maturity dates, and, for each leg
of the swap, the initial cash flow components, spreads, and points, and
the relevant indexes, prices, rates, coupons, or other price reference
measures;
(vi) Any price limits, trading halts, or circuit breaker
provisions, and procedures for the establishment of daily settlement
prices;
(vii) Speculative position limits, position accountability
standards, and position reporting requirements, including an indication
as to whether the contract meets the definition of economically
equivalent swap as defined in Sec. 150.1 of this chapter, and, if so,
the name of either the core referenced futures contract or referenced
contract, as applicable, to which the swap submitted under this part is
economically equivalent.
(viii) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
(ix) If physical delivery applies, delivery standards and
procedures, including fees related to delivery or the delivery process,
alternatives to delivery and applicable penalties or sanctions for
failure to perform;
(x) If cash settled, the definition, composition, calculation and
revision of the cash settlement price, and the settlement currency;
(xi) [Reserved]
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option, the existence of which is
contingent upon those prices;
(xiv) Any restrictions or requirements for exercising an option;
and
(xv) Life cycle events.
6. Amend Sec. 40.2 by revising paragraphs (a) introductory text,
(a)(1), (a)(3)(i), (ii), (v), and (vi), and (d) to read as follows:
Sec. 40.2 Listing products for trading by certification.
(a) A designated contract market or a swap execution facility must
comply with the submission requirements of this section prior to
listing a product for trading that has not been approved under Sec.
40.3. A submission shall comply with the following conditions:
(1) The designated contract market or the swap execution facility
has filed its submission electronically in a format and manner
specified by the Commission;
* * * * *
(3) * * *
(i) The information required by appendix D to this part;
(ii) A copy of the rules that set forth the contract's terms and
conditions;
* * * * *
(v) A concise explanation and analysis that is complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder. This explanation and analysis shall either be accompanied
by the documentation relied upon to establish the basis for compliance
with applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
(vi) A certification that the registered entity posted a notice of
a pending product certification with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's website. Information that the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4); and
* * * * *
(d) Class certification of swaps. (1) A designated contract market
or swap execution facility may list or facilitate trading in any swap
or number of swaps based upon an ``excluded commodity,'' as defined in
section 1a(19)(i) of the Act, not including any security, security
index, and currency other than the United States Dollar and a ``major
foreign currency,'' as defined in Sec. 15.03(a) of this chapter, or an
``excluded commodity,'' as defined in section 1a(19)(ii)-(iv) of the
Act, provided the designated contract market or swap execution facility
certifies, under paragraphs (a)(1) and (2) and (a)(3)(i), (iv), and
(vi) of this section, the following:
(i) Each particular swap within the certified class of swaps is
based upon an excluded commodity specified in paragraph (d)(1) of this
section;
(ii) Each particular swap within the certified class of swaps is
based upon an excluded commodity with an identical pricing source,
formula, procedure, and methodology for calculating reference prices
and payment obligations;
(iii) The pricing source, formula, procedure, and methodology for
calculating reference prices and payment obligations in each particular
swap within the certified class of swaps is identical to a pricing
source, formula, procedure, and methodology for calculating reference
prices and payment obligations in a product previously submitted to the
Commission and certified or approved pursuant to this section or Sec.
40.3; and
(iv) Each particular swap within the certified class of swaps is
based upon an excluded commodity involving an identical currency or
identical currencies.
(2) The Commission may in its discretion require a registered
entity to
[[Page 88624]]
withdraw its certification under paragraph (d)(1) of this section and
to submit each individual swap or certain individual swaps within the
submission for Commission review pursuant to this section or Sec.
40.3.
0
7. Amend Sec. 40.3 by:
0
a. Revising paragraphs (a) introductory text, (a)(1), (2), (4), (9),
and (10), (c), and (d);
0
b. Removing paragraph (e);
0
c. Redesignating paragraph (f) as paragraph (e); and
0
d. Revising newly redesignated paragraph (e).
The revisions read as follows:
Sec. 40.3 Voluntary submission of new products for Commission review
and approval.
(a) Request for approval. Pursuant to section 5c(c) of the Act, a
designated contract market, a swap execution facility, or a derivatives
clearing organization may request that the Commission approve a new
product prior to listing the product for trading or accepting the
product for clearing, or if a product was initially submitted under
Sec. 40.2 or Sec. 39.5 of this chapter, subsequent to listing the
product for trading or accepting the product for clearing. A submission
requesting approval shall:
(1) Be filed electronically in a format and manner specified by the
Commission;
(2) Include the information required by appendix D to this part;
* * * * *
(4) Include an explanation and analysis that is complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder. This explanation and analysis shall either be accompanied
by the documentation relied upon to establish the basis for compliance
with the applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
* * * * *
(9) Certify that the registered entity posted a notice of its
request for Commission approval of the new product and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's website. Information the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4); and
(10) Include, if requested by Commission staff, additional
evidence, information or data demonstrating that the contract meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for designation or registration under the Act, or the
Commission's regulations or policies thereunder. The registered entity
shall submit the requested information by the time specified by
Commission staff, or at the conclusion of any extended period agreed to
by Commission staff after timely receipt of a written request from the
registered entity.
* * * * *
(c) Commission review. (1) All products submitted for Commission
approval pursuant to, and in compliance with the submission
requirements of, paragraph (a) of this section shall be subject to
review by the Commission for a period of 45 days after receipt by the
Commission.
(2) The Commission may extend the initial 45-day review period for
up to an additional 45 days if the product raises novel or complex
issues that require additional time to analyze, the submission is
incomplete or the requestor does not respond completely to Commission
questions in a timely manner, in which case the Commission shall notify
the submitting registered entity within the initial 45-day review
period and shall briefly describe the nature of the specific issues for
which additional time for review shall be required.
(3) At any time during its review of a proposed product under this
section, the Commission may extend the review period for any period of
time to which the registered entity agrees in writing.
(4) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 45-day review period
in accordance with paragraph (c)(1) of this section, unless the
amendment or supplementation is requested by the Commission or is made
for correction of typographical errors, renumbering or other non-
substantive revisions.
(5) If the review period described in paragraph (c)(1) of this
section would end on a day that is not a business day, such review
period shall instead be extended to end on the next business day.
(d) Commission Determination--(1) Approval. Any product submitted
for Commission approval in compliance with paragraph (a) of this
section shall be deemed approved by the Commission under section 5c(c)
of the Act at the conclusion of the applicable review period under
paragraph (c) of this section, unless the Commission issues a notice of
non-approval to the registered entity under paragraph (d)(2) of this
section within the applicable review period.
(2) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered entity that it will
not, or is unable to, approve the new product. This notification will
briefly specify the nature of the issues raised and the specific
provision of the Act or the Commission's regulations, including the
form or content requirements of this section, with which the new
product is inconsistent or appears to be inconsistent with the Act or
the Commission's regulations.
(e) Effect of non-approval. (1) Notification to a registered entity
under paragraph (d)(2) of this section of the Commission's
determination not to approve a product does not prevent the entity from
subsequently submitting a revised version of the product for Commission
approval, or from submitting the product as initially proposed, in a
supplemented submission; the revised or supplemented submission will be
reviewed without prejudice.
(2) Notification to a registered entity under paragraph (d)(2) of
this section of the Commission's determination not to approve a product
shall be presumptive evidence that the entity may not truthfully
certify under Sec. 40.2 that the same, or substantially the same,
product complies with the Act and the Commission's regulations
thereunder.
0
8. Revise Sec. 40.4 to read as follows:
Sec. 40.4 Amendments to terms or conditions of enumerated
agricultural products.
(a) Notwithstanding the provisions of this part, a designated
contract market must submit for Commission approval under the
procedures of Sec. 40.5, prior to its implementation, any rule that,
for a delivery month having open interest, would materially change a
product's term or condition, as defined in Sec. 40.1, of a contract
for future delivery in an agricultural commodity enumerated in section
1a(9) of the Act, or of an option on such a contract or commodity.
(b) The following rules or rule amendments are not material and are
not required by this section to be submitted for Commission approval
under the procedures of Sec. 40.5:
(1) Rules or rule amendments that are enumerated in Sec.
40.6(d)(2) may be
[[Page 88625]]
implemented without prior approval or certification, provided that they
are implemented pursuant to the notification procedures of Sec.
40.6(d);
(2) Rules or rule amendments that are enumerated in Sec.
40.6(e)(2) may be implemented without prior approval or certification
or notification as permitted pursuant to Sec. 40.6(e);
(3) Rules or rule amendments governing trading hours may be
implemented without prior approval, provided that they are implemented
pursuant to the procedures of sect; 40.6(a);
(4) Rules or rule amendments that are required to comply with a
binding order of a court of competent jurisdiction, or a rule,
regulation or order of the Commission or of another Federal regulatory
authority, may be implemented without prior approval, provided that
they are implemented pursuant to the procedures of Sec. 40.6(a); or
(5) Any rule or rule amendment:
(i) The text of which has been submitted pursuant to the procedures
of paragraph (b)(5) of this section and Sec. 40.6(a) at least ten
business days prior to its implementation and that has been labeled
``Non-Material Agricultural Rule Change;''
(ii) For which the designated contract market has provided an
explanation as to why it considers the rule ``non-material,'' and any
other information that may be beneficial to the Commission in analyzing
the merits of the entity's claim of non-materiality including, if
applicable, a copy of a previously approved rule or rule amendment that
is, in substance, the same as the non-material rule or rule amendment;
and
(iii) With respect to which the Commission has not notified the
contract market during the review period that the rule appears to
require or does require prior approval under this section.
0
9. Amend Sec. 40.5 by:
0
a. Revising paragraphs (a) introductory text, (a)(1), (2), (5), (6),
and (9), and (c)(1);
0
b. Removing paragraph (c)(2);
0
c. Redesignating paragraph (d)(1) as paragraph (c)(2);
0
d. Revising newly redesignated paragraph (c)(2);
0
e. Redesignating paragraph (d)(2) as paragraph (c)(3);
0
f. Revising newly redesignated paragraph (c)(3);
0
g. Adding paragraphs (c)(4) through (6);
0
h. Revising paragraphs (d) introductory text and (d)(1);
0
i. Redesignating paragraph (g) as paragraph (d)(2);
0
j. Revising newly redesignated paragraph (d)(2);
0
k. Redesignating paragraph (e) as paragraph (d)(3);
0
l. Revising newly redesignated paragraph (d)(3);
0
m. Redesignating paragraphs (f)(1) and (2) as paragraphs (e)(1) and (2)
respectively; and
0
n. Revising newly redesignated paragraphs (e)(1) and (2).
The revisions and additions read as follows:
Sec. 40.5 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. Pursuant to section 5c(c) of the
Act, a registered entity may request that the Commission approve a new
rule or rule amendment prior to implementation of the rule, or if the
rule or rule amendment was initially submitted under Sec. 40.2 or
40.6, subsequent to implementation of the rule. A request for approval
shall:
(1) Be filed electronically in a format and manner specified by the
Commission;
(2) Include the information required by appendix D to this part;
* * * * *
(5) Provide an explanation and analysis that is complete with
respect to the operation, purpose, and effect of the proposed rule or
rule amendment and its compliance with applicable provisions of the
Act, including core principles, and the Commission's regulations
thereunder, including, as applicable, a description of the anticipated
benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the registered entity's framework of self-regulation;
(6) Certify that the registered entity posted a notice of its
request for Commission approval of the new rule or rule amendment and a
copy of the submission, concurrent with the filing of a submission with
the Commission, on the registered entity's website. Information the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4);
* * * * *
(9) Identify any Commission regulation that the Commission may need
to amend, or sections of the Act or the Commission's regulations that
the Commission may need to interpret, in order to approve the new rule
or rule amendment. To the extent that such an amendment or
interpretation is necessary to accommodate a new rule or rule
amendment, the submission should include a reasoned analysis supporting
the amendment to the Commission's regulation or the interpretation; and
* * * * *
(c) * * *
(1) Any rule submitted for Commission approval pursuant to, and in
compliance with the submission requirements of, paragraph (a) of this
section shall be subject to review by the Commission for a period of 45
days after receipt by the Commission.
(2) The Commission may extend the initial 45-day review period for
up to an additional 45 days if the proposed rule raises novel or
complex issues that require additional time for review or is of major
economic significance, the submission is incomplete or the requestor
does not respond completely to Commission questions in a timely manner,
in which case the Commission shall notify the submitting registered
entity within the initial 45-day review period and shall briefly
describe the nature of the specific issues for which additional time
for review shall be required.
(3) At any time during its review of a proposed rule under this
section, the Commission may extend the review period for any period of
time to which the registered entity agrees in writing.
(4) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 45-day review period
in accordance with paragraph (c)(1) of this section, unless the
amendment or supplementation is requested by the Commission or is made
for correction of typographical errors, renumbering or other non-
substantive revisions.
(5) If a rule or rule amendment that is submitted for Commission
approval under paragraph (a) of this section is also submitted and
labeled as a ``Non-Material Agricultural Rule Change'' in accordance
with Sec. 40.4(b)(5), the Commission shall commence the 45-day review
period in paragraph (c)(1) of this section ten business days after
receiving the submission.
(6) If the review period described in paragraph (c)(1) of this
section would end on a day that is not a business day, such review
period shall instead be extended to end on the next business day.
(d) Commission determination--(1) Approval. Any rule submitted for
[[Page 88626]]
Commission approval in compliance with paragraph (a) of this section
shall be deemed approved by the Commission under section 5c(c) of the
Act at the conclusion of the applicable review period under paragraph
(c) of this section, unless the Commission issues a notice of non-
approval to the registered entity under paragraph (d)(3) of this
section within the applicable review period.
(2) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, a proposed rule or rule amendment, including
changes to terms and conditions of a product that are consistent with
the Act and Commission regulations, may be approved by the Commission
at such time and under such conditions as the Commission shall specify
in a written notification.
(3) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered entity that it will
not, or is unable to, approve the new rule or rule amendment. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's regulations,
including the form or content requirements of this section, with which
the new rule or rule amendment is inconsistent or appears to be
inconsistent with the Act or the Commission's regulations.
(e) Effect of non-approval. (1) Notification to a registered entity
under paragraph (d)(3) of this section of the Commission's
determination not to approve a new rule or rule amendment does not
prevent the registered entity from subsequently submitting a revised
version of the proposed rule or rule amendment for Commission review
and approval, or from submitting the new rule or rule amendment as
initially proposed, in a supplemented submission; the revised or
supplemented submission will be reviewed without prejudice.
(2) Notification to a registered entity under paragraph (d)(3) of
this section of the Commission's determination not to approve a
proposed rule or rule amendment of a registered entity shall be
presumptive evidence that the entity may not truthfully certify under
Sec. 40.6 that the same, or substantially the same, proposed rule or
rule amendment complies with the Act and 17 CFR chapter I.
0
10. Amend Sec. 40.6 by:
0
a. Revising paragraphs (a) introductory text and (a)(1), (2), and (5)
through (8);
0
b. Adding paragraph (a)(9);
0
c. Revising paragraph (b);
0
d. Revising paragraphs (c)(2) and (3);
0
e. Adding paragraph (c)(5);
0
f. Revising paragraphs (d)(1) and (d)(2)(iii), (iv), and (ix);
0
g. Adding paragraphs (d)(2)(xi) through (xiii);
0
h. Redesignating paragraph (d)(3) as paragraph (e); and
0
i. Revising newly redesignated paragraph (e).
The additions and revisions read as follows:
Sec. 40.6 Self-certification of rules.
(a) Submission requirements. A registered entity shall comply with
the certification and submission requirements of this section prior to
implementing any rule that has not obtained Commission approval under
Sec. 40.5, or that is submitted under Sec. 40.10, except as otherwise
provided by Sec. 40.10(a). A submission shall comply with the
following conditions:
(1) The registered entity has filed its submission electronically
in a format and manner specified by the Commission.
(2) The registered entity has provided a certification that the
registered entity posted a notice of pending certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the registered entity's website.
Information that the registered entity seeks to keep confidential may
be redacted from the documents published on the registered entity's
website but it must be republished consistent with any determination
made pursuant to Sec. 40.8(c)(4).
* * * * *
(5) The rule or rule amendment is not a rule or rule amendment of a
designated contract market that materially changes a term or condition
of a contract for future delivery of an agricultural commodity
enumerated in section 1a(9) of the Act or an option on such a contract
or commodity in a delivery month having open interest.
(6) Rule certifications implemented in response to an emergency.
(i) Rules or rule amendments implemented under procedures of the
governing board to respond to an emergency as defined in Sec. 40.1,
shall, if practicable, be filed with the Commission prior to the
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than twenty-four hours after implementation. Such rules shall be
subject to the review and stay provisions of paragraphs (b) and (c) of
this section.
(ii) New rules or rule amendments that establish standards for
responding to an emergency must be submitted pursuant to paragraph (a)
of this section or may be submitted pursuant to Sec. 40.5.
(7) The rule submission shall include:
(i) The information required by appendix D to this part
(``Emergency Rule Certification'' should be noted in the Description
section in the case of a rule or rule amendment that responds to an
emergency);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the registered entity that the rule
complies with the Act and the Commission's regulations thereunder;
(v) A concise explanation and analysis that is complete with
respect to the operation, purpose, and effect of the proposed rule or
rule amendment and its compliance with applicable provisions of the
Act, including core principles, and the Commission's regulations
thereunder;
(vi) A brief explanation of any substantive opposing views
expressed to the registered entity by governing board or committee
members, members of the entity or market participants, that were not
incorporated into the rule, or a statement that no such opposing views
were expressed; and
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 40.8;
(8) The registered entity shall provide, if requested by Commission
staff, additional evidence, information or data that may be beneficial
to the Commission in conducting a due diligence assessment of the
filing and the registered entity's compliance with any of the
requirements of the Act or the Commission's regulations or policies
thereunder; and
(9) Notwithstanding the 10 business day filing requirement of
paragraphs (a)(3) and (b)(1) of this section, a registered entity may
file a submission and certification of a new rule or a rule amendment
that delists, or withdraws the certification of, a product that has no
open interest and may make the delisting or withdrawal of the product
with no open interest effective immediately upon filing the submission,
provided that the submission is made in compliance with paragraphs
(a)(1), (2) and (7) of this section.
(b) Review by the Commission. (1) The Commission shall have 10
business days to review the new rule or rule amendment before the new
rule or rule amendment is deemed certified and can
[[Page 88627]]
be made effective, unless the Commission notifies the registered entity
during the 10-business day review period that it intends to issue a
stay of the certification under paragraph (c) of this section.
(2) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 10-business day review
period in accordance with paragraph (b)(1) of this section, unless the
amendment or supplementation is requested by the Commission or is made
for correction of typographical errors, renumbering or other non-
substantive revisions.
(c) * * *
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph (c)(3) shall become effective and can be implemented,
pursuant to the certification, at the expiration of the 90-day review
period described in paragraph (c)(1) of this section unless the
Commission withdraws the stay prior to that time, or the Commission
notifies the registered entity during the 90-day time period that it
objects to the certification on the grounds that the proposed rule or
rule amendment is inconsistent with the Act or 17 CFR chapter I.
* * * * *
(5) Effect of objection. (i) Notification to a registered entity
under paragraph (c) of this section of the Commission's objection to a
certification by a registered entity on the grounds that the proposed
rule or rule amendment is inconsistent with the Act or the Commission's
regulations does not prevent the registered entity from subsequently
submitting a revised version of the proposed rule or rule amendment for
certification or Commission review and approval, or from submitting the
new rule or rule amendment as initially proposed, in a supplemented
submission; the revised or supplemented submission will be reviewed
without prejudice.
(ii) Notification to a registered entity under paragraph (c) of
this section of the Commission's objection to a certification by a
registered entity shall be presumptive evidence that the entity may not
truthfully certify under this part that the same, or substantially the
same, proposed rule or rule amendment complies with the Act and the
Commission's regulations thereunder.
(d) * * *
(1) The registered entity provides to the Commission at least
weekly a summary notice of all rule amendments made effective pursuant
to this paragraph (d)(1) during the preceding week. Such notice must be
labeled ``Weekly Notification of Rule Amendments'' and need not be
filed for weeks during which no such actions have been taken. One copy
of each such submission shall be furnished electronically in a format
and manner specified by the Commission; and
* * * * *
(2) * * *
(iii) Index products. Routine changes in the composition,
computation, or method of selection of component entities of an index
(other than routine changes to securities indexes to the extent that
such changes are not described in paragraph (e)(2)(vi) of this section)
referenced and defined in the product's terms, that do not affect the
pricing basis of the index, which are made by an independent third
party whose business relates to the collection or dissemination of
price information and which was not formed solely for the purpose of
compiling an index for use in connection with a futures or option
product;
(iv) Option contract terms. Changes to option contract rules, which
may qualify for implementation without notice pursuant to paragraph
(e)(2)(vii) of this section, relating to the strike price listing
procedures, strike price intervals, and the listing of strike prices on
a discretionary basis;
* * * * *
(ix) Trading months. The initial listing of trading months, or an
amendment to existing trading months, which may qualify for
implementation without notice pursuant to paragraph (e)(2)(viii) of
this section, within the currently established cycle of trading months;
* * * * *
(xi) Contact information. Updates of email addresses or other
contact information that market participants use to submit block
trades;
(xii) Changes to no cancellation ranges. For a contract for the
purchase or sale of a commodity for future delivery or an option on
such a contract or an option on a commodity (other than a swap),
changes to no cancellation ranges (which are the price ranges within
which a trade will not be cancelled); or
(xiii) Option premiums or margins. For a contract for the purchase
or sale of a commodity for future delivery or an option on such a
contract or an option on a commodity (other than a swap), payment or
collection of commodity options premiums or margins; or for a swap,
payment or collection of option premiums or margins.
* * * * *
(e) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of section 5c(c)(1) of the Act and
paragraph (a) of this section, a registered entity may place the
following rules or rule amendments into effect without certification or
notice to the Commission if the following conditions are met:
(1) The registered entity maintains documentation regarding all
changes to rules; and
(2) The rule governs:
(i) Transfer of membership or ownership. Procedures and forms for
the purchase, sale or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership or dues or assessments;
(ii) Administrative procedures. The organization and administrative
procedures of a registered entity governing bodies such as a Board of
Directors, Officers and Committees, but not voting requirements, Board
of Directors or Committee composition requirements or procedures,
decision making procedures, use or disclosure of material non-public
information gained through the performance of official duties, or
requirements relating to conflicts of interest;
(iii) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays, and changes to facilities housing the market, trading floor
or trading area;
(iv) Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules; and
(v) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Are less than $1.00 per contract; or
[[Page 88628]]
(B) Relate to matters such as dues, badges, telecommunication
services, booth space, real time quotations, historical information,
publications, software licenses or other matters that are
administrative in nature.
(vi) Securities indexes. Routine changes to the composition,
computation or method of security selection of an index that is
referenced and defined in the product's rules, and which is made by an
independent third party.
(vii) Option contract terms. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, changes to option contract rules relating to the strike price
listing procedures, strike price intervals, and the listing of strike
prices on a discretionary basis.
(viii) Trading months. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, the initial listing of trading months which are within the
currently established cycle of trading months.
0
11. Amend Sec. 40.7 by revising paragraphs (a)(5) and (b)(3) and
adding paragraph (e) to read as follows:
Sec. 40.7 Delegations.
(a) * * *
(5) The Commission hereby delegates to the Director of the Division
of Market Oversight, to be exercised by the Director or by such
employees of the Commission that the Director may designate from time
to time, with the concurrence of the General Counsel or the General
Counsel's delegate, the authority to determine whether a rule or rule
amendment submitted by a designated contract market is material under
Sec. 40.4(b)(5), and to notify the designated contract market of such
determination.
(b) * * *
(3) Establish or amend or relate to speculative limits or position
accountability provisions that are in compliance with the requirements
of the Act and17 CFR chapter I;
* * * * *
(e) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Risk and, separately, to
the Director of the Division of Market Oversight, to be exercised by
either Director, as appropriate, or by such employees of the Commission
that either Director may designate from time to time, the authority to
specify the format and manner to be used by a registered entity when
filing a submission pursuant to this part.
0
12. Amend Sec. 40.10 by:
0
a. Revising paragraphs (a) introductory text, (b), (d) introductory
text, and (h)(3); and
0
b. Adding paragraph (i).
The revisions and addition read as follows:
Sec. 40.10 Special certification procedures for submission of rules
by systemically important derivatives clearing organizations.
(a) Advance notice. A systemically important derivatives clearing
organization, as defined in Sec. 39.2 of this chapter, shall provide
notice to the Commission not less than 60 days in advance of any
proposed change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
systemically important derivatives clearing organization. A notice
submitted under this section shall be subject to the filing
requirements of Sec. 40.6(a)(1) and the website publication
requirements of Sec. 40.6(a)(2).
* * * * *
(b) Changes requiring advance notice. Changes to a systemically
important derivatives clearing organization's rules, procedures, or
operations that could materially affect the nature or level of risks
presented by the systemically important derivatives clearing
organization may include, but are not limited to: material changes to
its default management plan or default rules or procedures required
under Sec. 39.16 or 39.35 of this chapter, program of risk analysis
and oversight required under Sec. 39.18 of this chapter, or recovery
and wind down plans required under Sec. 39.39 of this chapter; the
adoption of a new or materially revised margin methodology; the
establishment of a cross-margining program or similar arrangement with
another clearing organization; and material changes to its approach to
the stress testing required under Sec. 39.13(h)(3) or 39.36(a) or (c)
of this chapter. If a systemically important derivatives clearing
organization determines that a proposed change could not materially
affect the nature or level of risks it presents and therefore does not
file an advance notice, the Commission may determine otherwise and
require the systemically important derivatives clearing organization to
withdraw the proposed change and provide notice pursuant to this
section.
* * * * *
(d) Notice of objection. A systemically important derivatives
clearing organization shall not implement a change to which the
Commission has an objection on the grounds that the proposed change is
not consistent with the Act or 17 CFR chapter I, or any applicable
rules, orders, or standards prescribed under section 805(a) of the
Dodd-Frank Act. The Commission will notify the systemically important
derivatives clearing organization in writing of any objection regarding
the proposed change within 60 days from the later of:
* * * * *
(h) * * *
(3) The Commission may require modification or rescission of the
emergency change if it finds that the change is not consistent with the
Act or 17 CFR chapter I, or any applicable rules, orders, or standards
prescribed under section 805(a) of the Dodd-Frank Act.
(i) Where in Sec. Sec. 39.3(g), 39.4(f), 39.13(i), and 39.15(b)(2)
of this chapter a derivatives clearing organization is required to
submit rules for approval pursuant to Sec. 40.5, a systemically
important derivatives clearing organization instead shall submit such
rules pursuant to this section if the rules could materially affect the
nature or level of risks presented by the systemically important
derivatives clearing organization.
0
13. Revise appendix D to read as follows:
Appendix D to Part 40--Submission Instructions for Rules and Products
(a) Rule and product submissions shall be submitted
electronically to the Commission by a registered entity in a format
and manner specified by the Commission, and shall include all of the
following information:
1. Date--The date of the filing.
2. Organization--The name of the organization filing the
submission (e.g., CBOT).
3. Type of Registered Entity--An indication as to whether the
rule or product is being submitted by a designated contract market
(DCM), derivatives clearing organization (DCO), swap execution
facility (SEF), or swap data repository (SDR).
4. Type of Filing--An indication as to whether the filing is a
new rule, rule amendment or new product and the section of this part
under which the filing is submitted. For a new product to be listed
by a DCM or a SEF, an indication whether the new product meets the
definition of referenced contract as such term is defined in Sec.
150.1 of this chapter and is described in appendix C to part 150 of
this chapter.
5. Rule Numbers--For rule filings, the rule number(s) being
adopted or modified in the case of rule amendment filings.
6. Description--For rule or rule amendment filings, a
description of the new rule or rule amendment, including a
discussion of its expected impact on the registered entity, market
participants, and the overall market. The narrative should describe
the substance of the submission with enough
[[Page 88629]]
specificity to characterize all material aspects of the filing.
7. Identifier Code (optional)--A registered entity Identifier
Code, if applicable. Such codes are commonly generated by registered
entities to provide an identifier that is unique to each filing
(e.g., NYMEX Submission 03-116).
(b) Other Requirements--A submission shall comply with all
applicable filing requirements for proposed rules, rule amendments,
or products. The entry of the information required by paragraph (a)
of this appendix does not obviate the registered entity's
responsibility to comply with applicable filing requirements (e.g.,
rules submitted for Commission approval under Sec. 40.5 must be
accompanied by an explanation of the purpose and effect of the
proposed rule along with a description of any substantive opposing
views).
(c) An indication of ``confidential treatment requested'' does
not obviate the submitter's responsibility to comply with all
applicable requirements for requesting confidential treatment in
Sec. 40.8 and, where appropriate, Sec. 145.9 of this chapter, and
will not substitute for notice or full compliance with such
requirements.
0
14. Add appendix E to read as follows:
Appendix E to Part 40--Guidance on Compliance With the Materiality
Assessment in Sec. 40.4
This appendix provides guidance on complying with the
requirement in Sec. 40.4(a) that a DCM must submit rule changes
that would materially change a term or condition of a contract on an
agricultural product enumerated in section 1a(9) of the CEA with
open interest for Commission approval under the procedures of Sec.
40.5. Section 40.4(a) applies strictly to rules that materially
change a product's economic terms and conditions, and does not apply
to other rules. Guidance is set forth below to assist a DCM in
assessing whether a change to the terms and conditions is material
pursuant to Sec. 40.4(a) and in explaining why it considers a rule
to be non-material when Sec. 40.4(b)(5) is applicable. The guidance
below can be used to demonstrate to the Commission compliance with
the requirement in Sec. 40.4(b)(5)(ii) that the DCM explain why it
considers a rule to be non-material when applicable.
Materiality of a Change of a Term or Condition
Any change that is enumerated by the Commission in Sec.
40.4(b)(1) through (4) is not material for purposes of Sec. 40.4(a)
and may be submitted under the applicable Sec. 40.6 provision that
is specified in the applicable Sec. 40.4(b). For any other rule
that the DCM believes to be non-material, Sec. 40.4(b)(5) sets
forth a process for the DCM to implement the change through self-
certification pursuant to Sec. 40.6(a).
In order for a DCM to self-certify a change to a term or
condition of a contract on an agricultural product enumerated in CEA
section 1a(9) with open interest that the DCM believes to be non-
material, Sec. 40.4(b)(5) requires the DCM to make a non-
materiality filing and explain why it considers the rule change to
be ``non-material.'' To assist an exchange in assessing and
explaining whether a change to the terms and conditions is non-
material pursuant to Sec. 40.4(b)(5), paragraphs (1) through (4) of
the following paragraph are the criteria that the Commission
generally considers as evidence that an enumerated agricultural
product rule change is non-material under Sec. 40.4(a) pursuant to
Sec. 40.4(b)(5). A DCM may address these criteria in its assessment
and explanation to demonstrate compliance with Sec. 40.4(b)(5).
The Commission considers a change to the terms and conditions of
a contract on an agricultural product enumerated in CEA section
1a(9) that has open interest as a non-material change if:
(1) The change should not affect a reasonable trader's decision
to enter into, or maintain, a position;
(2) The change should not affect a reasonable trader's decision
to make or take delivery on the contract or to exercise an option on
the contract; and
(3) The change should not have an effect on the value of
existing positions, including, but not limited to, a change
affecting the price of the contract due to a change in the commodity
quality characteristics of the existing contract, a change to the
size of the existing contract, or a change to a cost of effecting
delivery for the existing contract.
Issued in Washington, DC, on October 17, 2024, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Provisions Common to Registered Entities--Commission
Voting Summary and Commissioner's Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam, Commissioners Johnson,
Goldsmith Romero, and Pham voted in the affirmative. Commissioner
Mersinger voted in the negative.
Appendix 2--Statement of Commissioner Kristin N. Johnson
I support making our rules clearer and ensuring that our rules
enable the Commodity Futures Trading Commission (Commission) to
effectively address innovations regarding products, platforms, and
technologies.
Today, the Commission issues final amendments to provisions
common to registered entities set forth in Part 40 of the
Commission's regulations (the Final Rule).
Part 40 implements Section 5c(c) of the Commodity Exchange Act
(CEA or Act) and applies to designated contract markets (DCMs),
derivatives clearing organizations (DCOs), Swap Execution Facilities
(SEFs), and swap data repositories (SDRs). Notably, Part 40 includes
the procedures by which registered entities list new products and
implement new rules, along with standards for review and approval of
the same by the Commission.
As of the date of the proposed rulemaking,\1\ Part 40 had not
been amended comprehensively for a decade.\2\ Over the last ten
years, our markets and the market structures that characterize our
markets have experienced significant technological advancements.
Regulation must adapt to address emerging developments.
---------------------------------------------------------------------------
\1\ 88 FR 61432 (Sept. 6, 2023).
\2\ Kristin N. Johnson, Commissioner, Statement in Support of
Proposed Amendments to Provisions Common to Registered Entities
(July 26, 2023), Statement of Commissioner Kristin N. Johnson in
Support of Proposed Amendments to Provisions Common to Registered
Entities at https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072623b.
---------------------------------------------------------------------------
Today's Final Rule updates the Commission's regulations
governing the introduction of new products and new rules. The Final
Rule includes updates that demonstrate the Commission's commitment
to ongoing efforts to ensure the clarity and relevance of its
regulatory requirements--for example, updates to reflect the fact
that registered entities now communicate with the Commission via the
internet.
The Final Rule amends Sections 40.2 (self-certification of
products), 40.3 (voluntary submission of products for Commission
approval), 40.5 (voluntary submission of rules for Commission
approval), and 40.6 (self-certification of rules) to require that,
in each case, a registered entity provide a submission ``that is
complete with respect to'' key information about the product or
rule. These changes reflect the Commission's commitment to ensure
that registered entities provide sufficient information to the
Commission to enable the Commission to complete the analysis of
compliance required under the CEA and the Part 40 regulations.
Several commenters noted the importance of this change in ensuring
the Commission remains adequately informed about market
developments.\3\ And, as the Final Rule notes, the regulations
retain the word ``concise,'' thus minimizing the burden on
registered entities, while enabling the Commission to receive the
information it needs.
---------------------------------------------------------------------------
\3\ See FIA Comment Letter on Provisions Common to Registered
Entities (Nov. 3, 2023) at 1; Better Markets Comment Letter on
Provisions Common to Registered Entities (Nov. 6, 2023) at 4.
---------------------------------------------------------------------------
I thank staff in the Division of Clearing and Risk and the
Division of Market Oversight, including Rachel Kaplan, Steven
Benton, Nancy Markowitz, and Eileen Chotiner, for their efforts on
this rulemaking.
[FR Doc. 2024-24388 Filed 11-6-24; 8:45 am]
BILLING CODE 6351-01-P