[Federal Register: June 22, 2000 (Volume 65, Number 121)]
[Proposed Rules]
[Page 38985-39008]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jn00-31]
[[Page 38985]]
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Part III
Commodity Futures Trading Commission
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17 CFR Part 1, et al.
A New Regulatory Framework for Multilateral Transaction Execution
Facilities, Imtermediaries and Clearing Organizations; Exemption for
Bilateral Transactions; Proposed Rules
[[Page 38986]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 5, 15, 20, 36, 37, 38, 100, 170 and 180
RIN 3038-AB55
A New Regulatory Framework for Multilateral Transaction Execution
Facilities, Intermediaries and Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing a new regulatory framework to apply to multilateral
transaction execution facilities, to market intermediaries and to
clearing organizations. This new framework constitutes a broad
exemption under the authority of section 4(c) of the Commodity Exchange
Act from many of the current rules applicable to designated contract
markets. In addition, the proposed framework to a large degree relies
more heavily on disclosure rather than merit regulation. It establishes
three new market categories, including the category of exempt
multilateral transaction execution facility and two categories of
Commission-recognized and regulated multilateral transaction execution
facilities. In companion releases published in this edition of the
Federal Register, the Commission also is proposing new rules for
intermediaries and regulations applicable to entities that clear
derivative transactions. These notices propose far-reaching and
fundamental changes to modernize Federal regulation of commodity
futures and option markets. The Commission also is proposing in a
companion release published in this edition of the Federal Register to
expand and to clarify the operation of the current swaps exemption.
Nothing in these releases, however, would affect the continued vitality
of the Commission's exemption for swaps transactions under Part 35 of
its rules, or any of its other existing exemptions, policy statements
or interpretations. Moreover, nothing in the proposed rules would
affect the application of any statutory exclusion, including in
particular, the applicability of the exclusion under section
2(a)(1)(A)(ii), popularly known as ``the Treasury Amendment.''
DATES: Comments must be received by August 7, 2000.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1125 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521 or, by e-mail to
[email protected]. Reference should be made to ``Regulatory
Reinvention.''
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, or Alan L. Seifert, Deputy Director or
Riva Spear Adriance, Attorney-Advisor, Division of Trading and Markets,
Commodity Futures Trading Commission, Three Lafayette Centre, 1125 21st
Street, NW., Washington, DC 20581. Telephone: (202) 418-5260. E-mail:
([email protected]), ([email protected]) or ([email protected]).
SUPPLEMENTARY INFORMATION:
I. Background
A. Overview
The Commission is proposing a new regulatory framework to apply to
multilateral transaction execution facilities that trade contracts for
the purchase or sale of a contract for future delivery or commodity
options. The Commission believes that this new structure will promote
innovation, maintain U.S. competitiveness, and at the same time reduce
systemic risk and protect customers. The proposed framework does not
require that U.S. futures exchanges change their method of operation in
any way. However, the markets are poised to undergo rapid change as
they continue to meet the competitive challenges posed by technological
advances. The new framework provides U.S. futures exchanges the
flexibility to respond to these challenges by offering a level of
regulation tailored to three alternative types of markets.
Specifically, the Commission is proposing to replace the current
``one-size-fits-all'' regulation for futures markets with broad,
flexible ``Core Principles,'' and to establish three regulatory tiers
for markets: Recognized futures exchanges (RFEs), derivatives
transaction facilities (DTFs) and exempt multilateral transaction
execution facilities (exempt MTEFs). \1\ The Core Principles are
tailored to match the degree and manner of regulation to the varying
nature of the products traded thereon, and to the sophistication of
customers.
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\1\ Products subject to the special procedural provisions of
section 2(a)(1)(B) of the Act would continue to be designated and
regulated by the Commission as contract markets.
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Under the proposed framework, current U.S. futures exchanges would
be included automatically in the RFE category. These exchanges would
receive the immediate benefits associated with complying with core
principles rather than the prescriptive regulations now in place. In
addition to achieving greater flexibility in their current operations,
the exchanges also could choose to operate as a DTF or as an exempt
MTEF, where appropriate, and be subject to a lesser degree of
regulation for many of the commodities that they trade. Or they could
operate a combination of the three. The business choice would be
theirs.
The Commission is proposing that a category of multilateral
transaction execution facilities known as ``Derivatives Transaction
Facilities,'' which is geared toward institutional or commercial
traders, be subject to an intermediate level of regulation. DTFs, like
RFEs, would be Commission-recognized markets. Futures exchanges, if
they choose, also may operate as a DTF for those commodities with
deliverable supplies sufficiently large to render them eligible for
such an intermediate level of regulation.
Although DTFs are intended primarily for institutional traders, the
proposed rules provide the individual DTF the flexibility to decide
whether or not to include non-institutional traders. The Commission is
proposing, therefore, to permit access to a DTF by non-institutional
traders only through a registered futures commission merchant (FCM)
that is a member of a recognized clearing organization and that has $20
million of adjusted net capital. Those FCMs would be required to
provide their non-institutional customers trading on a DTF with
additional disclosures and other protections.
In addition, certain commercial markets may operate as DTFs for any
commodity, other than the agricultural commodities enumerated in
section 1a(3) of the Act. Such commercial traders generally would have
both the financial ability and the physical means to deliver tangible
commodities or otherwise be involved in trading that commodity in
connection with their line of commerce. A market that is eligible to be
an exempt MTEF, which is discussed below, may voluntarily become a DTF
in order to become a ``recognized'' market.
The Commission also is proposing an exemption for facilities on
which transactions are entered into among institutional traders in
contracts based upon a debt obligation, a foreign
[[Page 38987]]
currency, an interest rate, an exempt security, a measure of credit
risk or quality, or cash-settled based upon an economic or commercial
index or based upon an occurrence or contingency. These commodities are
highly unlikely to be susceptible to manipulation. These facilities
(exempt MTEFs) would be exempt from all of the requirements of the
Commodity Exchange Act (Act or CEA) and Commission rules, except for
anti-fraud and anti-manipulation provisions and a requirement that if
performing a price discovery function they provide pricing information
to the public. The proposed rules also include a provision that a
violation of the terms of the exemption would not render the
transactions void. These exempt markets could not hold themselves out
as being regulated by the Commission. As noted above, existing futures
markets, where appropriate, would have the opportunity to operate under
the terms of this exemption, if they so choose. The following chart
summarizes the proposed framework:
Summary of Framework for Multilateral Trade Execution Facilities
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Market Characteristics Requirements
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Recognized Futures Exchange (RFE) 1. Any commodity; Fifteen Core Principles.
2. Any trader
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Recognized Derivatives 1. Only commodities: Seven Core Principles.
Transaction Facility (DTF) \2\. (a) included in box below; or
(b) individual contracts on a case-by-
case basis; or
2. Only commercial traders
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Exempt Multilateral Transaction 1. Only for the following commodities: 1. Anti-fraud section of the CEA;
Facility (Exempt MTEF). (a) a debt obligation; 2. Anti-manipulation section of the
(b) a foreign currency; CEA; and
(c) an interest rate; 3. May not hold self out as
(d) an exempt security regulated.
(e) a measure of credit quality;
(f) an occurrence or contingency
beyond the control of the
counterparties; or
(g) cash-settled based upon an
economic or commercial index or
measure; and
2. Only institutional traders
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These proposed rules, along with those proposed in the companion
releases on intermediaries and clearing organizations, comprise a new
regulatory framework which is intended to provide greater flexibility
in meeting technological and competitive challenges. At the same time,
the Commission will retain its oversight authority to ensure the
integrity of markets and prices, to deter manipulation, to protect the
markets' financial integrity, and to protect customers.
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\2\ As noted above, although DTFs are geared toward
sophisticated or institutional traders, the framework would permit a
facility eligible to be a DTF based upon the nature of the
commodities traded to choose to include non-institutional traders.
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To ensure that the Commission's regulations address regulatory
goals in the least costly and burdensome manner consistent with
achieving the Commission's mission, the Commission has reviewed its
proposed regulatory framework in relation to the four primary
objectives of the Act: Ensuring market and price integrity; protecting
against market manipulation; protecting the financial integrity of the
markets; and protecting customers from abusive trading and sales
practices. The proposed amendments would move the Commission from a
direct to an oversight regulator, replacing prescriptive rules with
broad performance standards in the form of core principles. The core
principles are proposed to be supplemented with statements of guidance
on practices that comply with the standards and, only as necessary,
implementing rules. The proposed framework reflects differences in
regulation of individual markets due to the nature of the commodity
traded and the sophistication of market participants. Moreover, the
proposed framework adheres to internationally-accepted guidance
regarding appropriate regulatory measures for exchange-traded
derivatives markets.
The Commission was encouraged in this undertaking by the other
Federal financial regulators that comprise the President's Working
Group on Financial Markets \3\ and by the chairmen of the Commission's
Congressional oversight committees. Specifically, by letter dated
November 30, 1999, the Chairmen of the Senate and House Agriculture
Committees, joined by additional senior Senators and Members of the
House of Representatives, ``encourag[ed] the Commission to use the
exemptive authority granted it by the Commodity Exchange Act to lessen
regulatory burdens on United States' futures markets so that they may
compete more effectively.''
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\3\ Recognizing the importance of the OTC derivatives markets,
the Chairmen of the Senate and House Agriculture Committees
requested that the President's Working Group on Financial Markets
(PWG) conduct a study of OTC derivatives markets. After studying the
existing regulatory framework for OTC derivatives, recent
innovations, and the potential for future developments, the PWG on
November 9, 1999, reported to Congress its recommendations. See
Over-the-Counter Derivatives Markets and the Commodity Exchange Act,
Report of the President's Working Group. The PWG report focused on
promoting innovation, competition, efficiency, and transparency in
OTC derivatives markets and in reducing systemic risk.
Although specific recommendations about the regulatory structure
applicable to exchange-traded futures were beyond the scope of its
report, the PWG suggested that the Commission review existing
regulatory structures (particularly those applicable to markets for
financial futures) to determine whether they were appropriately
tailored to serve valid regulatory goals.
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B. Changing Nature of Exchange-Traded Markets
The proposed new regulatory framework responds to changes that have
occurred in markets operating under the CEA. Exchange-traded
derivatives markets have changed dramatically over the last twenty-five
years. Since the last major revision of the regulatory scheme in 1974,
the majority of futures trading volume has shifted from agricultural
commodities to financial commodities. Moreover, in
[[Page 38988]]
1974, no contracts were cash-settled. Today, many are. Over the past
twenty-five years the markets also have become increasingly
institutional. In addition, the exchanges themselves have matured.
During the last twenty-five years they have developed better audit
trails, have markedly improved their self-regulatory and surveillance
programs and have placed in effect greater safeguards against conflicts
of interest in decision-making. They have entered into arrangements
with both domestic and foreign exchanges to share surveillance
information in order better to carry out their functions. They also
have introduced for trading a remarkable range of new commodities.
The competitive environment for United States futures exchanges
also has changed dramatically during the last twenty-five years.
Although futures trading was always global in nature, aggregate trading
volume on non-U.S. futures and option exchanges has surpassed aggregate
trading volume on U.S. exchanges. In addition, exchange-traded
derivative markets face increased competition from the over-the-counter
markets.
II. Framework for Multilateral Transaction Execution Facilities
The Commission is proposing a multifaceted framework which includes
three broad categories of trading facilities: Recognized Futures
Exchanges, Derivatives Transaction Facilities and Exempt MTEFs. The
level of oversight applied to exchanges or trading facilities would be
based on the nature of participants allowed to trade on the facility
and certain characteristics of the commodities being traded. In
general, where access to an exchange or facility is restricted to more
sophisticated traders or commercial participants, or where the nature
of the commodity being traded poses a relatively low susceptibility to
manipulation, regulatory oversight would be set at a lower level,
reflecting the reduced need to monitor closely such markets. One
constant requirement at all levels of oversight, however, is the need
for markets serving a price discovery function to provide a degree of
price transparency. This multifaceted approach to oversight is intended
to balance the public interests of market and price integrity,
protection against manipulation and customer protection with the need
to permit exchanges and other trading facilities to operate more
flexibly in today's competitive environment.
A. Exempt Multilateral Transaction Execution Facilities (Exempt MTEFs)
The Commission is proposing a new, self-effectuating exemption for
those multilateral transaction facilities (MTEFs) meeting the
conditions specified in the rule. As proposed, these facilities would
be exempt from regulation by the Commission. The exemption would apply
to transactions traded on MTEFs that are open for trading only to
eligible participants, either trading for their own account or through
another eligible participant, and only for contracts based upon: (1) A
debt obligation; (2) a foreign currency; (3) an interest rate; (4) an
exempt security or index thereof, as provided in Sec. 2a(1)(B)(v) of
the Act; (5) a measure of credit risk or quality, including instruments
known as ``total return swaps,'' ``credit swaps'' or ``spread swaps;''
(6) an occurrence or contingency beyond the control of the
counterparties to the transaction; or (7) cash-settled, based upon an
economic or commercial index or measure beyond the control of the
counterparties to the transaction and not based upon prices derived
from trading in a directly corresponding underlying cash market.
The Commission is of the view that these commodities, when traded
between or among eligible participants need not be subject to the
regulatory scheme of the Act. Accord PWG Report at 17. In this regard,
transactions by eligible participants in these commodities would be
exempt from Commission regulation under either the Part 35 exemption
for bilateral transactions or under the Part 36 exemption for MTEFs.
It should be noted that the instruments eligible for exemption are
limited by operation of section 2(a)(1)(B) of the Act, which is
reserved in proposed Sec. 36.3(a). The reservation, and application, of
this provision is consistent with the language of section 4(c) of the
Act which limits the Commission's authority to exempt transactions from
the application of section 2(a)(1)(B) of the Act.
Examples of existing non-dormant, designated contract markets that
are based on an eligible debt obligation include CBT U.S. Treasury
bonds, CBT Long term U.S. Treasury notes and CME Treasury Bills. The
Commission particularly requests comment with respect to inclusion of
government securities in the list of commodities that are eligible for
the exemption under part 36. In light of the significant regulation of
government securities markets under the Government Securities Act of
1986 (as amended) \4\ and other securities laws, would granting a broad
exemption to contract markets for futures on government securities give
rise to significant and undesirable opportunities for regulatory
arbitrage?
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\4\ Government Securities Act of 1986, Pub. L. 99-571, 100 Stat.
3208; Government Securities Act Amendments of 1993, Pub. L. 103-202,
107 Stat. 2344.
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Examples of eligible foreign currencies include currency contract
and currency cross rates. Contracts on an interest rate typically
represent interest on time deposits. Because these time deposits
generally are non-negotiable, the contracts overlying them are usually
cash-settled. Such rates are derived from activity in the interbank
market, which is very liquid and deep. A major component of the
interbank market is the market for deposits of U.S. dollars held in
foreign markets. This market sets the interest rates for dollars held
as deposits in these banks. Much of the activity is centered in London
and is reflected by the London Interbank Offer Rate (LIBOR). LIBOR is
the rate at which the most credit-worthy banks offer to lend to one
another. Variable rate loans, deposits, and interest rate swaps are
often quoted as a spread over LIBOR. Other active trading centers exist
throughout Europe and in other countries in Asia and elsewhere, and the
interest rates reported for those markets share similar monikers such
as PIBOR (Paris Interbank Offer Rate), FIBOR (Frankfurt Interbank Offer
Rate), and TIBOR (Tokyo Offer Rate). Commodities on existing non-
dormant designated contract markets eligible for this exemption include
CME three month Eurodollars, CME one month LIBOR, CME three month
Euroyen, CME three month TIBOR, CME three month Euro Canada and CBT
yield curve spreads.
The commodities eligible for exemption include measures of credit
risk or quality. This category specifically includes various types of
instruments denominated as ``total return swaps,'' ``credit swaps,'' or
``credit spread swaps.'' As noted in a companion release in this issue
of the Federal Register proposing amendments to the Commission's part
35 exemption, nothing in the rules that the Commission is proposing
would affect the continued applicability of any existing Commission
exemptions, policy statements or interpretations to such total return
swaps or to any other instrument. An example of an existing designated
contract market included in this category is the CBT bankruptcy index.
[[Page 38989]]
The final two categories of eligible commodity are for contracts
based upon an occurrence or a contingency beyond the control of any
trader, or any economic or commercial index or measure not based upon
prices derived from trading in a directly corresponding underlying cash
market. These instruments must be cash settled, because there is no
underlying tangible commodity, financial asset or instrument which
could be delivered to settle the contracts at maturity, i.e., there is
no direct cash market counterpart. For these types of derivatives,
concerns about the potential for manipulation of cash market prices are
obviated, since individual traders typically have no ability to
influence the value of the cash settlement, and, since the settlement
value is not based on the prices of any asset or product traded in a
directly corresponding cash market.
Exempt derivative instruments included in this category are
contracts that are cash settled based upon an objective measurement of
an economic or commercial index, a natural occurrence or a contingency.
In this regard, the cash settlement measure could be based on an
objective process, such as a count or measurement of a physical
property or natural occurrence, or could be calculated by an
independent third party that is widely accepted as a reputable provider
of data regarding the commodity. Also included in this category are
contracts that are settled in cash based upon the outcome of a
contingency, such as a recurring or nonrecurring event, a specific
incident, a natural phenomenon or the unambiguous results of some other
condition that gives rise to a hedgeable risk. It is not intended to
include contracts based upon a cash-settlement price determined through
cash-market trading of any physical commodity or financial instrument,
but rather contracts based on the objectively determined results of an
outcome, occurrence, or event that is beyond the control of the parties
involved in the contract or the entity where trading occurs.
Derivatives traders have no ability to influence the final settlement
value to profit on a derivatives position, and in many cases, the data
used to compile the indexes are publicly available and are generated by
reputable sources. Finally, included in this category are contracts
based on an objectively determined index value or measure of an
economic or commercial index reflecting broad characteristics of the
economy as a whole, or portions thereof, or material segments of
commercial activity.
Examples include contracts based on: Weather (such as contracts
based on temperatures or precipitation data); the Consumer Price index
or the Gross Domestic Product; insurance data, bankruptcy rates, real
estate rental indexes or occupancy (vacancy) rates for individual
localities; or measures of physical production or sales amounts such as
housing starts or auto sales; or crop yields.
The Commission is proposing to define MTEF as ``an electronic or
non-electronic market or similar facility through which persons, for
their own accounts or for the accounts of others, enter into, agree to
enter into or execute binding transactions by accepting bids or offers
made by one person that are open to multiple persons conducting
business through such market or similar facility.'' The definition as
proposed does not, and is not intended to, ``preclude participants from
engaging in privately negotiated bilateral transactions, even where
these participants use computer or other electronic facilities, such as
`broker screens,' to communicate simultaneously with other participants
so long as they do not use such systems to enter orders to execute
transactions.'' See, 58 FR 5587, 5591 (Jan. 22, 1993). Accordingly, the
definition makes clear that it does not include facilities merely used
as a means of communicating bids or offers nor does it include markets
in which a single market maker offers to enter into bilateral
transactions with multiple counterparties who may not transact with
each other.
It should be noted that the definition of MTEF in proposed
Sec. 36.1(b) applies only to those rules in which it is cited. It is
not intended to modify, alter, amend or interpret any other provision
of the Act or the Commission's rules. For example, the proposed
Sec. 36.1(b) definition of MTEF does not affect the meaning or
application of the statutory term, ``board of trade.'' 7 U.S.C. 1a(a).
Thus, the scope and application of the statutory exclusion in section
2(a)(1)(A)(ii) of the Act, popularly known as the ``Treasury
Amendment,'' which depends in part on the meaning of ``board of
trade,'' is in no way affected by the Commission's proposed adoption of
a definition of MTEF under Sec. 36.1(b) for purposes of the exemptions
in part 35 and part 36 of its rules. Accordingly, a facility that fits
within the definition of ``multilateral transaction execution
facility'' in part 36 may not be a ``board of trade'' for purposes of
the Treasury Amendment.
As proposed, in exercising its authority under these exemptive
rules, the Commission would not make any determination that the
exempted transactions are or are not subject to its jurisdiction. When
it adopted section 4(c) in 1992, the Conferees of the Congress stated:
The Conferees do not intend that the exercise of exemptive
authority by the Commission (under Section 4(c)) would require any
determination beforehand that the agreement, instrument, or
transaction for which an exemption is sought is subject to the Act.
Rather, this provision provides flexibility for the Commission to
provide legal certainty to novel instruments where the determination
as to jurisdiction is not straightforward.\5\
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\5\ 5 H.R. Rep. No. 978, 102d Cong., 2d Sess. 82-83 (1992).
In exercising this exemptive authority to date, the Commission has
not made a determination that the transactions being exempted were, or
were not, subject to the Commission's jurisdiction under the CEA.\6\
Accordingly, the Commission is not making a determination that any
market that is eligible to be an exempt MTEF under the proposed
exemption is or is not subject to the Commission's jurisdiction under
the CEA. Moreover, the fact that one market may operate as an exempt
MTEF in reliance upon the proposed exemption, or that a similar market
voluntarily submits to CFTC oversight as a recognized DTF or RFE, does
not imply that the Commission has made a determination that any firm or
entity that operates in a similar manner is subject to the Commission's
jurisdiction under the CEA. However, the proposed exemptive rules for
DTFs and RFEs provide that a market that is eligible to operate as an
exempt MTEF but which chooses to become recognized by the Commission as
a DTF or RFE, is bound to comply with applicable provisions of the Act
and Commission rules as a condition of those exemptions.
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\6\ For instance, when the Commission exempted certain swap
agreements in 1993, pursuant to section 4(c) of the Act, it stated:
The issuance of this rule (Rule 35.2) should not be construed as
reflecting any determination that the swap agreements covered by the
terms hereof are subject to the Act, as the Commission has not made
and is not obligated to make any such determination.
58 FR 5587, 5588 (Jan. 22, 1993). See also Order Granting the
London Clearing House's Petition for an Exemption Pursuant to
Section 4(c) of the Commodity Exchange Act, 64 FR. 53346 (October 1,
1999); Exemption for Certain Contracts Involving Energy Products, 58
FR. 21286, 21288 (Apr. 20, 1993); Regulation of Hybrid Instruments,
58 FR 5580, 55821 n. 2 (Jan. 22, 1993).
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B. Derivatives Transaction Facilities
The Commission also is proposing a new exemptive category for
Derivatives Transaction Facilities. A market or similar facility,
including a board of
[[Page 38990]]
trade, would be eligible to become a DTF under proposed part 37,
regardless of its method of transmitting bids and offers or its
matching system, if the contracts traded on the DTF meet specified
commodity eligibility requirements. These are identical to the
commodity eligibility requirements for the exempt MTEF.\7\ Such DTFs
would have the choice of whether or not to permit access to the market
by non-eligible traders, but if they did permit such access, it would
be allowed only through registered FCMs meeting a number of additional
requirements. The intermediary firm and its associated person would be
required to meet a number of requirements, including providing their
non-institutional customers with enhanced disclosure and additional
protections.\8\ The DTF, however, may limit access solely to eligible
participants if it so chooses.\9\
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\7\ The Commission also expects, however, on a case-by-case
basis, that the surveillance history and the self-regulatory
undertakings of a particular exchange or facility could make it
possible to include a specific contract traded on that facility
within the DTF category even if the underlying commodity does not
meet the general eligibility criteria. An exchange or facility
seeking a case-by-case determination would be recognized as a DTF
for that contract or contracts only upon CFTC approval.
\8\ Proposed amendments to the Commission's rules governing
intermediaries are published today in a separate release in this
edition of the Federal Register. Although those amendments apply to
all categories of intermediaries irrespective of where they choose
to transact business, certain proposals differentiate between
intermediation on various types of markets and for different types
of customers.
\9\ Facilities that meet the commodity eligibility requirement
and permit access only to institutional traders are thereby eligible
to be exempt MTEFs. However, such facilities may choose to seek
recognition as a DTF. By choosing to comply with the additional DTF
requirements outlined in this framework and thereby becoming
recognized, the facility would be acknowledged to have met a higher
regulatory standard.
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In addition, under proposed part 37, a facility that restricted
participation to ``eligible commercial participants'' would be eligible
to become a DTF to trade contracts based on all commodities other than
those domestic agricultural commodities enumerated in section 1(a)(3)
of the Act \10\ and those commodities subject to the provisions of
section 2(a)(1)(B) of the Act. This type of eligible commercials-only
market structure lessens many of the regulatory concerns regarding
manipulation ordinarily present with contracts for tangible
commodities.\11\
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\10\ They are wheat, cotton, rice, corn, oats, barley, rye,
flaxseed, grain sorghums, mill feeds, butter, eggs, potatoes, wool,
wool tops, fats and oils, cottonseed meal, cottonseed, peanuts,
soybeans, soybean meal, livestock, livestock products, and frozen
concentrated orange juice.
\11\ Many of these trading facilities are expected to replicate
electronically various aspects of today's commercial markets,
including trading exclusively between principals, and direct
negotiation and documentation of trades. In addition, these
facilities often do not provide clearing arrangements for contracts.
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The Commission is proposing that the agricultural commodities
listed in section 1a(3) of the Act not be eligible for trading on a
DTF. Because the current futures markets in these commodities tend to
be the primary, if not the only, centralized source of price discovery
and price basing for these commodities, they have not been included by
the Commission in certain regulatory programs, particularly at the time
of their initiation.\12\ However, members of the agricultural community
have at times argued that they should not be prohibited from benefiting
from innovative trading practices that are available for non-
agricultural commodities. In light of the unique considerations that
these commodities present, the Commission is seeking comment from the
agricultural community on the advisability of allowing the enumerated
agricultural commodities to be traded on a DTF at this time.
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\12\ For example, options on agricultural futures contracts were
introduced subsequent to options trading on non-agricultural
commodities and the enumerated agricultural commodities are not
included in the existing Part 36 exemption.
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Although contracts, agreements or transactions traded on a DTF
would be exempt from many of the Act's provisions and Commission
regulations,\13\ the exemption is contingent upon compliance with the
conditions set forth in part 37.\14\ Transactions carried out in
reliance upon the proposed part 37 exemption would not be voidable as a
matter of law due to a violation of the part 37 exemption.
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\13\ Certain sections of the Act, including the fraud and
manipulation provisions of the Act and the Commission's regulations
are reserved in proposed rule 37.5 and would continue to apply.
\14\ Although exempt from many statutory and regulatory
requirements, DTFs as a condition of the Part 37 rules, generally
would be considered under proposed rule 37.1(a) to be subject to the
Act's provisions as though the DTF were a ``board of trade,'' or a
``designated contract market'' under the Act. Therefore, the Act
would apply to a DTF (and an RFE) as would any other statutory or
regulatory provision which refers to ``boards of trade'' or
``designated contract markets.'' Accordingly, transactions on a DTF
would be accorded the same treatment for bankruptcy or tax purposes
as transactions on formally designated contract markets.
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To be recognized as a DTF under proposed part 37 an entity either
must have been designated under sections 4c, 5, 5a(a) or 6 of the Act
as a contract market in at least one commodity which is not dormant
within the meaning of Sec. 5.2 of the Commission's regulations, or must
apply to the Commission for recognition as a DTF under part 37. Under
proposed Sec. 37.3, a DTF must meet certain conditions for recognition.
An application should address how the facility has provided for rules
relating to trading on its facility, including: (1) Depending on the
nature of the trading mechanism, (i) rules to deter trading abuses, and
adequate power and capacity to detect, investigate and take action
against violation of its trading rules, or (ii) use of technology that
provides participants with impartial access to transactions and
captures information that is available for use in determining whether
violations of its rules have occurred; (2) rules or terms and
conditions defining, or specifications detailing, the operation of the
trading mechanism or electronic matching platform; and (3) rules or
terms and conditions detailing the financial framework applying to the
transactions or ensuring the financial integrity of transactions
entered into by, or through, its facilities. The application also
should address how the facility would initially, and on a continuing
basis, meet and adhere to seven core principles: enforcement, market
oversight, operational information, transparency, fitness,
recordkeeping and competition.\15\
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\15\ A board of trade, facility, or entity recognized as a DTF
that also maintained a designated contract market or a recognized
futures exchange would be required either to clearly identify
trading products by market on any electronic system or to provide
for separate physical trading locations, depending upon the trading
mechanism.
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Guidance on meeting the conditions for recognition is provided in
the appendix to part 37. Including information not self-evident from
the DTF's rules or trading terms addressing the issues set forth in the
appendix to part 37 in an application for recognition would assist the
Commission in understanding how the applicant meets and adheres to the
conditions for recognition. The guidance in the appendix to part 37,
however, is intended to be a safe harbor and not the exclusive method
of meeting the part 37 conditions for recognition. A DTF could meet a
condition for recognition or support its application through
procedures, materials, descriptions or documents other than those
described in the part 37 appendix.
A board of trade, facility, or entity seeking recognition as a
derivatives transaction facility would be deemed to be recognized
thirty days after the Commission received the application if the
application met the conditions for recognition pursuant to Sec. 37.3
and the applicant and/or its rules or procedures do not violate the Act
or the
[[Page 38991]]
Commission's regulations. An entity seeking recognition as a DTF may
request that the Commission approve its initial set of rules under
section 5a(a)(12)(A) of the Act and Commission regulations thereunder.
Subsequently, the DTF would notify the Commission of additional rules
and rule amendments in the same manner that it notifies market
participants. A DTF could request that the Commission approve new rules
or rule amendments under section 5a(a)(12)(A) of the Act and Commission
regulations thereunder. A DTF also could request the Commission to
issue an order determining whether the DTF, in adopting and
implementing a rule, endeavored to take the least anticompetitive means
of achieving the objective, purposes, and policies of the Act.\16\
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\16\ The Commission is proposing a new part 20 to require
traders on DTFs to provide information to the Commission concerning
their trading on a DTF in response to a Commission special call for
such information. This authority is critical to the Commission's
ability to oversee the market. In addition, the Commission is
proposing to amend Rule 15.05 by adding paragraphs (e), (f) and (g).
The new paragraphs will permit the Commission to obtain information
from foreign brokers, any of their customers or a foreign trader
trading on a DTF or an RFE regarding their futures or options
transactions on the facility or exchange. The amendments extend to
foreign persons trading on DTFs or RFEs the requirements of rule
15.05 relative to foreign brokers, their customers and foreign
traders whose accounts are maintained by a futures commission
merchant or introducing broker.
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C. Recognized Futures Exchanges
The Commission also is proposing significant regulatory relief to
futures exchanges from current requirements that are applicable to
designated contract markets. All currently designated contract markets,
except for those designated as contract markets in section 2(a)(1)(B)
commodities, will be afforded this relief. Under proposed part 38,
currently designated contract markets will become recognized futures
exchanges. Proposed part 38 replaces many prescriptive rules with
performance-based rules. These performance-based rules, or Core
Principles, will provide recognized futures exchanges with greater
operational flexibility. Prescriptive rules relating to audit trail and
conflict of interest procedures, for example, will be replaced by more
flexible Core Principles. Moreover, the Commission would not require
that it approve an RFE's new contracts prior to listing. In addition,
except for the terms and conditions of agricultural commodities
enumerated in section 1a(3) of the Act, the Commission would not
require its approval of an RFE's rules and rule amendments prior to
implementation, although an RFE voluntarily could submit such contracts
or rule amendments to the Commission for review and approval.
Furthermore, the exchanges would no longer be responsible for auditing
intermediaries' sales practices. Instead, enforcement would be the
responsibility of a registered futures association. The National
Futures Association (NFA) currently is the only such registered
organization.
In addition to currently designated contract markets, other
multilateral transaction execution facilities could apply for
recognition as an RFE. Eligibility for recognition is not limited by
the nature of the trader having access to the facility or the nature of
the commodities to be traded. Because RFEs may permit unconditioned
access to any type of trader, including both institutional and non-
institutional customers or participants, and may list contracts on any
type of commodity, including those based on commodities that have
finite deliverable supplies or cash markets with limited liquidity, RFE
markets potentially have a greater susceptibility to price manipulation
and raise greater concerns regarding customer protection than those of
DTFs. Therefore, the proposed rules in part 38 preserve a higher level
of market surveillance, position reporting obligations, customer
protections and financial safeguards than do the rules for DTFs.
In order to be recognized as an RFE, an applicant must meet all of
the conditions for recognition specified by proposed rule 38.3.
Applicants are to demonstrate how the board of trade, facility or
entity has provided for: (1) A clear framework for conducting programs
of market surveillance, compliance, and enforcement, including having
procedures in place to make use of collected data for real-time
monitoring and for post-event audit and compliance purposes to prevent
market manipulation; (2) rules relating to trading on its exchange,
including rules to deter trading abuses, and adequate authority and
capacity to detect, investigate and take action against violations of
its trading rules, and a dedicated regulatory department or delegation
of that function to an appropriate entity; (3) rules defining, or
specifications detailing, the manner of operation of the trading
mechanism or electronic matching platform and a trading mechanism or
electronic matching platform that performs as defined in the
operational rules or specifications; (4) a clear framework for ensuring
the financial integrity of transactions entered into by or through its
exchange; (5) established procedures for impartial disciplinary
committee(s) or other similar mechanisms empowered to discipline,
suspend, or expel members, or to deny access to participants or, if
provided for, discipline participants; and (6) arrangements to obtain
necessary information to perform the above functions, including the
capacity and arrangements to carry out the International Information
Sharing Agreement and Memorandum of Understanding developed by the
Futures Industry Association (FIA) Global Task Force on Financial
Integrity and a mechanism to provide to the public ready access to its
rules and regulations.
The application is to address how the exchange initially, and on a
continuing basis, meets and adheres to each of part 38's fifteen Core
Principles: rule enforcement, products, position monitoring and
reporting, position limits, emergency authority, public information,
transparency, trading system, audit trail, financial standards,
customer protection, dispute resolution, governance, recordkeeping and
competition. Guidance on meeting the Core Principles is provided in the
appendix to part 38. Information addressing these issues should be
included in an application for recognition and should explain to the
Commission how the applicant meets and adheres to the conditions for
recognition.
Appendix A to part 38 offers general guidance for applicants
seeking recognition and also includes a number of proposed statements
of acceptable practices for compliance with several Core Principles.
These acceptable practices are intended to indicate a manner in which
an applicant can meet a Core Principle, but are not meant to be the
exclusive means for meeting that Core Principle. Rather, these
acceptable practices should be viewed as safe harbors. If an RFE
follows an acceptable practice included in the appendix to part 38, it
is assured of meeting the relevant Core Principle.
A board of trade, facility, or entity seeking recognition as a
recognized futures exchanges would be deemed to be recognized sixty
days after the Commission received the application unless it appeared
that the applicant and/or its rules or procedures might violate a
specific provision of the Act or Commission rule that has been reserved
under the proposed exemptive rule, or fails to meet one or more of the
conditions for recognition in proposed
[[Page 38992]]
rule 38.3. In that case, the Commission could notify the applicant that
the Commission would review the proposal under section 6 of the Act.
The Commission is proposing amendments to part 5 of its rules to
permit RFEs to list new products based only on their certification that
the contract and its rules do not violate any applicable provision of
the Act or Commission rules. As an aid to exchanges listing new
products through this certification procedure, the Commission also is
proposing a new statement of guidance relating to Core Principle #2,
that contracts listed for trading not be readily susceptible to
manipulation. New products listed under this procedure must be labeled
as listed pursuant to exchange certification. Alternatively, an RFE
could submit a new product for prior Commission review and approval
under fast-track procedures. RFEs choosing to submit new contracts for
prior approval under fast-track procedures should submit an application
which conforms to the requirements of Guideline No. 1, 17 CFR part 5,
appendix A.\17\ The Commission will approve the terms and conditions of
contracts submitted for review. Such contracts may be listed as
``approved by the Commission.''
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\17\ Guideline No. 1 was itself recently amended to reduce
unnecessary burdens. By and large it merely requires an applicant to
file with the Commission the proposed contract's terms and
conditions and a completed checklist. This checklist replaces a
previously required narrative explanation and justification of the
proposed contract's terms and conditions.
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Similarly, an RFE may request that the Commission approve
amendments to its rules under section 5a(a)(12)(A) of the Act and
Commission regulations thereunder. The Commission is proposing a
voluntary procedure for the review and approval of exchange rules.
Under these procedures, all exchange rule amendments could be submitted
for forty-five day fast track review and certain rule amendments could
be submitted for expedited review as provided previously by the
Commission in approving a general authorizing rule. Alternatively, an
RFE could amend its rules (other than the terms or conditions of
contracts on the agricultural commodities enumerated in section 1a(3)
of the Act) by certification to the Commission that a rule does not
violate the Act or Commission rules on the day preceding the rule's
implementation.
The certification procedure proposed under the changes to rule 1.41
is similar to a certification procedure published by the Commission as
proposed rule 1.41(z) in November of 1999.\18\ The Commission points
out, however, that the currently proposed certification procedure
includes a stay provision that was not included in the 1.41(z)
proposal. That provision is limited to use during any proceeding to
disapprove, alter or amend a rule.\19\ The decision to impose a stay
would not be delegable to any employee of the Commission. The
Commission requests comments on this provision.
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\18\ 64 FR 66428 (November 26, 1999).
\19\ Proposed rule 1.41(c)(1)(iv).
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The Commission is also proposing that it merely be notified on a
weekly basis following the implementation of certain specified exchange
rule amendments. The Commission need not be notified, even as part of a
weekly update, however, of rule changes relating to exchange
administration, including those relating to decorum.
D. Deletion of Part 180 and Amendment of Commission Regulation 170.8
Contract markets are required, under section 5a(a)(11) of the Act,
to provide fair and equitable procedures for the settlement of customer
claims and grievances against any of its members or such members'
employees, whether through arbitration or other dispute resolution
programs. The Commission promulgated part 180 (Arbitration or other
Dispute Resolution Procedures) to give the contract markets a blueprint
for developing the required ``fair and equitable'' procedures. As part
of the regulatory reform process discussed earlier the Commission is
proposing to delete part 180. Instead of following the detailed
requirements of part 180, the Commission is proposing that RFEs be
required to meet the Core Principle for dispute resolution. For
contracts in section 2(a)(1)(B) commodities which will continue to be
designated contract markets, section 5a(a)(11) of the Act would still
require the contract market to provide fair and equitable procedures
for the settlement of customer claims and grievances.
The Commission has included an appendix to part 38, as explained
above, to provide guidance on meeting the conditions for approval under
part 38, including acceptable practices for some of the Core
Principles. These acceptable practices, as previously explained, are
ways to meet a Core Principle but are not meant to be the only method
for meeting that Core Principle. Instead, these acceptable practices
should be viewed as safe harbors. Therefore, the guidance on Core
Principle 12, dispute resolution, includes acceptable practices for
exchange dispute resolution programs as one, but not the only, means
for meeting the dispute resolution Core Principle. The acceptable
practices provided in the appendix were based on the principles for
arbitration and other dispute resolution settlement procedures under
part 180. The guidance on customer dispute resolution found in the
appendix to part 38 would also be applicable to derivative transaction
facilities that allowed access to non-institutional participants.\20\
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\20\ In light of the deletion of part 180, a new rule 166.5
replacing former rule 180.3 relating to the use of pre-dispute
arbitration agreements is being proposed in the companion release on
intermediaries in today's edition of the Federal Register. The
substance of the rule as proposed is unchanged from the current
requirement.
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The Commission is also proposing to amend Sec. 170.8 of the
Commission's regulations as that provision currently requires that the
procedures for settlement of customer disputes promulgated by futures
associations be consistent with part 180. Under the proposed amendments
to Sec. 170.8, programs for resolution of customer claims and
grievances promulgated by futures associations would be required to be
consistent with the guidelines and acceptable practices found in the
appendix to part 38.
III. Section 4(c) Findings
These rule amendments are being proposed under section 4(c) of the
Act, which grants the Commission broad exemptive authority. Section
4(c) of the Act provides that, in order to promote responsible economic
or financial innovation and fair competition, the Commission may by
rule, regulation or order exempt any class of agreements, contracts or
transactions, either unconditionally or on stated terms or conditions.
To grant such an exemption, the Commission must find that the exemption
would be consistent with the public interest, that the agreement,
contract, or transaction to be exempted would be entered into solely
between appropriate persons and that the exemption would not have a
material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory duties
under the Act.\21\
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\21\ See, 7 U.S.C. 6(c).
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As explained above, these proposed rules would establish a new
regulatory framework. The proposed framework is intended to promote
innovation and competition in the trading of derivatives and to permit
the markets the flexibility to respond to technological and structural
changes in the markets. Specifically, the proposed framework would
establish three regulatory tiers with regulations tailored to the
nature of
[[Page 38993]]
the commodities traded and the nature of the market participant. As the
Commission explained above, access to each of the tiers is dependent
upon the appropriateness of the participant. Accordingly, and for the
reasons detailed above, the Commission finds that each class of
participant eligible to participate in a specific tier is appropriate
for that exemptive relief. Moreover, the exemptions for parts 37 and 38
are upon stated terms. As detailed above, these terms include
application of regulatory and self-regulatory requirements tailored to
the nature of the market. The Commission believes that, in light of
these conditions, the exemptive relief would have no adverse effect on
any of the regulatory or self-regulatory responsibilities imposed by
the Act. The Commission specifically requests the public to comment on
these issues.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
these rules on small entities. Information of the type that would be
required under the proposed rule does not involve any small
organizations.
B. Paperwork Reduction Act of 1995
This proposed rulemaking contains information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget (OMB) for its review.
Collection of Information: Rules Relating to part 37, Establishing
Procedures for Entities to be Recognized as Derivatives Transaction
Facilities (DTFs), OMB Control Number 3038-XXXX.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 200.
Annual reporting burden: 2,000.
Collection of Information: Rules Relating to part 38, Establishing
Procedures for Entities to become a Recognized Futures Exchange (RFE),
OMB Control Number 3038-XXXX.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 300.
Annual reporting burden: 3,000.
Collection of Information: Rules Pertaining to Large Trader
Reports, OMB Control Number 3038-0009
The estimated burden associated with the elimination of large
trader reporting requirements for futures exchanges that operate exempt
multilateral trade execution facilities was calculated as follows:
Estimated number of respondents: 4,731.
Annual responses by each respondent: 14.67.
Total annual responses: 69,392.
Estimated average hours per response: .35213.
Annual reporting burden: 24,435.
This annual reporting burden of 24,435 hours represents a decrease
of 394 hours as a result of the proposed revision.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 10202, New Executive Office Building, 725 17th Street, NW,
Washington, DC 20503; Attention: Desk Officer for the Commodity Futures
Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the information
to be collected; and
Minimizing the burden of collection of information on those who are
to respond, including through the use of appropriate automated
electronic, mechanical, or other technological collection techniques or
other forms of information technology; e.g., permitting electronic
submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington DC 20581, (202) 418-5160.
List of Subjects
17 CFR Part 1
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
17 CFR Part 5
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
17 CFR Part 15
Commodity futures, Contract markets, Reporting and recordkeeping
requirements.
17 CFR Part 20
Commodity futures, Contract markets, Reporting and recordkeeping
requirements.
17 CFR Part 36
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 37
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 38
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 100
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 170
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 180
Claims, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections 4,
4c, 4i, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6, 6c, 6i, 7, 7a, 8, and 12a,
the Commission hereby proposes to amend Chapter I of Title 17 of the
Code of Federal Regulations as follows:
[[Page 38994]]
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.
2. Section 1.37 is proposed to be amended by adding paragraphs (c)
and (d) to read as follows:
Sec. 1.37 Customer's or option customer's name, address, and
occupation recorded; record of guarantor or controller of account.
* * * * *
(c) Each derivatives transactions facility and each recognized
futures exchange shall keep a record in permanent form which shall show
the true name; address; and principal occupation or business of any
foreign trader executing transactions on the facility or exchange, as
well as the name of any person guaranteeing such transactions or
exercising any control over the trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a derivatives
transactions facility or recognized futures exchange on which
transactions in futures contracts or options contracts of foreign
traders are executed through and the resulting transactions are
maintained in accounts carried by a registered futures commission
merchant or introducing broker subject to the provisions of paragraph
(a) of this section.
3. Section 1.41 is proposed to be amended as follows:
a. By removing and reserving paragraph (b),
b. By redesignating paragraph (e) as paragraph (i) and revising it,
c. By revising paragraphs (c) through (e),
d. By amending paragraphs (f) and (g) by adding the words ``or
recognized futures exchange'' after the words ``contract market'' each
time they appear, and
e. By removing and reserving paragraphs (j) through (t), to read as
follows:
Sec. 1.41 Contract market rules; submission of rules to the
Commission; exemption of certain rules.
* * * * *
(b) [Reserved]
(c) Exemption from the rule review procedure requirements of
Section 5a(a)(12)(A) of the Act and related regulations.
(1) Rules of designated contract markets, recognized futures
exchanges and recognized clearing organizations. Notwithstanding the
rule approval and filing requirements of Section 5a(a)(12) of the Act,
designated contract markets, recognized futures exchanges and
recognized clearing organizations may place a rule into effect without
prior Commission review or approval if:
(i) The rule is not a term or condition of a contract for future
delivery of an agricultural commodity listed in section 1(a)(3) of the
Act;
(ii) The entity has filed a submission for the rule, and the
Commission has received the submission at its Washington, D.C.
headquarters and at the regional office having jurisdiction over the
entity by close of business on the business day preceding
implementation of the rule; and
(iii) The rule submission includes:
(A) The label, ``Submission of rule by self-certification;''
(B) The text of the rule (in the case of a rule amendment, brackets
must indicate words deleted and underscoring must indicate words
added);
(C) A brief explanation of the rule including any substantive
opposing views not incorporated into the rule; and
(D) A certification by the eligible entity that the rule does not
violate any provision of the Act and regulations thereunder.
(iv) The Commission retains the authority to stay the effectiveness
of a rule implemented pursuant to paragraph (c)(1) of this section
during the pendency of Commission proceedings to disapprove, alter or
amend the rule. The decision to stay the effectiveness of a rule in
such circumstances may not be delegable to any employee of the
Commission.
(2) Rules of derivatives transaction facilities. Notwithstanding
the rule approval and filing requirements of section 5a(a)(12)(A) of
the Act, derivatives transaction facilities may place a rule into
effect without prior Commission review or approval if the derivatives
transaction facility files with the Commission at its Washington, D.C.
headquarters a submission labeled, ``DTF Rule Notice'' which includes
the text of the rule or rule amendment (brackets must indicate words
deleted and underscoring must indicate words added) at the time traders
or participants in the market are notified, but in no event later than
the close of business on the business day preceding implementation of
the rule.
(d)(1) Voluntary submission of rules for fast-track approval. A
designated contract market, recognized futures exchange, derivatives
transaction facility or recognized clearing organization may submit any
rule or proposed rule, except those submitted to the Commission under
paragraph (f) of this section, for approval by the Commission pursuant
to section 5a(a)(12)(A) of the Act, whether or not so required by
section 5a(a)(12) of the Act under the following procedures:
(i) One copy of each rule submitted under this section shall be
furnished in hard copy or electronically in a format specified by the
Secretary of the Commission to the Commission at its Washington, DC
headquarters. If a hard copy is furnished for submissions under
appendix A to part 5 of this chapter, two additional hard copies shall
be furnished to the Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Each
submission under this paragraph (d)(1) shall be in the following order:
(A) Label the submission as ``Submission for Commission rule
approval:''
(B) Set forth the text of the rule or proposed rule (in the case of
a rule amendment, brackets must indicate words deleted and underscoring
must indicate words added);
(C) Describe the proposed effective date of a proposed rule and any
action taken or anticipated to be taken to adopt the proposed rule by
the contract market, recognized futures exchange, derivatives
transaction facility or recognized clearing organization or by its
governing board or by any committee thereof, and cite the rules of the
entity that authorize the adoption of the proposed rule;
(D) Explain the operation, purpose, and effect of the proposed
rule, including, as applicable, a description of the anticipated
benefits to market participants or others, any potential
anticompetitive effects on market participants or others, how the rule
fits into the contract market, recognized futures exchange, derivatives
transaction facility or recognized clearing organization's framework of
self-regulation, and any other information which may be beneficial to
the Commission in analyzing the proposed rule. If a proposed rule
affects, directly or indirectly, the application of any other rule of
the submitting entity, set forth the pertinent text of any such rule
and describe the anticipated effect;
(E) Note and briefly describe any substantive opposing views
expressed with respect to the proposed rule which were not incorporated
into the proposed rule prior to its submission to the Commission; and
(F) Identify any Commission regulation that the Commission may
[[Page 38995]]
need to amend, or sections of the Act or Commission regulations that
the Commission may need to interpret in order to approve or allow into
effect the proposed rule. To the extent that such an amendment or
interpretation is necessary to accommodate a proposed rule, the
submission should include a reasoned analysis supporting the change.
(ii) All rules submitted for Commission approval under paragraph
(d)(1)(i) of this section shall be deemed approved by the Commission
under section 5a(a)(12)(A) of the Act, forty-five days after receipt by
the Commission, unless notified otherwise within that period, if:
(A) The submission complies with the requirements of paragraphs
(d)(1)(i) (A) through (F) of this section or, for dormant contracts,
the requirements of Sec. 5.3 of this chapter;
(B) The submitting entity does not amend the proposed rule or
supplement the submission, except as requested by the Commission,
during the pendency of the review period; and
(C) The submitting entity has not instructed the Commission in
writing during the review period to review the proposed rule under the
180 day review period under section 5a(a)(12)(A) of the Act.
(iii) The Commission, within forty-five days after receipt of a
submission filed pursuant to paragraph (d)(1)(i) of this section, may
notify the entity making the submission that the review period has been
extended for a period of thirty days where the proposed rule raises
novel or complex issues which require additional time for review or is
of major economic significance. This notification shall briefly
describe the nature of the specific issues for which additional time
for review is required. Upon such notification, the period for review
shall be extended for a period of thirty days, and, unless the entity
is notified otherwise during that period, the rule shall be deemed
approved at the end of the enlarged review time.
(iv) During the forty-five day period for fast-track review, or the
thirty-day extension when the period has been enlarged under paragraph
(d)(1)(iii) of this section, the Commission shall notify the submitting
entity that the Commission is terminating fast-track review procedures
and will review the proposed rule under the 180 day review period of
section 5a(a)(12)(A) of the Act, if it appears that the proposed rule
may violate a specific provision of the Act, regulations, or form or
content requirements of this section. This termination notification
will briefly specify the nature of the issues raised and the specific
provision of the Act, regulations, or form or content requirements of
this section that the proposed rule appears to violate. Within fifteen
days of receipt of this termination notification, the designated
contract market, recognized futures exchange, derivatives transaction
facility or recognized clearing organization may:
(A) Withdraw the rule;
(B) Request the Commission to review the rule pursuant to the one
hundred and eighty day review procedures set forth in section
5a(a)(12)(A) of the Act; or
(C) Request the Commission to render a decision whether to approve
the proposed rule or to institute a proceeding to disapprove the
proposed rule under the procedures specified in section 5a(a)(12)(A) of
the Act by notifying the Commission that the submitting entity views
its submission as complete and final as submitted.
(2) Voluntary submission of rules for expedited approval.
Notwithstanding the provisions of paragraph (d)(1) of this section,
changes to terms and conditions of a contract that are consistent with
the Act and Commission regulations and with standards approved or
established by the Commission in a written notification to the market
or clearing organization of the applicability of this paragraph (d)(2)
shall be deemed approved by the Commission at such time and under such
conditions as the Commission shall specify, provided, however, that the
Commission may at any time alter or revoke the applicability of such a
notice to any particular contract.
(e)(1) Notification of rule amendments. Notwithstanding the rule
approval and filing requirements of section 5a(a)(12) of the Act and of
paragraphs (c) and (d) of this section, designated contract markets,
recognized futures exchanges, derivatives transaction facilities and
recognized clearing organizations may place the following rules into
effect without prior notice to the Commission if the following
conditions are met:
(i) The designated contract market, recognized futures exchange,
derivatives transaction facility or clearing organization provides to
the Commission at least weekly a summary notice of all rule changes
made effective pursuant to this paragraph during the preceding week.
Such notice must be labeled ``Weekly Notification of Rule Changes'' and
need not be filed for weeks during which no such actions have been
taken. One copy of each such submission shall be furnished in hard copy
or electronically in a format specified by the Secretary of the
Commission to the Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581; and
(ii) The rule change governs:
(A) Non-material revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
approved entities and other such nonsubstantive revisions of contract
terms and conditions that have no effect on the economic
characteristics of the contract;
(B) Delivery standards set by third parties. Changes to grades or
standards of commodities deliverable on futures contracts that are
established by an independent third party and that are incorporated by
reference as terms of the contract, provided that the grade or standard
is not established, selected or calculated solely for use in connection
with futures or option trading;
(C) Index contracts. Routine changes in the composition,
computation, or method of selection of component entities of an index
other than a stock index referenced and defined in the contract's
terms, made by an independent third party whose business relates to the
collection or dissemination of price information and that was not
formed solely for the purpose of compiling an index for use in
connection with a futures or option contract;
(D) 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; or
(E) Administrative Procedures. The organization and administrative
procedures of a contract market's governing bodies such as a Board of
Directors, Officers and Committees, but not voting requirements and
procedures or requirements or procedures relating to conflicts of
interest.
(2) Notification of rule amendments not required. Notwithstanding
the rule approval and filing requirements of section 5a(a)(12) of the
Act and of paragraphs (c) and (d) of this section, designated contract
markets, recognized futures exchanges, derivatives transaction
facilities and recognized clearing organizations may place into effect
without notice to the Commission, rules governing:
(i) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not
[[Page 38996]]
guaranty, reserves, or similar funds; declaration of holidays, and
changes to facilities housing the market, trading floor or trading
area; or
(ii) Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges,
visitors, but not the establishment of penalties for violations of such
rules.
* * * * *
(i) Membership lists. Upon request of the Commission each
designated contract market, recognized futures exchange, derivatives
transaction facility or recognized clearing organization shall promptly
furnish to the Commission a current list of the facility's or entity's
members or owners subject to fitness requirements.
4. In part 1, Secs. 1.43, 1.45, and 1.50 are proposed to be removed
and reserved.
5. Part 5 is proposed to be amended as as follows:
PART 5--PROCEDURES FOR LISTING NEW PRODUCTS
a. The authority citation for part 5 continues to read as follows:
Authority: 7 U.S.C. 6(c), 6c, 7, 7a, 8 and 12a.
b. The heading of part 5 is proposed to be revised as set forth
above and Secs. 5.1 through 5.4 are proposed to be revised to read as
follows:
Sec. 5.1 Listing contracts for trading by exchange certification.
(a) Notwithstanding the provisions of section 4(a)(1) of the Act or
Sec. 33.2 of this chapter, a board of trade that has been recognized by
the Commission as a recognized futures exchange under Sec. 38.3 of this
chapter may list for trading contracts of sale of a commodity for
future delivery or commodity option contracts, if the recognized
futures exchange:
(1) Lists for trading at least one contract which is not dormant
within the meaning of Sec. 5.3 of this part;
(2) In connection with the trading of the contract complies with
all requirements of the Act and Commission regulations thereunder
applicable to the recognized futures exchange under part 38 of this
chapter;
(3) Files with the Commission at its Washington, D.C., headquarters
either in electronic or hard-copy form a copy of the contract's initial
terms and conditions and a certification by the recognized futures
exchange that the contract's initial terms and conditions neither
violate nor are inconsistent with any requirement of part 38 of this
chapter, any applicable provision of the Commodity Exchange Act or of
the rules thereunder, and the filing is received no later than the
close of business of the business day preceding the contract's initial
listing; and
(4) Identifies the contract in its rules as listed for trading
pursuant to exchange certification.
(b) The provisions of this section shall not apply to:
(1) A contract subject to the provisions of section 2(a)(1)(B) of
the Act;
(2) A contract to be listed initially for trading that is the same
or substantially the same as one for which an application for
Commission review and approval pursuant to Sec. 5.2 was filed by
another board of trade while the application is pending before the
Commission; or
(3) A contract to be listed initially for trading that is the same
or substantially the same as one which is the subject of a pending
Commission proceeding to disapprove designation under section 6 of the
Act, to disapprove a term or condition under section 5a(a)(12) of the
Act, to alter or supplement a term or condition under section 8a(7) of
the Act, to amend terms or conditions under section 5a(a)(10) of the
Act, to declare an emergency under section 8a(9) of the Act, or to any
other proceeding the effect of which is to disapprove, alter,
supplement, or require a contract market to adopt a specific term or
condition, trading rule or procedure, or to take or refrain from taking
a specific action.
Sec. 5.2 Listing products for trading by derivatives transaction
facilities.
Notwithstanding the provisions of section 4(a)(1) of the Act or
Sec. 33.2 of this chapter, a recognized derivatives transaction
facility under Sec. 37.3 of this chapter may list contracts for trading
if it files with the Commission at its Washington, D.C. headquarters, a
submission labeled ``DTF Notice of Product Listing,'' which includes
the text of the contract's terms or conditions at the time traders or
participants in the market are notified, but in no event later than the
close of business on the business day preceding initial listing.
Sec. 5.3 Voluntary submission of new products for Commission review
and approval.
(a) Cash-settled contracts. A new contract to be listed for trading
by a recognized futures exchange under Sec. 38.3 of this chapter or a
recognized derivatives transaction facility under Sec. 37.3 of this
chapter shall be deemed approved by the Commission ten business days
after receipt by the Commission of the application for contract
approval, unless notified otherwise within that period, if:
(1) The submitting entity labels the submission as being submitted
pursuant to Commission rule 5.2--Fast Track Ten-Day Review;
(2)(i) The application for approval is for a futures contract
providing for cash settlement or for delivery of a foreign currency for
which there is no legal impediment to delivery and for which there
exists a liquid cash market; or
(ii) For an option contract that is itself cash-settled, is for
delivery of a foreign currency that meets the requirements of paragraph
(a)(2)(i) of this section or is to be exercised into a futures contract
which has already been designated as a contract market or approved
under this section;
(3) The application for approval is for a commodity other than
those enumerated in section 1a(3) of the Act or one that is subject to
the procedures of section 2(a)(1)(B) of the Act;
(4) The submitting entity trades at least one contract which is not
dormant within the meaning of this part;
(5) The submission complies with the requirements of Appendix A of
this part--Guideline No. 1;
(6) The submitting entity does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission or for correction of
typographical errors, renumbering or other such nonsubstantive
revisions, during that period; and
(7) The submitting entity has not instructed the Commission in
writing during the review period to review the application for
designation under the usual procedures under section 6 of the Act.
(b) Contracts for physical delivery. A new contract to be listed
for trading by a recognized futures exchange under Sec. 38.3 of this
chapter or by a derivatives transaction facility under Sec. 37.3 of
this chapter shall be deemed approved by the Commission forty-five days
after receipt by the Commission of the application for contract
approval, unless notified otherwise within that period, if:
(1) The submitting entity labels the submission as being submitted
pursuant to Commission rule 5.2--Fast Track Forty-Five Day Review;
(2) The application for contract approval is for a commodity other
than those subject to the procedures of section 2(a)(1)(B) of the Act;
(3) The submitting entity lists for trading at least one contract
which is not dormant within the meaning of this part;
[[Page 38997]]
(4) The submission complies with the requirements of Appendix A to
this part--Guideline No. 1;
(5) The submitting entity does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission or for correction of
typographical errors, renumbering or other such nonsubstantive
revisions, during that period; and
(6) The submitting entity has not instructed the Commission in
writing during the forty-five day review period to review the
application for designation under the usual procedures under section 6
of the Act.
(c) Notification of extension of time. The Commission, within ten
days after receipt of a submission filed under paragraph (a) of this
section, or forty-five days after receipt of a submission filed under
paragraph (b) of this section, may notify the submitting entity that
the review period has been extended for a period of thirty days where
the application for approval raises novel or complex issues which
require additional time for review. This notification will briefly
specify the nature of the specific issues for which additional time for
review is required. Upon such notification, the period for fast-track
review of paragraphs (a) and (b) of this section shall be extended for
a period of thirty days.
(d) Notification of termination of fast-track procedures. During
the fast-track review period provided under paragraphs (a) or (b) of
this section, or of the thirty-day extension when the period has been
enlarged under paragraph (c) of this section, the Commission shall
notify the submitting entity that the Commission is terminating fast-
track review procedures and will review the proposed rule under the
usual procedures of section 6 of the Act, if it appears that the
proposed contract may violate a specific provision of the Act,
regulations, or form or content requirements of Appendix A to this
part. This termination notification will briefly specify the nature of
the issues raised and the specific provision of the Act, regulation, or
form or content requirement of Appendix A to this part that the
proposed contract appears to violate. Within ten days of receipt of
this termination notification, the submitting entity may request that
the Commission render a decision whether to approve the designation or
to institute a proceeding to disapprove the proposed application for
designation under the procedures specified in section 6 of the Act by
notifying the Commission that the exchange views its application as
complete and final as submitted.
(e) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Economic
Analysis or to the Director's delegatee, with the concurrence of the
General Counsel or the General Counsel's delegatee, authority to
request under paragraphs (a)(6) and (b)(5) of this section that the
recognized futures exchange or derivatives transaction facility amend
the proposed contract or supplement the application, to notify a
submitting entity under paragraph (c) of this section that the time for
review of a proposed contract term submitted for review under
paragraphs (a) or (b) of this section has been extended, and to notify
the submitting entity under paragraph (d) of this section that the
fast-track procedures of this section are being terminated.
(2) The Director of the Division of Economic Analysis may submit to
the Commission for its consideration any matter which has been
delegated in paragraph (e)(1) of this section.
(3) Nothing in the paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (e)(1)
of this section.
Sec. 5.4 Dormant contracts.
(a) Definitions. For purposes of this section:
(1) The term dormant contract means any commodity futures or option
contract:
(i) In which no trading has occurred in any future or option
expiration for a period of six complete calendar months; or
(ii) Which has been certified by a recognized futures exchange or a
recognized derivatives transaction facility to the Commission to be a
dormant contract market.
(2) [Reserved]
(b) Listing of additional futures trading months or option
expiration by certification. A contract that has been listed for
trading initially under the procedures of either Secs. 5.1 or 5.3 of
this part that has become dormant may be relisted for trading
additional months pursuant to the procedures of Sec. 1.41(c) by filing
the bylaw, rule, regulation or resolution to list additional trading
months or expirations with the Commission as specified in that section.
Upon relisting, the contract must be identified by the recognized
futures exchange as listed for trading by exchange certification.
(c) Approval for listing of additional futures trading months or
option expirations. A contract that has been initially approved by the
Commission under Sec. 5.3 of this part and that has become dormant may
be relisted for trading additional months pursuant to the procedures of
Sec. 1.41(d) by filing the bylaw, rule, regulation or resolution to
list additional trading months or expirations with the Commission as
specified in that section.
(1) Each such submission shall clearly designate the submission as
filed pursuant to Commission Rule 5.3; and
(2) Include the information required to be submitted pursuant to
Sec. 5.3 of this part or an economic justification for the listing of
additional months or expirations in the dormant contract market, which
shall include an explanation of those economic conditions which have
changed subsequent to the time the contract became dormant and an
explanation of how any new terms and conditions which are now being
proposed, or which have been proposed for an option market's underlying
futures contract market, would make it reasonable to expect that the
futures or option contract will be used on more than an occasional
basis for hedging or price basing.
(d) Exemptions. No contract shall be considered dormant until the
end of sixty (60) complete calendar months:
(1) Following initial listing; or
(2) Following Commission approval of the contract market bylaw,
rule, regulation, or resolution to relist trading months submitted
pursuant to paragraph (c) of this section.
c. Appendices C and D are removed and reserved to read as follows:
Appendix C--[Reserved]
Appendix D--[Reserved]
PART 15--REPORTS--GENERAL PROVISIONS
6. The authority citation for Part 15 is proposed to be revised to
read as follows:
Authority: 7 U.S.C. 2, 4, 5, 6(c), 6a, 6c(a)-(d), 6f, 6g, 6i,
6k, 6m, 6n, 7, 9, 12a, 19 and 21.
7. Section 15.05 is proposed to be amended by adding paragraphs (e)
through (h) to read as follows:
Sec. 15.05 Designation of agent for foreign brokers, customers of a
foreign broker and foreign traders.
* * * * *
(e) Any derivatives transaction facility or recognized futures
exchange that permits a foreign broker to intermediate transactions in
futures contracts or options contracts on the facility or exchange, or
permits a foreign trader to effect transactions in futures contracts
[[Page 38998]]
or options contracts on the facility or exchange shall be deemed to be
the agent of the foreign broker and any of its customers for whom the
transactions were executed, or the foreign trader for purposes of
accepting delivery and service of any communication issued by or on
behalf of the Commission to the foreign broker, any of its customers or
the foreign trader with respect to any futures or options contracts
executed by the foreign broker or the foreign trader on the derivatives
transaction facility or recognized futures exchange. Service or
delivery of any communication issued by or on behalf of the Commission
to a derivatives transaction facility or recognized futures exchange
pursuant to such agency shall constitute valid and effective service
upon the foreign broker, any of its customers, or the foreign trader. A
derivatives transaction facility or recognized futures exchange who has
been served with, or to whom there has been delivered, a communication
issued by or on behalf of the Commission to a foreign broker, any of
its customers, or a foreign trader shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the Commission in the communication, to the
foreign broker, any of its customers or the foreign trader.
(f) It shall be unlawful for any derivatives transaction facility
or recognized futures exchange to permit a foreign broker, any of its
customers or a foreign trader to effect transactions in futures
contracts or options contracts unless the derivatives transaction
facility or recognized futures exchange prior thereto informs the
foreign broker, any of its customers or the foreign trader in any
reasonable manner the derivatives transaction facility or recognized
futures exchange deems to be appropriate, of the requirements of this
section.
(g) The requirements of paragraphs (e) and (f) of this section
shall not apply to any transactions in futures contracts or options if
the foreign broker, any of its customers or the foreign trader has duly
executed and maintains in effect a written agency agreement in
compliance with this paragraph with a person domiciled in the United
States and has provided a copy of the agreement to the derivatives
transaction facility or recognized futures exchange prior to effecting
any transactions in futures contracts or options contracts on the
derivatives transaction facility or recognized futures exchange. This
agreement must authorize the person domiciled in the United States to
serve as the agent of the foreign broker, any of its customers or the
foreign trader for purposes of accepting delivery and service of all
communications issued by or on behalf of the Commission to the foreign
broker, any of its customers or the foreign trader and must provide an
address in the United States where the agent will accept delivery and
service of communications from the Commission. This agreement must be
filed with the Commission by the derivatives transaction facility or
recognized futures exchange prior to permitting the foreign broker, any
of its customers or the foreign trader to effect any transactions in
futures contracts or options contracts. Unless otherwise specified by
the Commission, the agreements required to be filed with the Commission
shall be filed with the Secretary of the Commission at Three Lafayette
Centre, 1155 21st Street, NW, Washington, D.C. 20581. A foreign broker,
any of its customers or a foreign trader shall notify the Commission
immediately if the written agency agreement is terminated, revoked, or
is otherwise no longer in effect. If the derivatives transaction
facility or recognized futures exchange knows or should know that the
agreement has expired, been terminated, or is no longer in effect, the
derivatives transaction facility or recognized futures exchange shall
notify the Secretary of the Commission immediately. If the written
agency agreement expires, terminates, or is not in effect, the
derivatives transaction facility or recognized futures exchange and the
foreign broker, any of its customers or the foreign trader are subject
to the provisions of paragraphs (e) and (f) of this section.
(h) The provisions of paragraphs (e), (f) and (g) of this section
shall not apply to a derivatives transactions facility or recognized
futures exchange on which all transactions in futures contracts or
options contracts of foreign brokers, their customers or foreign
traders are executed through and the resulting transactions are
maintained in accounts carried by a registered futures commission
merchant or introducing broker subject to the provisions of Rules
15.05(a), (b), (c) and (d).
8. Chapter I of 17 CFR is proposed to be amended by adding a new
Part 20 to read as follows:
PART 20--SPECIAL CALLS RELATING TO TRANSACTIONS ON DERIVATIVES
TRANSACTION FACILITIES
Sec.
20.1 Special calls for information from derivatives transaction
facilities.
20.2 Special calls for information from futures commission
merchants.
20.3 Special calls for information from participants.
20.4 Delegations of authority.
Authority: 7 U.S.C. 6(c), 6i and 12(a)(5).
Sec. 20.1 Special calls for information from derivatives transaction
facilities.
Upon special call by the Commission, a derivatives transaction
facility shall provide to the Commission such information related to
its business as a derivatives transaction facility, including
information relating to data entry and trade details, in the form and
manner and within the time as specified by the Commission in the
special call.
Sec. 20.2 Special calls for information from futures commission
merchants.
Upon special call by the Commission, each person registered or
deemed to be registered as a futures commission merchant that carries
or has carried an account for a customer on a derivatives transaction
facility shall provide information to the Commission concerning such
accounts or related positions carried for the customer on other
facilities or markets, in the form and manner and within the time
specified by the Commission in the special call.
Sec. 20.3 Special calls for information from participants.
Upon special call by the Commission, any person who enters into or
has entered into a contract, agreement, or transaction on a derivatives
transaction facility shall provide information to the Commission
concerning such contracts, agreements, or transactions or related
positions on other facilities or markets, in the form and manner and
within the time specified by the Commission in the special call.
Sec. 20.4 Delegation of authority.
The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls for information set
forth in Secs. 20.1, 20.2 and 20.3 to the Directors of the Division of
Economic Analysis and the Division of Trading and Markets to be
exercised separately by each Director or by such other employee or
employees as the Director may designate from time to time. The Director
of the Divisions of Economic Analysis and Trading and Markets may
submit to the Commission for its consideration any matter that has been
delegated in this paragraph. Nothing in this paragraph prohibits the
Commission, at its election, from exercising the authority delegated in
this paragraph.
9. PART 36 is proposed to be revised to read as follows:
[[Page 38999]]
PART 36--EXEMPTION OF TRANSACTIONS ON MULTILATERAL TRANSACTION
EXECUTION FACILITIES
Sec.
36.1 Definitions.
36.2 Exemption.
36.3 Enforceability.
Authority: 7 U.S.C. 2, 6, 6c, and 12a.
Sec. 36.1 Definitions.
As used in this part:
(a) Eligible participant means and shall be limited to the parties
or entities listed in Sec. 35.1(b)(1)-(11) of this chapter; and
(b) Multilateral transaction execution facility means an electronic
or non-electronic market or similar facility through which persons, for
their own accounts or for the accounts of others, enter into, agree to
enter into or execute binding transactions by accepting bids or offers
made by one person that are open to multiple persons who conduct
business through such market or similar facility, but does not include:
(1) A facility whose participants individually negotiate (or have
individually negotiated) with counterparties the material terms
applicable to transactions between them, including transactions
conducted on the facility, and which are subject to subsequent
acceptance by the counterparties;
(2) Any electronic communications system on which the execution of
a transaction results from the content of bilateral communications
exchanged between the parties and not by the interaction of multiple
orders within a predetermined, non-discretionary automated trade
matching algorithm; or
(3) Any facility on which only a single firm may participate as
market maker and participants other than the market maker may not
accept bids or offers of other non-market maker participants.
Sec. 36.2 Exemption.
A contract, agreement or transaction traded on a multilateral
transaction execution facility as defined in Sec. 36.1(b) is exempt
from all provisions of the Act and any person or class of persons
offering, entering into, rendering advice, or rendering other services
with respect to such contract, agreement or transaction is exempt for
such activity from all provisions of the Act (except in each case the
provisions enumerated in Sec. 36.3(a)) provided the following terms and
conditions are met:
(a) Only eligible participants, either trading for their own
account or through another eligible participant, have trading access to
the multilateral transaction execution facility;
(b) The contract, agreement or transaction listed on or traded
through the multilateral transaction execution facility is based upon:
(1) A debt obligation;
(2) A foreign currency;
(3) An interest rate;
(4) An exempt security or index thereof, as provided in section
2a(1)(B)(iv) of the Act;
(5) A measure of credit risk or quality, including instruments
known as ``total return swaps,'' ``credit swaps'' or ``spread swaps;''
(6) An occurrence, extent of an occurrence or contingency beyond
the control of the counterparties to the transaction; or
(7) Cash-settled, based upon an economic or commercial index or
measure beyond the control of the counterparties to the transaction and
not based upon prices derived from trading in a directly corresponding
underlying cash market;
(c) If cleared, the submission of such contracts, agreements or
transactions for clearance and/or settlement must be to a clearing
organization that is authorized by the Commission under Sec. 39.2 of
this chapter: Provided, however, that nothing in this paragraph
precludes:
(1) Arrangements or facilities between parties to such contracts,
agreements or transactions that provide for netting of payment
obligations resulting from such agreements; or
(2) Arrangements or facilities among parties to such contracts,
agreements or transactions, that provide for netting of payments
resulting from such contracts, agreements or transactions;
(d) The multilateral transaction execution facility on or through
which such contracts, agreements or transactions are traded and the
parties to, participants in, or intermediaries in such a facility that
is exempt under this section are prohibited from claiming that the
facility is regulated, recognized or approved by the Commission;
(e) The facility must be legally separate from any designated
contract market, any recognized futures exchange under part 38 of this
chapter and any facility recognized as a derivatives trading facility
under part 37 of this chapter;
(f) The facility:
(1) If an electronic system that also lists for trading products
pursuant to parts 37 or 38 of this chapter, must provide notice of the
agreements, contracts or transactions traded on the facility pursuant
to this part 36 and that such transactions are not subject to
regulation under the Act; or
(2) If providing a physical trading environment, must provide that
products trading pursuant to parts 37 or part 38 of this chapter be
traded in a location separate from products traded pursuant to this
part 36; and
(g) If the Commission determines by order, after notice and an
opportunity for a hearing, that the facility serves as a significant
source for the discovery of prices for an underlying commodity, the
facility must on a daily basis disseminate publicly trading volume and
price ranges and other trading data appropriate to that market as
specified in the order.
(h) Any person or entity may apply to the Commission for exemption
from any of the provisions of the Act (except 2(a)(1)(B)) for other
arrangements or facilities, on such terms and conditions as the
Commission deems appropriate, including, but not limited to, the
applicability of other regulatory regimes.
Sec. 36.3 Enforceability.
(a) Notwithstanding the exemption in Sec. 36.2, sections
2(a)(1)(B), 4b, and 4o of the Act and Sec. 32.9 of this chapter as
adopted under section 4c(b) of the Act, and sections 6(c) and 9(a)(2)
of the Act to the extent they prohibit manipulation of the market price
of any commodity in interstate commerce or for future delivery on or
subject to the rules of any contract market, continue to apply to
transactions and persons otherwise subject to those provisions.
(b) A party to a contract, agreement, or transaction that is with
an eligible counterparty (or counterparty reasonably believed by such
party to be an eligible counterparty) shall be exempt from any claim,
counterclaim or affirmative defense by such counterparty under section
22(a)(1) of the Act or any other provision of the Act:
(1) That such contract, agreement, or transaction is void, voidable
or unenforceable, or
(2) To rescind or recover any payment made in respect of such
contract, agreement, or transaction, based solely on the failure of
such party or such contract, agreement, or transaction to comply with
the terms or conditions of the exemption under this part.
10. Chapter I of 17 CFR is proposed to be amended by adding new
Part 37 as follows:
PART 37--EXEMPTION OF TRANSACTIONS ON A DERIVATIVES TRANSACTION
FACILITY
Sec.
37.1 Scope and definitions.
37.2 Exemption.
[[Page 39000]]
37.3 Conditions for recognition as a derivatives transaction
facilities.
37.4 Procedures for recognition.
37.5 Enforceability.
37.6 Fraud in connection with Part 37 transactions.
Appendix A to Part 37--Application Guidance
Authority: 7 U.S.C. 2, 6, 6c, 6(c) and 12a.
Sec. 37.1 Scope and Definitions.
(a) Scope. (i) The derivatives transaction facility and the
products listed for trading thereon under this exemption shall be
deemed to be subject to all of the provisions of the Act and Commission
regulations thereunder which are applicable to a ``board of trade,''
``board of trade licensed by the Commission,'' ``exchange,'' ``contract
market,'' ``designated contract market,'' or ``contract market
designated by the Commission'' as though those provisions were set
forth in this section and included specific reference to contracts
listed for trading by recognized derivatives transaction facilities
pursuant to this section.
(2) The provisions of this section shall not apply to a commodity
or a contract subject to the provisions of section 2(a)(1)(B) of the
Act.
(b) Definition. As used in this part ``eligible commercial
participant'' means, and shall be limited to, a party or entity listed
in Secs. 35.1(b)(1), (b)(2), (b)(3), (b)(6) and (b)(8) of this chapter
that in connection with its business, makes and takes delivery of the
underlying physical commodity and regularly incurs risks related to
such commodity, or is a dealer that regularly provides hedging, risk
management or market-making services to the foregoing entities.
Sec. 37.2 Exemption.
Notwithstanding Sec. 37.1(a)(1), a contract, agreement or
transaction traded on a multilateral transaction execution facility as
defined in Sec. 36.1(b) of this chapter, the facility and the
facility's operator are exempt from all provisions of the Act and from
all Commission regulations thereunder for such activity, except for
those provisions of the Act and Commission regulations which, as a
condition of this exemption, are reserved in Sec. 37.5(a), provided the
following terms and conditions are met:
(a)(1) Only eligible commercial participants trading for their own
account have trading access to the derivatives transaction facility for
contracts, agreements or transactions in any commodity except for those
listed in section 1(a)(3) of the Act,; or
(2)(i) The contract, agreement or transaction listed on or traded
through the multilateral transaction execution facility meets the
requirements set forth in Sec. 36.2(b) of this chapter or has been
found by the Commission on a case-by-case determination to have a
sufficiently liquid and deep cash market and a surveillance history
based on actual trading experience to provide assurance that the
contract is highly unlikely to be manipulated; and
(ii) Participants that are not eligible participants as defined in
Sec. 35.1(b) of this chapter may have trading access only through a
registered futures commission merchant that operates in accordance with
the provisions of Sec. 1.17(a)(1)(ii) of this chapter;
(b) The multilateral transaction execution facility through which
the contract agreement or transaction is entered into has been
recognized by the Commission as a derivatives transaction facility
pursuant to Sec. 37.3;
(c) A multilateral transaction execution facility that applies to
be, and is, a recognized derivatives transaction facility must comply
with all of the conditions of this part 37 exemption and must disclose
to participants transacting on or through its facility that
transactions conducted on or through the facility are subject to the
provisions of this part 37;
(d) If cleared, the submission of such contracts, agreements or
transactions for clearance and/or settlement must be to a clearinghouse
that is authorized by the Commission under part 39 of this chapter.
Provided, however, that nothing in this paragraph precludes:
(1) Arrangements or facilities between parties to such contracts,
agreements or transactions that provide for netting of payment
obligations resulting from such agreements; or
(2) arrangements or facilities among parties to such contracts,
agreements or transactions, that provide for netting of payments
resulting from such contracts, agreements or transactions; and
(e) The products if traded on an electronic system must be clearly
identified as traded on a recognized derivatives transaction facility
or if traded in a physical trading environment must be traded in a
location separate from products traded as designated contract markets,
or pursuant to parts 36 and 38 of this chapter;
Sec. 37.3 Conditions for recognition as a derivatives transaction
facility
(a) To be recognized as a derivatives transaction facility, the
facility initially must have:
(1) Rules relating to trading on its facility, including, depending
on the nature of the trading mechanism:
(i) Rules to deter trading abuses, and adequate power and capacity
to detect, investigate and take action against violation of its trade
rules including arrangements to obtain necessary information to perform
the functions in paragraph (a)(1)(i) of this section, or
(ii) Use of technology that provides participants with impartial
access to transactions and captures information that is available for
use in determining whether violations of its rules have occurred;
(2) Rules or terms and conditions defining, or specifications
detailing, the operation of the trading mechanism or electronic
matching platform;
(3) Rules or terms and conditions detailing the financial framework
applying to the transactions or ensuring the financial integrity of
transactions entered into by, or through, its facilities; and
(b) Initially, and on a continuing basis, must meet and adhere to
the following seven core principles:
(1) Enforcement. Monitor and enforce its rules or terms and
conditions including, if applicable, limitations on access.
(2) Market oversight. As appropriate to the market and the
contracts traded:
(i) Monitor markets on a routine and nonroutine basis as necessary
to ensure orderly trading and have and where appropriate exercise
authority to maintain an orderly market; or
(ii) Provide information to the CFTC as requested by the CFTC to
satisfy its obligations under the CEA.
(3) Operational information. Disclose to regulators and market
participants, to the extent possible, information concerning trading
terms, contract terms and conditions, trading mechanisms, financial
integrity arrangements or mechanisms, as well as other relevant
information.
(4) Transparency. Provide to market participants on a fair,
equitable and timely basis information regarding prices, bids and
offers, and other information appropriate to the market and, as
appropriate to the market, make available to the public with respect to
actively traded products and, to the extent applicable, information
regarding daily opening and closing prices, price range, trading volume
and other related market information.
(5) Fitness. As appropriate to the market, have fitness standards
for members, operators or owners with greater than 10 percent interest
or an affiliate of such an owner, members of the governing board, and
those who make disciplinary determinations.
(6) Recordkeeping. Keep full books and records of all activities
related to its
[[Page 39001]]
business as a recognized derivatives transaction facility, including
full information relating to data entry and trade details sufficient to
reconstruct trading, in a form and manner acceptable to the CFTC for a
period of five years, during the first two of which the books and
records are readily available, and which shall be open to inspection by
any representative of the CFTC or the U.S. Department of Justice.
(7) Competition. Avoid unreasonable restraints of trade or imposing
any burden on competition not necessary or appropriate in furtherance
of the objectives of the Act or the regulations thereunder.
Sec. 37. 4 Procedures for recognition.
(a) Recognition by certification. A board of trade, facility or
entity that is designated under sections 4c, 5, 5a(a) or 6 of the Act
as a contract market in at least one commodity which is not dormant
within the meaning of Sec. 5.2 of this chapter will be recognized by
the Commission as a derivatives transaction facility upon receipt by
the Commission at its Washington, D.C. headquarters of a copy of the
derivatives transaction facility's rules and a certification by the
board of trade, facility or entity that it meets the conditions for
recognition under this part.
(b) Recognition by application. A board of trade, facility or
entity shall be recognized by the Commission as a derivatives
transaction facility thirty days after receipt by the Commission of an
application for recognition as a derivatives transaction facility
unless notified otherwise during that period, if:
(1) The application demonstrates that the applicant satisfies the
conditions for recognition under this part;
(2) The submission is labeled as being submitted pursuant to this
part 37;
(3) The submission includes a copy of the derivatives transaction
facility's rules and a brief explanation of how the rules satisfy each
of the conditions for recognition under Sec. 37.3;
(4) The applicant does not amend or supplement the application for
recognition, except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period; and
(5) The applicant has not instructed the Commission in writing
during the review period to review the application pursuant to
procedures under section 6 of the Act.
(6) Appendix A to this part provides guidance to applicants on how
the conditions for recognition enumerated in Sec. 37.3 could be
satisfied.
(c) Termination of Part 37 review. During the thirty-day period for
review pursuant to paragraph (b) of this section, the Commission shall
notify the applicant seeking recognition that the Commission is
terminating review under this section and will review the proposal
under the procedures of section 6 of the Act, if it appears that the
application fails to meet the conditions for recognition under this
part. This termination notification will state the nature of the issues
raised and the specific condition of recognition that the application
appears to violate, is contrary to or fails to meet. Within ten days of
receipt of this termination notification, the applicant seeking
recognition may request that the Commission render a decision whether
to recognize the derivatives transaction facility or to institute a
proceeding to disapprove the proposed submission under procedures
specified in section 6 of the Act by notifying the Commission that the
applicant seeking recognition views its submission as complete and
final as submitted.
(d) Delegation of Authority.
(1) The Commission hereby delegates, until it orders otherwise, to
the Directors of the Division of Trading and Markets and the Division
of Economic Analysis or their delegatees, with the concurrence of the
General Counsel or the General Counsel's delegatee, authority to notify
the entity seeking recognition under paragraph (b) of this section that
review under those procedures is being terminated.
(2) The Directors of the Division of Trading and Markets or the
Division of Economic Analysis may submit to the Commission for its
consideration any matter which has been delegated in this paragraph.
(3) Nothing in the paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (d)(1)
of this section.
(e) Request for Commission approval of rules and products. (1) An
entity seeking recognition as a derivatives transaction facility may
request that the Commission approve any or all of its rules and
subsequent amendments thereto, including both operational rules and the
terms or conditions of products listed for trading on the facility, at
the time of recognition or thereafter, under section 5a(a)(12) of the
Act and Secs. 1.41 and 5.3 of this chapter, as applicable. A
derivatives transaction facility may label a product in its rules as,
``Listed for trading pursuant to Commission approval,'' if the
product's terms or conditions have been approved by the Commission.
Rules of the derivatives trading facility not submitted pursuant to
Sec. 37.4(b)(3) shall be submitted to the Commission pursuant to
Sec. 1.41 of this chapter.
(2) An entity seeking recognition as a derivatives transaction
facility may request that the Commission consider under the provisions
of section 15 of the Act any of the entity's rules or policies,
including both operational rules and the terms or conditions of
products listed for trading, at the time of recognition or thereafter.
(f) Request for withdrawal of recognition. A recognized derivatives
transaction facility may withdraw from Commission recognition by filing
with the Commission at its Washington, D.C. headquarters such a
request. Withdrawal from recognition shall not affect any action taken
or to be taken by the Commission based upon actions, activities or
events occurring during the time that the facility was recognized by
the Commission.
Sec. 37.5 Enforceability
(a) Notwithstanding the exemption in Sec. 37.2, sections 1a,
2(a)(1), 4, 4b, 4c, 4g, 4i, 4o, 5(6), 5(7), the rule disapproval
procedures of 5a(a)(12), 5b, 6(a), 6(b), 6(c), 6b, 6c, 8(a), 8(c),
8a(6), 8a(7), 8a(9) 8c(a), 9(a)(2), 9(a)(3), 9(f), 14, 20 and 22 of the
Act and Secs. 1.3, 1.31, 1.37, 1.41, 5.3, 33.10, Part 5, Part 20, and
Part 37 of this chapter continue to apply.
(b) For purposes of section 22(a) of the Act, a party to a
contract, agreement, or transaction is exempt from a claim that the
contract, agreement or transaction is void, voidable, subject to
rescission or otherwise invalidated or rendered unenforceable solely
for failure of the parties to a contract, agreement or transaction, or
the contract, agreement or transaction itself, to comply with the terms
and conditions for the exemption under this part or as a result of:
(1) A violation by the recognized derivatives transaction facility
of the provisions of this part 37; or
(2) Any Commission proceeding to disapprove a rule, term or
condition under section 5a(a)(12) of the Act, to alter or supplement a
rule, term or condition under section 8a(7) of the Act, to declare an
emergency under section 8a(9) of the Act, or any other proceeding the
effect of which is to disapprove, alter, supplement, or require a
recognized derivatives transaction facility to adopt a specific term or
condition, trading rule or procedure, or to take or refrain from taking
a specific action.
Sec. 37.6 Fraud in connection with Part 37 transactions.
It shall be unlawful for any person, directly or indirectly, in or
in
[[Page 39002]]
connection with an offer to enter into, the entry into, the
confirmation of the execution of, or the maintenance of any transaction
entered pursuant to this part--
(1) To cheat or defraud or attempt to cheat or defraud any person;
(2) Willfully to make or cause to be made to any person any false
report or statement thereof or cause to be entered for any person any
false record thereof;
(3) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
Appendix A to Part 37--Application Guidance
This appendix provides guidance to applicants for recognition as
derivatives transaction facilities under Sec. 37.3. Addressing the
issues and questions set forth below would help the Commission in
its consideration of whether the application has met the conditions
for recognition. To the extent that compliance with, or satisfaction
of, a core principle is not self-explanatory from the face of the
derivatives transaction facilities rules or terms, the application
should include an explanation or other form of documentation
demonstrating that the applicant meets the conditions for
recognition.
Core Principle #1: Enforcement: Monitoring and enforcement of its
rules or terms and conditions including, if applicable, limitations
on access
(a) A derivatives transaction facility should have arrangements
and resources and authority for effectively and affirmatively
enforcing its rules, including the authority and ability to collect
or capture information and documents on both a routine and non-
routine basis and to investigate effectively possible rule
violations.
(b) This should include the authority and ability to discipline,
and limit or suspend a member's or participant's activities and/or
the authority and ability to terminate a member's or participant's
activities or access pursuant to clear and fair standards.
Core Principle #2: Market Oversight: As appropriate to the market
and the contracts traded, to: (1) Monitor markets on a routine and
non-routine basis as necessary to ensure open and competitive
trading and have and, where appropriate, exercise authority to
maintain an open and competitive market; or (2) provide information
to the Commission as necessary for the Commission to satisfy its
obligations under the Act
(a) Arrangements and resources for effective market surveillance
programs should facilitate, on both a routine and non-routine basis,
direct supervision of the market. Appropriate objective testing and
review of any automated systems should occur initially and
periodically to ensure proper system functioning, adequate capacity
and security. The analysis of data collected should be suitable for
the type of information collected and should occur in a timely
fashion. A derivatives transaction facility should have the
authority to collect the information and documents necessary to
reconstruct trading for appropriate market analysis as it carries
out its market surveillance programs. The derivatives transaction
facility also should have the authority to intervene as necessary to
maintain an open and competitive market. In carrying out this
responsibility, the facility should address access to, and use of,
material non-public information by members, owners or operators,
participants or facility employees.
(b) Alternatively, and as appropriate to the market, a
derivatives transaction facility may choose to satisfy Core
Principle #2 by providing information to the Commission as requested
by the Commission to satisfy its obligations under the Act. The
derivatives transaction facility should have the authority to
collect or capture and retrieve all necessary information.
(c) The Commission will collect reporting data from large
traders only upon Special Call as provided in Part 20 of this
chapter.
Core Principle #3: Operational Information: Disclose to regulators
and market participants, to the extent possible, information
concerning trading terms, contract terms and conditions, trading
mechanisms, financial integrity arrangements or mechanisms, as well
as other relevant information
A derivatives transaction facility should have arrangements and
resources for the disclosure and explanation of trading terms,
contract terms and conditions, trading mechanisms, financial
integrity arrangements or mechanisms. Such information may be made
publicly available through the operation of a website by the
derivatives transaction facility.
Core Principle #4: Transparency: Provide to market participants on
a fair, equitable and timely basis information regarding prices,
bids and offers, and other information appropriate to the market,
make available to the public with respect to actively traded
products and, to the extent applicable, information regarding daily
opening and closing prices, price range, trading volume and other
related market information
All market participants should have information regarding
prices, bids and offers, or other information appropriate to the
market readily available on a fair and equitable basis. The
derivatives transaction facility should provide to the public
information regarding daily opening and closing prices, price range,
trading volume, open interest and other related market information
for actively traded contracts. Provision of information could be
through such means as provision of the information to a financial
information service or by placement of the information on a
facility's web site.
Core Principle #5: Fitness: Appropriate fitness standards for
members, operators or owners with greater than 10 percent interest
or an affiliate of such an owner, members of the governing board,
and those who make disciplinary determinations
A derivatives transaction facility should have appropriate
eligibility criteria for the categories of persons set forth in the
Core Principle which would include standards for fitness and for the
collection and verification of information supporting compliance
with such standards. Minimum standards of fitness are those bases
for refusal to register a person under section 8a(2) of the Act. A
demonstration of the fitness of the applicant's members, operators
or owners may include providing the Commission with registration
information for such persons, certification to the fitness of such
persons, an affidavit of such persons' fitness by the facility's
Counsel or other information substantiating the fitness of such
persons.
Core Principle #6: Recordkeeping: Maintenance of full books and
records of all activities related to its business as a recognized
derivatives transaction facility, including full information
relating to data entry and trade details, in a form and manner
acceptable to the Commission for a period of five years, during the
first two of which the books and records are readily available, and
which shall be open to inspection by any representative of the
Commission or the United States Department of Justice
Commission rule 1.31 constitutes the acceptable practice
regarding the form and manner for keeping records.
Core Principle #7: Competition: To avoid unreasonable restraints of
trade or imposing any burden on competition not necessary or
appropriate in furtherance of the objectives of the Act or the
regulations thereunder
Guidance on individual rules, terms or practices is available by
submitting a rule for Commission approval under the procedures of
Sec. 1.41of this chapter or by requesting that the Commission issue
an Order considering the rule, term or practice under the provision
of section 15 of the Act.
11. Chapter I of 17 CFR is proposed to be amended by adding new
Part 38 as follows:
PART 38--EXEMPTION OF TRANSACTIONS ON A RECOGNIZED FUTURES EXCHANGE
Sec.
38.1 Scope.
38.2 Exemption.
38.3 Conditions for recognition as a recognized futures exchange.
38.4 Procedures for recignition.
38.5 Enforceability.
38.6 Fraud in connection with Part 38 transactions.
Appendix A to Part 38--Guidance for Applicants and Acceptable
Practices
Authority: 7 U.S.C. 2, 6, 6c, and 12a.
Sec. 38.1 Scope.
(a) Except for commodities subject to paragraph (a) of this
section, the provisions of the exemption in Sec. 38.2 of this part
shall apply to every board of trade that has been designated as a
contract market in a commodity under section 6 of the Act. Provided,
however,
[[Page 39003]]
nothing in this provision affects the eligibility of designated
contract markets for exemption under parts 36 or 37 of this chapter.
(b) Recognized futures exchanges that have been recognized by the
Commission by application under Sec. 38.3 and the products listed for
trading thereon shall be deemed to be subject to all of the provisions
of the Act and Commission regulations thereunder which are applicable
to a ``board of trade,'' ``board of trade licensed by the Commission,''
``exchange,'' ``contract market,'' ``designated contract market,'' or
``contract market designated by the Commission'' as though those
provisions were set forth in this section and included specific
reference to contracts listed for trading by recognized futures
exchanges pursuant to this section.
(c) The provisions of this section shall not apply to a commodity
or a contract subject to the provisions of section 2(a)(1)(B) of the
Act.
Sec. 38.2 Exemption.
Notwithstanding Sec. 38.1(b), a contract, agreement or transaction
traded on a multilateral transaction execution facility as defined in
Sec. 36.1(b) of this chapter, the facility and the facility's operator
are exempt from all provisions of the Act and from all Commission
regulations thereunder for such activity, except for those provisions
of the Act and Commission regulations which, as a condition of this
exemption, are reserved in Sec. 38.5(a), provided the following terms
and conditions are met:
(a) The multilateral transaction execution facility on which the
contract agreement or transaction is entered into has been recognized
by the Commission as a recognized futures exchange pursuant to
Sec. 38.3;
(b) A multilateral transaction execution facility that applies to
be, and is, a recognized futures exchange must comply with all of the
conditions of this part 38 exemption and must disclose to participants
transacting on or through its facilities that transactions conducted on
or through the facility are subject to the provisions of this part 38;
(c) If cleared, the submission of such contracts, agreements or
transactions for clearance and/or settlement must be to a clearinghouse
which is authorized by the Commission under part 39 of this chapter.
Provided, however, that nothing in this paragraph precludes:
(1) Arrangements or facilities between parties to such contracts,
agreements or transactions that provide for netting of payment
obligations resulting from such agreements; or
(2) Arrangements or facilities among parties to such contracts,
agreements or transactions, that provide for netting of payments
resulting from such agreements; and
(d) The products if traded on an electronic system must be clearly
identified as traded on a recognized futures exchange or if traded in a
physical trading environment must be traded in a location separate from
products traded pursuant to parts 36 and 37 of this chapter;
Sec. 38.3 Conditions for recognition as a recognized futures exchange.
(a) To be recognized as a recognized futures exchange, the exchange
must demonstrate initially that it has:
(1) A clear framework for conducting programs of market
surveillance, compliance, and enforcement, including having procedures
in place to make use of collected data for real-time monitoring and for
post-event audit and compliance purposes to prevent market
manipulation;
(2) Rules relating to trading on the exchange, including rules to
deter trading abuses, and adequate power and capacity to detect,
investigate and take action against violations of its trading rules,
and a dedicated regulatory department or delegation of that function to
an appropriate entity;
(3) Rules defining, or specifications detailing, the manner of
operation of the trading mechanism or electronic matching platform and
a trading mechanism or electronic matching platform that performs as
defined in the operational rules or specifications;
(4) A clear framework for ensuring the financial integrity of
transactions entered into by or through the exchange;
(5) Established procedures for impartial disciplinary committee(s)
or other similar mechanisms empowered to discipline, suspend, and expel
members, or to deny access to participants or, if provided for,
discipline participants;
(6) Arrangements to obtain necessary information to perform the
above functions, including the capacity and arrangements to carry out
the International Information Sharing Agreement and Memorandum of
Understanding developed by the Futures Industry Association (FIA)
Global Task Force on Financial Integrity, and a mechanism to provide to
the public ready access to its rules and regulations; and
(b) Initially, and on a continuing basis, must meet and adhere to
the following fifteen core principles:
(1) Rule enforcement. Monitor and enforce its rules;
(2) Products. List contracts for trading which are not readily
susceptible to manipulation;
(3) Position monitoring and reporting. Monitor markets on a routine
and nonroutine basis as necessary to prevent manipulation, price
distortion, and disruptions of the delivery or cash settlement process;
(4) Position limits. Adopt position limits on trading where
necessary and appropriate to lessen the threat of market manipulation
or congestion during delivery months;
(5) Emergency authority. Exercise authority to intervene to
maintain fair and orderly trading, including where applicable authority
to liquidate or transfer open positions, to require the suspension or
curtailment of trading, and to require the posting of additional
margin;
(6) Public information. Make information concerning the contract
terms and conditions and the trading mechanism, as well as other
relevant information, readily available to market authorities, users
and the public;
(7) Transparency. Provide, appropriate to the market, information
to the public regarding prices, bids and offers, including the opening
and closing prices and daily range, and information on volume and open
interest;
(8) Trading system. Provide a competitive, open, and efficient
market;
(9) Audit trail. Have procedures to ensure the recording of full
data entry and trade details sufficient to reconstruct trading, the
safe storage of such information and systems to enable information to
be used in assisting in detecting and deterring customer and market
abuse. Such procedures should ensure the quality of data captured;
(10) Financial standards. Have, monitor, and enforce rules
regarding the financial integrity of the transactions that have been
executed on the exchange and, where intermediaries are permitted, have
rules addressing the financial integrity of the intermediary and the
protection of customer funds as appropriate and a program to enforce
those requirements;
(11) Customer protection. Have, monitor and enforce rules for
customer protection;
(12) Dispute resolution. Provide for alternative dispute resolution
mechanisms appropriate to the nature of the market;
(13) Governance. Have fitness standards for members, for owners or
operators with greater than ten percent interest or an affiliate of
such an owner, members of the governing board, and those who make
disciplinary
[[Page 39004]]
determinations. The recognized futures exchange must have a means to
address conflicts of interest in making decisions and access to, and
use of, material non-public information by the foregoing persons and by
exchange employees. For mutually owned futures exchanges, the
composition of the governing board must reflect market participants;
(14) Recordkeeping. Keep full books and records of all activities
related to their business as a recognized futures exchange in a form
and manner acceptable to the CFTC for a period of five years, during
the first two of which the books and records are readily available, and
which shall be open to inspection by any representative of the CFTC or
the U.S. Department of Justice; and
(15) Competition. Avoid unreasonable restraints of trade or impose
any burden on competition not necessary or appropriate in furtherance
of the objectives of the Act or the regulations thereunder.
Sec. 38. 4 Procedures for recognition.
(a) Recognition by prior designation. A board of trade, facility or
entity that is designated under sections 4c, 5, 5a(a) or 6 of the Act
as a contract market on the effective date of this rule in at least one
commodity which is not dormant within the meaning of Sec. 5.2 of this
chapter is recognized by the Commission as a recognized futures
exchange and each of the contracts traded thereon that has been
designated by the Commission as a designated contract market in a
commodity may be labeled in the recognized futures exchange's rules as
listed for trading pursuant to Commission approval.
(b) Recognition by application. A board of trade, facility or
entity shall be recognized by the Commission as a recognized futures
exchange sixty days after receipt by the Commission of an application
for recognition unless notified otherwise during that period, if:
(1) The application demonstrates that the applicant satisfies the
conditions for recognition under this part;
(2) The submission is labeled as being submitted pursuant to this
part 38;
(3) The submission includes a copy of the applicant's rules and a
brief explanation of how the rules satisfy each of the conditions for
recognition under Sec. 38.3;
(4) The applicant does not amend or supplement the application for
recognition, except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period; and
(5) The applicant has not instructed the Commission in writing
during the review period to review the application pursuant to
procedures under section 6 of the Act.
(6) Appendix A to this part provides guidance to applicants on how
the conditions for recognition enumerated in Sec. 38.3 could be
satisfied.
(c) Termination of Part 38 review. During the sixty-day period for
review pursuant to paragraph (b) of this section, the Commission shall
notify the applicant seeking recognition that the Commission is
terminating review under this section and will review the proposal
under the procedures of section 6 of the Act, if it appears that the
application fails to meet the conditions for recognition under this
part. This termination notification will state the nature of the issues
raised and the specific condition of recognition that the application
appears to violate, is contrary to or fails to meet. Within ten days of
receipt of this termination notification, the applicant seeking
recognition may request that the Commission render a decision whether
to recognize the futures exchange or to institute a proceeding to
disapprove the proposed submission under procedures specified in
section 6 of the Act by notifying the Commission that the applicant
seeking recognition views its submission as complete and final as
submitted.
(d) Delegation of Authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Directors of the Division of Trading
and Markets and the Division of Economic Analysis or their delegatees,
with the concurrence of the General Counsel or the General Counsel's
delegatee, authority to notify the entity seeking recognition under
paragraph (b) of this section that review under those procedures is
being terminated.
(2) The Directors of the Division of Trading and Markets or the
Division of Economic Analysis may submit to the Commission for its
consideration any matter which has been delegated in this paragraph.
(3) Nothing in the paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (d)(1)
of this section.
(e) Request for Commission approval of rules and products. (1) An
entity seeking recognition as a recognized futures exchange may request
that the Commission approve any or all of its rules and subsequent
amendments thereto, including both operational rules and the terms or
conditions of products listed for trading on the exchange, at the time
of recognition or thereafter, under section 5a(a)(12) of the Act and
Secs. 1.41 and 5.3 of this chapter, as applicable. A product the terms
or conditions of which have been approved by the Commission may be
labeled in its rules as listed for trading pursuant to Commission
approval. In addition, rules of the recognized futures exchange not
submitted pursuant to Sec. 38.4(b)(3) shall be submitted to the
Commission pursuant to Sec. 1.41 of this chapter.
(2) An entity seeking recognition as a recognized futures exchange
may request that the Commission consider under the provisions of
section 15 of the Act any of the entity's rules or policies, including
both operational rules and the terms or conditions of products listed
for trading, at the time of recognition or thereafter.
(f) Request for withdrawal of application for recognition or
withdrawal of recognition. An entity may withdraw an application to be
a recognized futures exchange or once recognized, may withdraw from
Commission recognition by filing with the Commission at its Washington,
D.C. headquarters such a request. Withdrawal from recognition shall not
affect any action taken or to be taken by the Commission based upon
actions, activities or events occurring during the time that the
exchange was recognized by the Commission.
Sec. 38.5 Enforceability
(a) Notwithstanding the exemption in Sec. 38.2, sections 1a,
2(a)(1), 4, 4a, 4b, 4c, 4g, 4i, 4o, 5(6), 5(7), the rule disapproval
procedures of 5a(a)(12), 5b, 6(a), 6(b), 6(c), 6b, 6c, 8(a), 8(c),
8a(6), 8a(7), 8a(9), 8c(a), 8c(b), 8c(c), 8c(d), 9(a), 9(f), 20 and 22
of the Act and Secs. 1.3, 1.31, 1.37, 1.38, 1.41, 33.10, part 5, part
9, parts 15-21 and part 38 of this chapter continue to apply.
(b) For purposes of Section 22(a) of the Act, a party to a
contract, agreement, or transaction is exempt from a claim that the
contract, agreement or transaction is void, voidable, subject to
rescission or otherwise invalidated or rendered unenforceable as a
result of:
(1) A violation by the recognized futures exchange of the
provisions of this part 38; or
(2) Any Commission proceeding to disapprove a rule, term or
condition under section 5a(a)(12) of the Act, to alter or supplement a
rule, term or condition under section 8a(7) of the Act, to declare an
emergency under section 8a(9) of the Act, or any other proceeding the
effect of which is to disapprove, alter, supplement, or require a
recognized futures exchange to adopt a specific term or condition,
trading rule
[[Page 39005]]
or procedure, or to take or refrain from taking a specific action.
Sec. 38.6 Fraud in connection with Part 38 transactions.
It shall be unlawful for any person, directly or indirectly, in or
in connection with an offer to enter into, the entry into, the
confirmation of the execution of, or the maintenance of any transaction
entered pursuant to this part:
(a) To cheat or defraud or attempt to cheat or defraud any person;
(b) Willfully to make or cause to be made to any person any false
report or statement thereof or cause to be entered for any person any
false record thereof; or
(c) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
Appendix A to Part 38--Guidance for Applicants and Acceptable
Practices
This appendix provides guidance and acceptable practices for the
Core Principles found in Part 38. Guidance to applicants for
recognition as recognized futures exchanges under Sec. 38.3 is
offered under subsection (a) following a Core Principle. Addressing
the issues and questions set forth therein would help the Commission
in its consideration of whether the application has met the
conditions for recognition. To the extent that compliance with, or
satisfaction of, a core principle is not self-explanatory from the
face of the recognized futures exchange's rules or terms, the
application should include an explanation or other form of
documentation demonstrating that the applicant meets the conditions
for recognition. Acceptable practices meeting the requirements of
the Core Principles are set forth in subsection (b). Recognized
futures exchanges that follow specific practices outlined under
subsection (b) for any Core Principle below will meet the applicable
Core Principle. Except where otherwise provided, subsection (b) does
not state the exclusive means for satisfying a Core Principle.
Core Principle #1: Rule Enforcement: Monitor and enforce its rules
(a) Application Guidance.
(1) A recognized futures exchange should have arrangements and
resources for effective trade practice surveillance programs, with
the authority to collect information and documents on both a routine
and non-routine basis including the examination of books and records
kept by members/participants of the exchange. The arrangements and
resources should facilitate the direct supervision of the market and
the analysis of data collected.
(2) A recognized futures exchange should have arrangements,
resources and authority for effective rule enforcement. The
Commission believes that this should include the authority and
ability to discipline and limit or suspend a member's or
participant's activities as well as the authority and ability to
terminate a member's or participant's activities pursuant to clear
and fair standards.
(b) Acceptable Practices. An effective trade practice
surveillance program should include:
(1) Maintenance of data reflecting the details of each
transaction executed on an RFE;
(2) Electronic analysis of these data routinely to detect
potential trading violations;
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to its attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend a member's or participant's
activities pursuant to clear and fair standards. See, e.g., 17 CFR
Part 8.
Core Principle #2 Products: List contracts for trading which are
not readily susceptible to manipulation
(a) Application Guidance. Applicants should submit their initial
product for listing for Commission approval under Sec. 5.1 and Part
5, Appendix A of this chapter. Subsequent products may be listed for
trading by self-certification under Sec. 5.3 of this chapter.
(b) Acceptable Practices. Guideline No. 1, 17 CFR Part 5,
Appendix A may be used as guidance in meeting this Core Principle.
Core Principle #3: Position monitoring and reporting: Monitor
markets on a routine and nonroutine basis as necessary to prevent
manipulation, price distortion, and disruptions of the delivery or
cash settlement process
(a) Application Guidance. [Reserved].
(b) Acceptable Practices. (1) An acceptable program for
monitoring markets will generally involve the collection of various
market data, including information on traders' market activity.
Those data should be evaluated on an ongoing basis in order to make
an appropriate regulatory response to potential market disruptions
or abusive practices.
(2) The recognized futures exchange should collect data in order
to assess whether the market price is responding to the forces of
supply and demand. Appropriate data usually include various
fundamental data about the underlying commodity, its supply, its
demand, and its movement through marketing channels. Especially
important are data related to the size and ownership of deliverable
supplies--the existing supply and the future or potential supply,
and to the pricing of the deliverable commodity relative to the
futures price and relative to similar, but nondeliverable, kinds of
the commodity. For cash-settled markets, it is more appropriate to
pay attention to the availability and pricing of the commodity
making up the index to which the market will be settled, as well as
monitoring the continued suitability of the methodology for deriving
the index.
(3) To assess a traders' activity and potential power in a
market, at a minimum, every exchange should have routine access to
the positions and trading done by the members of its clearing
facility. Although clearing member data may be sufficient for some
exchanges, an effective surveillance program for exchanges with
substantial numbers of customers trading through intermediaries
should employ a much more comprehensive large-trader reporting
system (LTRS). The Commission operates an industry-wide LTRS. As an
alternative to having its own LTRS or contracting out for such a
system, exchanges may find it more efficient to use information
available from the Commission's LTRS data for position monitoring.
Core Principle #4: Position Limits: Adopt position limits on
trading where necessary and appropriate to lessen the threat of
market manipulation or congestion during delivery months
(a) Application Guidance. [Reserved].
(b) Acceptable Practices. (1) In order to diminish potential
problems arising from excessively large speculative positions, the
Commission sets limits on traders' positions for certain
commodities. These position limits specifically exempt bona fide
hedging, permit other exemptions, and set limits differently by
markets, by futures or delivery months, or by time periods. For
purposes of evaluating an exchange speculative-limit program, the
Commission considers the specified limit levels, aggregation
policies, types of exemptions allowed, methods for monitoring
compliance with the specified levels, and procedures for enforcement
to deal with violations.
(2) In general, position limits are not necessary for markets
where the threat of excessive speculation or manipulation is very
low. Thus, exchanges do not need to set position-limit levels for
futures markets in major foreign currencies and in certain financial
futures having very liquid and deep underlying cash markets. Where
speculative limits are appropriate, acceptable speculative-limit
levels typically are set in terms of a trader's combined position in
the futures contract plus its position in the option contract (on a
delta-adjusted basis).
(3) Spot-month levels for physical-delivery markets should be
based upon an analysis of deliverable supplies and the history of
spot-month liquidations. Spot-month limits for physical-delivery
markets are appropriately set at no more than 25 percent of the
estimated deliverable supply. For cash-settled markets, spot-month
position limits may be necessary if the underlying cash market is
small or illiquid such that traders can disrupt the cash market or
otherwise influence the cash-settlement price to profit on a futures
position. In these cases, the limit should be set at a level that
minimizes the potential for manipulation or distortion of the
futures contract's or the underlying commodity's price. Markets may
elect not to provide all-months-combined and non-spot month limits.
(4) An exchange may provide for position accountability
provisions in lieu of position limits for contracts on financial
instruments, intangible commodities, or certain tangible
commodities. Markets appropriate for
[[Page 39006]]
position accountability rules include those with large open-
interest, high daily trading volumes and liquid cash markets.
(5) Exchanges must have aggregation rules that apply to those
accounts under common control, those with common ownership, i.e.,
where there is a 10 percent or greater financial interest, and those
traded according to an expressed or implied agreement. Exchanges
will be permitted to set more stringent aggregation policies. For
example, one major exchange adopted a policy of automatically
aggregating members of the same household, unless they were granted
a specific waiver. Exchanges may grant exemptions to their position
limits for bona fide hedging (as defined in Commission Rule 1.3(z))
and may grant exemptions for reduced risk positions, such as
spreads, straddles and arbitrage positions.
(6) Exchanges must establish a program for effective monitoring
and enforcement of these limits. One acceptable enforcement
mechanism is a program whereby traders apply for these exemptions by
the exchange and are granted a position level higher than the
applicable speculative limit. The position levels granted under
hedge exemptions are based upon the trader's commercial activity in
related markets. Exchanges may allow a brief grace period where a
qualifying trader may exceed speculative limits or an existing
exemption level pending the submission and approval of appropriate
justification. An exchange should consider whether it wants to
restrict exemptions during the last several days of trading in a
delivery month. Acceptable procedures for obtaining and granting
exemptions include a requirement that the exchange approve a
specific maximum higher level.
(7) Exchanges with many markets with large numbers of traders
should have an automated means of detecting traders' violations of
speculative limits or exemptions. Exchanges should monitor the
continuing appropriateness of approved exemptions by periodically
reviewing each trader's basis for exemption or requiring a
reapplication.
(8) Finally, an acceptable speculative limit program must have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The exchange policy will
need to consider appropriate actions where the violation is by a
non-member and should address traders carrying accounts through more
than one intermediary.
(9) A violation of exchange position limits that have been
approved by the Commission is also a violation of section 4a(e) of
the Act.
Core Principle #5: Emergency Authority: Exercise authority to
intervene to maintain fair and orderly trading markets including
where applicable authority to liquidate or transfer open positions,
to require the suspension or curtailment of trading, and to require
the posting of additional margin
(a) Application Guidance. [Reserved].
(b) Acceptable Practices. A recognized futures exchange should
have clear procedures and guidelines for exchange decision-making
regarding emergency intervention in the market. An exchange should
also have the authority to intervene as necessary to maintain
markets with fair and orderly trading as well as procedures for
carrying out the intervention. As is necessary to address perceived
market threats, the exchange, among other things, should be able to
impose position limits in particular in the delivery month, impose
or modify price limits, modify circuit breakers, call for additional
margin either from customers or clearing members, order the
liquidation or transfer of open positions, order the fixing of a
settlement price, order the reduction in positions, extend or
shorten the expiration date or the trading hours, suspend or curtail
trading on the market, order the transfer of customer contracts and
the margin for such contracts from one member of the exchange to
another or alter the delivery terms or conditions. The Commission
believes that a recognized futures exchange should also have
procedures and guidelines for the notification of the Commission of
the exercise of regulatory emergency authority as well as procedures
and guidelines for documentation of the exchange's decision-making
process and the reasons for use of its emergency action authority.
Core Principle #6: Public Information: Make information concerning
the contract terms and conditions and the trading mechanism, as
well as other relevant information, readily available to market
authorities, users and the public
(a) Application Guidance. A recognized futures exchange should
have arrangements and resources for the disclosure of contract terms
and conditions and trading mechanisms to the Commission, users and
the public. Procedures should also include the provision of
information on listing new products, rule amendments or other
changes to previously disclosed information to the Commission, users
and the public.
(b) Acceptable Practices. [Reserved].
Core Principle #7: Transparency. Provide, appropriate to the
market, information to the public regarding prices, bids and
offers, including the opening and closing prices and daily range,
and information on volume and open interest
(a) Application Guidance. [Reserved].
(b) Acceptable Practices. [Reserved].
Core Principle #8: Trading system: Provide, a competitive, open,
and efficient market
(a) Application Guidance. (1) Appropriate objective testing and
review of any automated systems should occur initially and
periodically to ensure proper system functioning, adequate capacity
and security. A recognized futures exchange's analysis of its
automated system should address appropriate principles for the
oversight of automated systems, ensuring proper system function,
adequate capacity and security. The Commission believes that the
guidelines issued by the International Organization of Securities
Commissions (``IOSCO'') in 1990 (which have been referred to as the
``Principles for Screen-Based Trading Systems''), subsequently
adopted by the Commission on November 21, 1990 (55 FR 48670), are
appropriate guidelines for a recognized futures exchange to apply to
electronic trading systems. Any program of objective testing and
review of the system should be performed by an independent third
party. A professional that is a certified member of the
Informational Systems Audit and Control Association experienced in
the industry would be an acceptable party to carry out such testing
and review. The Commission believes that information gathered by
analysis, oversight or any program of objective testing and review
of any automated systems regarding system functioning, capacity and
security should be made available to the Commission and the public.
(2) A recognized futures exchange that determines to allow block
trading should have rules which:
(i) Define the block based upon the customary size of large
positions in the cash and derivatives market,
(ii) Restrict access to block trading to eligible participants,
(iii) Provide a mechanism for ensuring that the block's price
will be fair and reasonable, and
(iv) provide for transparency of the trade by requiring that it
be reported for clearing within a reasonable period of time and that
it be identified separately in the price reporting system.
(b) Acceptable Practices. [Reserved].
Core Principle #9: Audit trail: Have in place procedures to ensure
the recording of full data entry and trade details sufficient to
reconstruct trading, the safe storage of such information and
systems to enable information to be used in assisting in combating
customer and market abuse. Such procedures should ensure the
quality of data captured
(a) Application Guidance. A recognized futures exchange should
have arrangements and resources for recording of full data entry and
trade details sufficient to reconstruct trading and the safe storage
of audit trail data systems enabling information to be used in
combating customer and market abuse.
(b) Acceptable Practices. (1) The goal of an audit trail is to
detect and deter customer and market abuse. An effective exchange
audit trail should capture and retain sufficient trade-related
information to permit exchange staff to detect trading abuses and to
reconstruct all transactions. An audit trail should include
specialized electronic surveillance programs that would identify
potentially abusive trades and trade patterns, including for
instance, withholding or disclosing customer orders, trading ahead,
and preferential allocation. An acceptable audit trail must be able
to track a customer order from time of receipt through fill
allocation. The exchange must create and maintain an electronic
transaction history database that contains information with respect
to transactions affected on the recognized futures exchange.
(2) An acceptable audit trail, therefore, should include the
following: Original source documents, transaction history,
electronic analysis capability, and safe storage capability. A
registered futures exchange whose audit trail satisfies the
following acceptable practices would satisfy Core Principle 9.
[[Page 39007]]
(i) Original Source Documents. Original source documents include
unalterable, sequentially identified records on which trade
execution information is originally recorded, whether recorded
manually or electronically. For each customer order, such records
reflect the terms of the order, an account identifier that relates
back to the account(s) owner(s), and the time of order entry. For
floor-based exchanges, the time of report of execution of the order
should also be captured.
(ii) Transaction History. A transaction history which consists
of an electronic history of each transaction, including:
(A) All data that are input into the trade entry or matching
system for the transaction to match and clear;
(B) Whether the trade was for a customer or proprietary account;
(C) Timing and sequencing data adequate to reconstruct trading;
and
(D) The identification of each account to which fills are
allocated.
(iii) Electronic Analysis Capability. An electronic analysis
capability that permits sorting and presenting data included in the
transaction history so as to reconstruct trading and to identify
possible trading violations with respect to both customer and market
abuse.
(iv) Safe Storage Capability. Safe storage capability provides
for a method of storing the data included in the transaction history
in a manner that protects the data from unauthorized alteration, as
well as from accidental erasure or other loss. Data should be
retained in accordance with the recordkeeping standards of Core
Principle 14.
Core Principle #10: Financial standards: Have, monitor, and enforce
rules regarding the financial integrity of the transactions that
have been executed on the exchange and, where intermediaries are
permitted, have rules addressing the financial integrity of the
intermediary and the protection of customer funds as appropriate
and a program to enforce those requirements
(a) Application Guidance. Clearing of transactions executed on a
recognized futures exchange should be provided through a Commission
recognized clearing facility. In addition, a recognized futures
exchange should maintain the financial integrity of its transactions
by maintaining minimum financial standards and having default rules
and procedures. The minimum financial standards should be monitored
for compliance purposes. The Commission believes that in order to
monitor for minimum financial requirements, a recognized futures
exchange should routinely receive financial and related information.
Rules addressing the protection of customer funds should address the
segregation of customer and proprietary funds, the custody of
customer funds and the investment standards for customer funds.
(b) Acceptable Practices. [Reserved]
Core Principle #11: Customer protection: Have, monitor and enforce
rules for customer protection
(a) Application Guidance. A recognized futures exchange should
have rules prohibiting conduct by intermediaries that is fraudulent,
noncompetitive, unfair, or an abusive practice in connection with
the execution of trades and a program to detect and discipline such
behavior. Intermediated markets are not required to have, monitor or
enforce rules requiring intermediaries to provide risk disclosure or
to comply with other sales practices.
(b) Acceptable Practices. [Reserved]
Core Principle #12: Dispute resolution: Provide for alternative
dispute resolution mechanisms appropriate to the nature of the
market
(a) Application Guidance. A recognized futures exchange should
provide customer dispute resolution procedures that are fair and
equitable and that are made available to the customer on a voluntary
basis, either directly or through another self-regulatory
organization.
(b) Acceptable Practices. (1) Core Principle #12 requires a
recognized futures exchange to provide for dispute resolution
mechanisms that are appropriate to the nature of the market.
(2) In order to satisfy acceptable standards, a recognized
futures exchange should provide a customer dispute resolution
mechanism that is fundamentally fair and is equitable. The procedure
should provide:
(i) The customer with an opportunity to have his or her claim
decided by a decision-maker that is objective and impartial,
(ii) Each party with the right to be represented by counsel, at
the party's own expense,
(iii) Each party with adequate notice of claims presented
against him or her, an opportunity to be heard on all claims,
defenses and permitted counterclaims, and an opportunity for a
prompt hearing,
(iv) For prompt written final settlement awards that are not
subject to appeal within the exchange, and
(v) Notice to the parties of the fees and costs which may be
assessed.
(3) The procedure employed also must be voluntary, as provided
in Sec. 166.5 of this part. If the recognized futures exchange also
provides a procedure for the resolution of disputes which do not
involve customers (i.e., member-to-member disputes), the procedure
for the resolution of such disputes must be independent of and shall
not interfere with or delay the resolution of customers' claims or
grievances.
(4) A counterclaim which arises out of a transaction or
occurrence that is the subject of a customer's claim or grievance
and which does not require for adjudication the presence of
essential witnesses, parties or third persons over whom the
recognized futures exchanges does not have jurisdiction could be
allowed under the recognized futures exchange's dispute resolution
procedures. Other counterclaims should be permissible only if the
customer agreed to the submission after the counterclaim had arisen,
and if the aggregate monetary value of the counterclaim was capable
of calculation.
(5) A recognized futures exchange may delegate to another self-
regulatory organization or to a registered futures association its
responsibility to provide for customer dispute resolution
mechanisms, Provided, however, that, if the recognized futures
exchange does so delegate that responsibility, the exchange shall in
all respects treat any decision issued by such other organization or
association as if the decision were its own including providing for
the appropriate enforcement of any award issued against a delinquent
member.
Core Principle #13: Governance: Have fitness standards for members,
for owners or operators with greater than 10 percent interest or an
affiliate of such an owner, members of the governing board, and
those who make disciplinary determinations. The recognized futures
exchange must have a means to address conflicts of interest in
making decisions and access to, and use of, material non-public
information by the foregoing persons and by exchange employees. For
mutually owned futures exchanges, the composition of the governing
board must reflect market participants
(a) Application Guidance. A recognized futures exchange should
have appropriate eligibility criteria for the categories of persons
set forth in the Core Principle which should include standards for
fitness and for the collection and verification of information
supporting compliance with such standards. The standards could be
based on the disqualification standards under section 8a(2) of the
Act. The Commission believes that such standards should include the
provision to the Commission of registration information for such
persons, whether registration information, certification to the
fitness of such persons, an affidavit of such persons' fitness by
the facility's counsel or other information substantiating the
fitness of such persons. If an exchange provided certification of
the fitness of such a person, the Commission believes that such
certification should be based on verified information that the
person is fit to be in their position. The means to address
conflicts of interest in decision-making should include methods to
ascertain the presence of conflicts of interest and to make
decisions in the event of such a conflict. In addressing the access
to, and use of, material non-public information, the Commission
believes that the recognized futures exchange should provide for
limitations on exchange employee trading.
(b) Acceptable Practices. [Reserved]
Core Principle #14: Recordkeeping: Must keep full books and records
of all activities related to their business as a recognized futures
exchange in a form and manner acceptable to the Commission for a
period of five years, during the first two of which the books and
records are readily available, and which shall be open to
inspection by any representative of the Commission or the United
States Department of Justice
(a) Application Guidance. [Reserved]
(b) Acceptable Practices. Commission rule 1.31 constitutes the
acceptable practice regarding the form and manner for keeping
records.
[[Page 39008]]
Core Principle #15: Competition: Recognized futures exchanges
should avoid unreasonable restraints of trade or impose any burden
on competition not necessary or appropriate in furtherance of the
objectives of the Act or the regulations thereunder
(a) Application Guidance. A recognized futures exchange should
avoid unreasonable restraints of trade in any terms and conditions
of access or provision of services or any non-compete clauses or
limitations on future activity.
(b) Acceptable Practices. [Reserved]
PART 100--[REMOVED AND RESERVED]
12. Part 100 is proposed to be removed and reserved.
PART 170--REGISTERED FUTURES ASSOCIATIONS
13. The authority citation for Part 170 continues to read as
follows:
Authority: 7 U.S.C. 6p, 12a, and 21.
14. Section 170.8 is proposed to be revised to read as follows:
Sec. 170.8 Settlement of customer disputes (section 17(b)(10) of the
Act).
A futures association must be able to demonstrate its capacity to
promulgate rules and to conduct proceedings which provide a fair,
equitable and expeditious procedure, through arbitration or otherwise,
for the voluntary settlement of a customer's claim or grievance brought
against any member of the association or any employee of a member of
the association. Such rules shall conform to and be consistent with
section 17(b)(10) of the Act and be consistent with the guidelines and
acceptable practices for dispute resolution found within Appendix A and
Appendix B to Part 38 of this chapter.
PART 180--ARBITRATION OR OTHER DISPUTE SETTLEMENT PROCEDURES
[REMOVED]
15. Part 180 is proposed to be removed.
Issued in Washington, DC, this 8th day of June, 2000, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-14914 Filed 6-21-00; 8:45 am]
BILLING CODE 6351-01-P
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