[Federal Register: March 9, 2001 (Volume 66, Number 47)]
[Proposed Rules]
[Page 14261-14289]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09mr01-17]
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Part III
Commodity Futures Trading Commission
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17 CFR Parts 1, et al.
A New Regulatory Framework for Trading Facilities, Intermediaries and
Clearing Organizations; Proposed Rule
[[Page 14262]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 5, 15, 36, 37, 38, 40, 41, 100, 166, 170 and 180
RIN 3038-AB63
A New Regulatory Framework for Trading Facilities, Intermediaries
and Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing rules to implement the Commodity Futures Modernization Act
of 2000 and the Commission's new regulatory framework. These proposed
rules apply to trading facilities. The proposed rules implement the new
statutory framework establishing three new market categories, including
exempt markets and two categories of markets subject to Commission
regulatory oversight--designated contract markets and registered
derivatives transaction execution facilities. These proposed rules
implement statutory changes that profoundly alter federal regulation of
commodity futures and option markets. Nothing in these rules, however,
diminishes the Commission's responsibility for overseeing and enforcing
compliance by self-regulatory organizations, Commission registrants and
market participants with the provisions of the Commodity Exchange Act.
The remaining parts of the framework relating to clearing
organizations and to intermediaries will be reproposed shortly.
DATES: Comments must be received by April 9, 2001.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521 or, by e-mail to
[email protected]. Reference should be made to ``Regulatory
Reinvention.''
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis; Alan L. Seifert, Deputy Director,
Division of Trading and Markets; Lawrence B. Patent, Associate Chief
Counsel, Division of Trading and Markets; or Riva Spears Adriance,
Special Counsel, Division of Trading and Markets, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. Telephone: (202) 418-5260. E-mail:
([email protected]), ([email protected]), ([email protected]) or
([email protected]).
SUPPLEMENTARY INFORMATION:
I. Background
The Commission on June 22, 2000, proposed (65 FR 38986) and on
December 13, 2000, issued (65 FR 77962) final rules promulgating a new
regulatory framework to apply to multilateral transaction execution
facilities that trade contracts for sale of a commodity for future
delivery or commodity options. The final rules were to become effective
on February 12, 2001. However, Congress on December 15, 2000, passed,
and the President on December 21, 2000, signed into law, the Commodity
Futures Modernization Act of 2000 (CFMA),\1\ which substantially
amended the Commodity Exchange Act, 7 U.S.C. 1 et seq. (Act). The
Commission on December 28, 2000, withdrew most of the final rules in
order to determine their consistency with the Act as amended. 65 FR
82272.
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\1\ See Commodity Futures Modernization Act of 2000, Appendix E,
Pub. L. No. 106-554, 114 Stat. 2763 (2000).
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The Commission's new regulatory framework was intended to ``promote
innovation, maintain U.S. competitiveness, and at the same time reduce
systemic risk and protect customers,'' 65 FR 38986, and to provide U.S.
futures exchanges greater flexibility with which to respond to the
competitive challenges brought about by new technologies.\2\
Specifically, the framework replaced ``one-size-fits-all'' regulation
for futures markets with broad, flexible ``core principles,'' and
established three regulatory tiers for markets.
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\2\ The President's Working Group on Financial Markets (PWG) and
the chairmen of the Commission's congressional oversight committees
encouraged the Commission to consider proposing such major revisions
to the regulatory framework. 65 FR at 38987. Recognizing the
importance of the OTC derivatives markets, the chairmen of the
Senate and House Agriculture Committees asked the PWG to conduct a
study of OTC derivatives markets. After studying OTC derivatives,
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.
Subsequently, 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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In general, the framework provided a lower level of regulatory
oversight where access to an exchange or facility would have been
restricted to eligible participants or commercial participants or where
the nature of the underlying commodity would have posed a relatively
low susceptibility to manipulation. This reflects the reduced need to
monitor closely such markets. The Commission also provided that markets
serving a price discovery function, irrespective of the product traded
or market participants, offer a degree of price transparency. The
framework therefore balanced 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.
II. The Statutory Scheme
The Act, as amended by the CFMA, establishes two tiers of regulated
markets, designated contract markets (contract markets) and registered
derivatives transaction execution facilities (DTFs). In addition, the
Act, as amended, provides for two markets exempt from regulation,
exempt boards of trade and, under section 2(h)(3) of the Act, as
amended, exempt commercial markets.
The CFMA, in both its broad contours and in many of its specific
provisions, codifies the Commission's regulatory framework without
significant change. It varies from the rules withdrawn by the
Commission in a number of its details and renders unnecessary a number
of Commission rules by enacting their provisions into statute. The
Commission therefore is reproposing rules conforming to and
implementing the amended statutory scheme.
III. The Proposed Rules
A. Designated Contract Markets
Proposed part 38 governs designated contract markets. Under the Act
as amended, ``designated contract markets'' are those approved boards
of trade or trading facilities on which contracts for future delivery
on any commodity may be traded by any type
[[Page 14263]]
of market participant.\3\ Proposed rule 38.2 exempts designated
contract markets operating under this part from all other Commission
rules not specifically reserved.\4\
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\3\ Prior to its recent amendment, the Act referred to
``designated contract markets'' as the Commission-approved products
traded on a board of trade. Commission rules were consistent with
that usage. The Act, as amended, however, uses the term ``designated
contract market'' to refer to the approved or licensed market on
which futures contracts and commodity options are traded. Part 38
refers to ``designated contract markets'' in this sense. The meaning
of ``designated contract market'' in all other Commission rules must
be inferred from the context.
\4\ In addition, the Commission is proposing to delete a number
of rules herein. With respect to those rules not reserved or
deleted, the Commission intends to review its rulebook in its
entirety and to remove all rules that have been superseded or that
are otherwise no longer in force following completion of all of the
rulemakings necessary to implement the CFMA.
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Proposed rule 38.3 establishes the application and approval
procedure for designation of new contract markets.\5\ As proposed,
applicants meeting the criteria will be deemed to be designated by the
Commission 60 days after receipt of the application.\6\ The proposed
procedure permits the Commission to designate a contract market upon
conditions. Applications must demonstrate that the contract market
satisfies the criteria for designation under section 5(b) of the Act
and the core principles for operation under section 5(d) of the Act.
The application also must include a copy of the contract market's rules
and, to the extent that compliance with the conditions for designation
is not self-evident, a brief explanation of how the conditions for
designation are satisfied. As provided under the Commission's current
fast-track review rules, the applicant may not make substantive
amendments to the application during the 60-day review period unless
requested to do so by the Commission. Amended applications would be
treated as being filed anew for purposes of fast-track review.
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\5\ Section 5(c) of the Act, as amended, provides that existing
boards of trade designated as a contract market are considered to be
designated contract markets under the Act as amended.
\6\ This 60-day review period is one-third of the 180-day review
period permitted by the Act. See 7 U.S.C. 8(a).
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As proposed, the Commission may terminate the 60-day fast-track
review if it appears during that period that the application violates
or appears to violate, or if there is insufficient information to
determine whether it would violate, the Act or Commission rules. The
Commission, after terminating a fast-track review, will continue to
review the application under the deadlines of section 6 of the Act.
Alternatively, within ten days of receiving a termination notification,
the applicant may seek to have the Commission determine whether or not
to institute a proceeding to deny a proposed designation application
under section 6 of the Act.
Section 5 of the Act, as amended, requires that an applicant meet a
number of designation requirements. Under the proposed rules, an
applicant must also demonstrate its ability to comply with core
regulatory principles. The Commission has proposed rules giving notice
of how it will interpret the meaning of several of the statutory
requirements.\7\ In addition, the Commission has provided an appendix
containing general guidance regarding application criteria and guidance
with regard to acceptable practices for meeting the core principles.\8\
As the Commission previously noted, the guidance establishes non-
exclusive safe harbors. It does not establish a mandatory means of
compliance with the core principles.
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\7\ In particular, in proposed rule 38.3(b)(1) the Commission
notes that the statutory designation requirement relating to
preventing market manipulation includes the requirement that
designated contract markets have a dedicated regulatory department
or delegate that function. Proposed rule 38.3(b)(2) provides that
the designation requirement relating to fair and equitable trading
rules includes fair and timely availability to market participants
of information regarding prices, bids and offers. This requirement
may be satisfied by making such information available to traders
through commercial vendors.
In addition, proposed rule 38.3(b)(3) makes clear that a trading
facility applying for designation may satisfy the requirement that
it have disciplinary procedures with respect to non-members by
having the capacity to sanction non-member violations by expelling
them or by denying them future access. The proposed guidance with
respect to acceptable practices for core principles applicable to
contract markets and DTFs has similar provisions.
\8\ Separate from the Appendix providing guidance on compliance
with the core principles, proposed rule 38.3(b)(4) clarifies that
the core principle on fitness standards, in the context of
proprietary, rather than mutually-owned exchanges, applies to
natural persons with greater than a ten percent ownership interest
in the facility or in its owners. Moreover, fitness requirements
that apply to members are required by the Act. However, the
Commission, in providing guidance with regard to this requirement,
has made clear that some types of members, such as those who do not
have voting rights or exercise disciplinary or governing
responsibilities, meet the fitness requirements by meeting the
applicable requirements for market access or participation.
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Section 5c of the Act permits designated contract markets to
request that the Commission provide ``prior'' approval of the
facility's rules and products. Proposed rule 38.4, pursuant to the
Commission's exemptive authority under section 4(c) of the Act,
provides designated contract markets the additional flexibility to
request such approval at any time. Contract markets, for competitive
reasons, may wish to choose to list a new product for trading by
certification and subsequently to request Commission approval. The
Commission believes that, in light of the increased competitiveness of
these markets, such procedural flexibility is in the public interest.
Based on the Commission's prior administrative experience, it has
simplified and streamlined the review procedures. Under these
procedures, qualifying contract market rules that are voluntarily
submitted for review would be eligible for review and approval in 45
days, half the time permitted under the Act.\9\
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\9\ As noted above, prior to adoption of the CFMA, a board of
trade or trading facility was required to be designated as a
contract market in each specific contract traded thereon. As amended
by the CFMA, however, the trading facility itself and not each
contract is required to be designated as a contract market and
contracts may be listed for trading pursuant to exchange
certification. The facility also may request that the Commission
review and approve new products.
Proposed rule 38.4(a) provides that any contract that has been
submitted for Commission review and approved by the Commission may
be labeled in the facility's rules as ``Listed for trading pursuant
to Commission approval.'' Contracts that were designated by the
Commission as contract markets prior to December 21, 2000, may be
labeled as approved by the Commission. Contracts listed for trading
by exchange certification under the procedures then in effect under
rule 5.3 are not eligible to be so labeled.
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The Commission further proposes to exercise its section 4(c)
exemptive authority to make less burdensome the statutory certification
provision regarding contract market rules. Section 5c of the Act
requires contract markets to certify that each and every rule or rule
change does not violate the Act and Commission rules. However, based
upon its experience administering the Act prior to its recent
amendment, the Commission is of the view that many rules need not be so
certified. Indeed, under prior practice, contract markets were required
only to provide notice to the Commission when amending certain types of
administrative rules, and in some instances, no notice was required. In
light of the past successful conduct of its oversight duties without
the submission of every rule change, the Commission believes that it is
in the public interest to exempt contract markets from the requirement
that they certify all rules. The Commission also believes that this
additional flexibility is consistent with the overall intent and
structure of the recent amendments to the Act.
As proposed, the Commission would permit contract markets simply to
notify the Commission on a weekly basis of amendments to some types of
rules, and would not require a certification or
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notification of changes to rules that relate solely to administrative
or ministerial matters. Nevertheless, each contract market is required
to have available a full and accurate record of the procedural history
of each of its rules.
Proposed rule 38.5 provides for information requests to contract
markets regarding compliance with the conditions for designation. These
requests may be made for any oversight purpose.\10\ In this regard, for
example, the Commission may request designated contract markets to
provide information relating to their operations or their practices in
connection with their compliance with particular core principles or
other conditions of their designation or in connection with the
Commission's formulation of statements of acceptable practice and its
general oversight responsibilities under the Act.
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\10\ Section 5c(d) of the Act provides a mechanism for notifying
contract markets (and other registered entities) that they are
violating a core principle. The request for a demonstration of
compliance operates independently of the section 5c(d) procedure.
Indeed, the request for such a demonstration from a registered
entity, and the Commission's consideration of the entity's response
may constitute a useful alternative to the more formal procedures of
section 5c(d) of the Act. It would be the Commission's intent to
explore such informal methods of resolving issues of compliance with
core principles by registered entities prior to invoking more formal
mechanisms.
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Proposed rule 38.6 makes clear that a violation of these part 38
rules is not intended to and does not constitute a basis for voiding an
agreement, contract, or transaction that has been duly entered into.
Under rule 38.6, a Commission proceeding to alter or supplement a rule,
term, or condition of a contract for trading on the facility under
section 8a(7) of the Act, to declare an emergency under section 8a(9),
or to take any other action to require a designated contract market to
take or refrain from taking specific action would not constitute
grounds for rescinding contracts. This provision does not change
applicable law and merely restates the existing understanding of the
effect of such a Commission action on contracts entered into already.
B. Derivatives Transaction Execution Facilities
Proposed part 37 implements section 5a of the Act, as amended.
Section 5a of the Act provides for registration by the Commission of a
board of trade or trading facility under an intermediate level of
regulation as a DTF. This new category of market is available to
eligible traders for futures and option contracts on commodities that
have a nearly inexhaustible deliverable supply; are highly unlikely to
be susceptible to the threat of manipulation; have no cash market;
security futures products; or futures and option contracts on
commodities that the Commission may determine, on a case-by-case basis,
are highly unlikely to be susceptible to the threat of manipulation. In
addition, except as provided in section 5(e)(2) of the Act, eligible
commercial entities trading for their own account may do so on a DTF
with respect to futures and option contracts on commodities other than
those enumerated in section 1a(4) of the Act. Furthermore, a board of
trade operating as a DTF may trade on the facility agreements,
contracts, or transactions involving commodities excluded or exempt
pursuant to sections 2(c), 2(d), 2(g), or 2(h) as provided by section
5a(g) of the Act, subject to the Commission's exclusive jurisdiction.
Proposed rule 37.2 exempts DTFs from all Commission regulations
applicable to a trading facility that are not reserved. It also makes
clear that the reserved regulations apply as though DTFs were
specifically referenced therein.
Proposed rule 37.3 identifies the commodities eligible to be traded
on a DTF under section 5a of the Act. Specifically, proposed rule 37.3
identifies those commodities that qualify under the requirements of
section 5a(b)(2)(A) through (C) of the Act \11\ as those commodities
defined as an ``excluded commodity'' in section 1a(13) of the Act.\12\
Excluded commodities under section 1a(13) of the Act include exempt
securities. Unlike the provisions governing exempt boards of trade, the
CFMA imposes no specific limitations or requirements for exempt
securities to trade on a DTF. The Commission is requesting comment on
whether additional regulatory requirements, such as large trader
reporting, should be imposed as a condition for such trading on a DTF.
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\11\ Section 5a(b)(2)(A) through (C) of the Act as amended
provides that a registered derivatives transaction execution
facility may trade any contract of sale of a commodity for future
delivery (or option on such a contract) only if--
``(A) the underlying commodity has a nearly inexhaustible
deliverable supply;
(B) the underlying commodity has a deliverable supply that is
sufficiently large that the contract is highly unlikely to be
susceptible to the threat of manipulation; [or]
(C) the underlying commodity has no cash market[.]''
\12\ Section 1a(13) of the Act as amended defines an ``excluded
commodity'' to mean among other things an interest rate, exchange
rate, currency, credit risk or measure, debt instrument, measure of
inflation, or other macroeconomic index or measure.
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Proposed rule 37.3 also establishes a procedure whereby a specific
DTF would be able to make a showing under section 5a(b)(2)(E) of the
Act that a contract is highly unlikely to be susceptible to the threat
of manipulation and should be eligible for trading on that DTF in light
of the characteristics of the commodity and the market's surveillance
history, including its self-regulatory record, capacity and
undertakings. Proposed rule 37.3(a)(3)(ii)(B) lists those factors that
are relevant in making such a showing. The rule does not require that
the written demonstration include explanations of information that is
self-evident. Agricultural commodities that are not enumerated in the
Act, such as soft, world commodities, may trade on a DTF upon
successfully making such a demonstration, or under section 5a(b)(2)(F)
of the Act, by limiting trading access to eligible commercial
entities.\13\
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\13\ The Commission, pursuant to section 1a(11)(C) of the Act,
has proposed to include within the definition of eligible commercial
entity floor traders or floor brokers whose trading obligations are
guaranteed by a futures commission merchant, trading for their own
account. This is consistent with the Commission's withdrawn rules
and with Congress' inclusion in the statutory definition (under
section 1a(11)(B)) of certain other specified liquidity providers.
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Consistent with section 5(e)(2) of the Act, as amended, the
Commission will determine in a future rulemaking whether those
agricultural commodities that are enumerated in the Act should be
eligible for trading on a DTF and, if so, the appropriate conditions
for such trading. The Commission has reserved a paragraph in rule 37.3
for this purpose.
Proposed part 37 includes a number of procedural provisions to
provide greater administrative flexibility in the registration and
oversight of DTFs. For example, proposed rule 37.5(b) permits the
Commission to register a DTF upon conditions. This would enable the
Commission to register a facility conditioned upon its subsequent
compliance with a particular condition for registration. In addition,
the Commission is proposing a fast-track review procedure for
applications for registration that are not amended while under review.
Such applicants would be deemed to be registered 30 days after
receipt.\14\
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\14\ Again, the proposed rule provides for a review period that
is substantially less than that permitted by the statute. See 7
U.S.C. 8(a).
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Section 5a(c)(1) of the Act provides that applicants for DTF
registration shall be required to demonstrate only that they comply
with the requirements for trading specified in section 5a(b) and the
criteria for registration specified in
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section 5a(c).\15\ However, to maintain registration, DTFs must be in
compliance with the core principles of section 5a(d) of the Act.
Accordingly, the Commission is proposing that an applicant for DTF
registration may, if it chooses, become registered without
demonstrating its capacity to comply with the core principles for
trading. A new DTF that chooses not to make such a demonstration,
however, must certify to the Commission that it has the capacity to,
and upon commencing operations will, operate in compliance with the
core principles. This certification may be made separately or as part
of the initial application.
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\15\ Existing contract markets need not make such a
demonstration. As proposed, they must simply notify the Commission
of their intent to operate as a DTF, and file with the Commission
the DTF's rules and a certification that they meet all of the
requirements for registration as a DTF.
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As with the rules regarding contract markets, the Commission is
proposing in an appendix general guidance regarding applications and
acceptable practices for core principles. The proposed acceptable
practices are not mandatory in nature, but rather provide a non-
exclusive safe-harbor for compliance. Proposed rule 37.6(d) interprets
application of certain of the core principles in the circumstances
specified in the rule. For example, the Commission proposes that an
electronic platform that is accessible for trading only by eligible
commercial entities and that trades only tailored products may satisfy
the requirement to monitor trading in a manner ``appropriate to the
market'' by assuring compliance with its rules regarding access
limitations.
In addition, the Commission is proposing in rule 37.1(b) to include
within the definition of ``eligible commercial entity'' a registered
floor broker or floor trader, trading for its own account, whose
trading obligations are guaranteed by a futures commission merchant.
This is consistent both with the Commission's withdrawn rules and with
the CFMA's inclusion of certain types of liquidity providers within the
statutory definition of ``eligible commercial entity.'' In this regard,
it has been suggested that electronic markets may have functional
counterparts to floor brokers and floor traders, and that these persons
should also be included within the definition of eligible commercial
entity. The Commission is requesting comment on how and by whom this
market making function may be performed on electronic trading
facilities, the similarities and differences in this market making
function and its regulation when performed on an electronic platform
rather than in a physical trading environment, and whether such persons
should be included within the definition of eligible commercial entity.
The Commission has proposed to interpret the core principle
regarding disclosure of information relevant to market participants as
including the principle of providing market participants information
regarding prices, bids and offers on a fair, equitable and timely
basis. Such transparency is key to protecting market participants from
fraud and other types of abusive trading practices. Price transparency
has been the hallmark of regulated markets and should be so recognized
in the core principles. Finally, the Commission has proposed to
interpret the core principle concerning fitness standards as including
a DTF's owners, defined as natural persons that directly or indirectly
have greater than a ten percent interest in the facility. By this
interpretation, the Commission is proposing to clarify the application
of the core principle on fitness to proprietary trading facilities.
Like contract markets, DTFs may request that the Commission approve
their trading rules, which may be trading protocols, and the products
that they trade. The Commission has used its section 4(c) exemptive
authority to permit DTFs to request such approval at any time, before
or after the rule's implementation or the product's listing. Although
this modification to the statutory scheme is modest, it may provide
DTFs with far greater flexibility in bringing products to market.
Proposed section 37.7 includes several special call provisions.
Under these provisions, the Commission may issue special calls to the
DTF, its market intermediaries or participants upon a determination
that the Commission needs certain information to conduct limited
surveillance of trading in one or more products traded on the DTF. On
occasion, it may need to examine trading activity for a specific period
of time to ensure against excessive speculation, manipulation,
controls, corners or squeezes.
C. Exempt Markets
In addition to the types of markets subject to the regulatory
oversight of the Commission--designated contract markets and DTFs--the
Act as amended authorizes two categories of markets that are exempt
from regulatory oversight by the Commission. They are: exempt
commercial markets and exempt boards of trade. The Commission in part
36 has proposed rules necessary to implement these statutory
exemptions.
1. Exempt Commercial Markets
Transactions by eligible commercial entities in exempt commodities
traded on an electronic trading facility are exempt commercial markets
under section 2(h)(3) of the Act. These markets that satisfy the
initial and ongoing requirements of sections 2(h)(3) through (5) of the
Act as amended are excluded from the Act's other requirements.\16\ The
Commission is proposing rules for these markets that implement the
qualifying conditions of the exemption.
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\16\ See Sections 2(e)(1) and 2(h)(3) of the Act, as added by
sections 104 and 106 of the CFMA. The Act refers to electronic
commercial markets as ``excluded'' from the Act's regulatory
requirements that are not qualifying conditions for the exemption.
These qualifying conditions are found in paragraphs 2(h)(4) and (5).
Moreover, it should be noted that among these qualifying conditions,
the Commission is authorized to promulgate rules to ensure
disclosure of prices and to specify procedures regarding redress by
participants to an order denying them access in response to a
determination that the participant did not comply with a subpoena
issued by the Commission. See sections 2(h)(4)(D), 2(h)(5)(C)(ii)
and 2(h)(6) of the Act as amended.
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Proposed rule 36.3(a) implements the notification requirements of
section 2(h)(5)(A) of the Act. Proposed rule 36.3(b)(1) establishes
information requirements for exempt commercial markets consistent with
section 2(h)(5)(B) of the Act. In this regard, an exempt commercial
market may satisfy reporting requirements by providing the Commission
with electronic access to transactions conducted on the facility.
Alternatively, an exempt commercial market may choose to satisfy its
reporting requirements for such transactions by providing the
Commission with information regarding such positions by large traders
by an alternative means, the form and content of which the Commission
may determine is acceptable pursuant to a petition to the Commission
for such a determination. Such an alternative should provide the
Commission with information comparable in coverage and frequency to
that provided to the Commission by its large trader reporting system.
As required by section 2(h)(6) of the Act, proposed rule 36.3(b)(3)
establishes procedures for a foreign person named in a subpoena issued
by the Commission under section 2(h)(5)(C) to challenge the
Commission's action. In this regard, the Commission is proposing to use
its existing hearing procedures found in rules 21.03(g) through (h) and
to incorporate them by reference.
Although the Act as amended exempts these electronic markets from
Commission regulatory oversight, the
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Act at the same time affirmatively vests the Commission with
comprehensive antimanipulation and antifraud enforcement authority over
these trading facilities. Section 2(h)(4)(A) of the Act provides that
an agreement, contract or transaction entered into on a qualifying
exempt commercial market shall be subject to sections 6(c) and 9(a)(2)
of the Act ``to the extent such sections prohibit manipulation of the
market price of any commodity in interstate commerce and to the extent
the agreement, contract or transaction would otherwise be subject to
such sections[.]'' Section 2(h)(4)(B) of the Act provides that such
transactions are subject to sections 4b and 4o, as well as regulations
promulgated pursuant to 4c(b) proscribing fraudulent activity. Thus,
the Commission is charged with monitoring these markets for
manipulation and fraudulent conduct, and enforcing the antimanipulation
and antifraud provisions of the Act. The informational requirements
imposed by the Act and by these proposed rules are designed to ensure
that the Commission can effectively perform these functions.
2. Exempt Boards of Trade
Section 5d of the Act, as added by section 114 of the CFMA,
establishes a category of market exempt from Commission regulatory
oversight referred to as an ``exempt board of trade.'' The Commission
in rule 36.2 is proposing implementing regulations for section 5d of
the Act. First, the Commission is proposing to define those commodities
that are eligible to trade on an exempt board of trade to include
commodities defined in section 1a(13) of the Act as ``excluded
commodities,'' other than securities, and such other commodities as the
Commission may define by rule, regulation or order. See proposed rule
36.2(a). The Commission believes that this definition provides legal
certainty and further satisfies section 5d's requirements that the
underlying commodity has ``(A) a nearly inexhaustible deliverable
supply; (B) a deliverable supply that is sufficiently large, and a cash
market sufficiently liquid, to render any contract traded on the
commodity highly unlikely to be susceptible to the threat of
manipulation; or (C) no cash market[.]'' In addition, proposed rule
36.2(b) implements the notification requirements of section 5d of the
Act.
3. Additional Requirements
Consistent with sections 2(h)(5)(F) and 5d(g) of the Act, the
proposed rules prohibit exempt boards of trade and exempt commercial
markets from representing that they are registered with, designated,
recognized, licensed or approved by the Commission. The Commission
invites comment on whether the rule also should require that such
exempt entities affirmatively disclose to traders that the facility and
trading on the facility are not so regulated or approved by the
Commission.
D. Anti-Fraud Provisions
One of the purposes for which the CFMA was enacted was ``to clarify
the jurisdiction of the Commodity Futures Trading Commission over
certain retail foreign exchange transactions and bucket shops that may
not be otherwise regulated.'' CFMA, section 2(5). The Commission is
proposing rule 1.1, which applies in scope to such retail foreign
exchange transactions not otherwise regulated, pursuant to its
authority in sections 3 and 8a(5) of the Act. Congress recently amended
section 3 of the Act through enactment of the CFMA. Section 3(a)
expressly finds that the transactions subject to the Act are regularly
entered into in interstate and international commerce and are affected
with a ``national public interest by providing a means for managing and
assuming price risks, discovering prices, or disseminating pricing
information through trading in liquid, fair and financially secure
trading facilities.'' Section 3(b) provides, as pertinent here, that it
is the purpose of the Act
to deter and prevent price manipulation or any other disruptions to
market integrity; to ensure the financial integrity of all
transactions subject to this Act and the avoidance of systemic risk;
to protect all market participants from fraudulent or other abusive
sales practices and misuse of customer assets; and to promote
responsible innovation and fair competition among boards of trade,
other markets and market participants.
Section 8a(5) authorizes the Commission ``to make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of this Act.''
In the judgment of the Commission, proposed rule 1.1 is reasonably
necessary to effectuate the express purpose of the Act to protect
retail foreign exchange market participants from fraudulent or other
abusive sales practices. It is the Commission's intention that proposed
rule 1.1 not replace the applicability of any existing antifraud rule,
including rules 32.9 (fraud in connection with commodity option
transactions), and 33.10 (fraud in connection with domestic exchange-
traded option transactions), which were promulgated under section 4c(b)
of the Act, rule 30.9 (fraud involving any foreign futures contract or
foreign options transaction), rule 4.41 (fraudulent advertising by
commodity pool operators, commodity trading advisors, and principals
thereof) and rule 31.3 (fraud in connection with leverage
transactions).
E. Arbitration
Section 110 of the CFMA removed the Act's previous requirements for
contract market designation, including former section 5a(11) of the
Act, governing exchange arbitration proceedings. The Commission is
therefore proposing to delete Part 180 of its rules, which was based,
in part, on the provisions of former Section 5a(11) of the Act, and to
repropose its withdrawn rule 166.5, incorporating certain amendments
required by the new legislation. For example, the reproposed version
provides that an FCM may require an eligible contract participant to
sign an agreement waiving the right to reparations as a condition to
using the FCM's services.\17\ The CFMA is silent as to whether pre-
dispute arbitration agreements must be entered into voluntarily.
Compare former Sec. 5a(11) of the Act with Sec. 5(d)(13) of the Act, as
amended. The proposed rule retains this requirement.
---------------------------------------------------------------------------
\17\ This provision is consistent with section 118 of the CFMA.
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IV. Section 4(c) Findings
Some of the proposals contained in this Federal Register notice 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, from any of the
requirements of any provision of the Act (except certain provisions
governing a group or index of securities and security futures
products). As relevant here, when granting an exemption pursuant to
section 4(c), the Commission must find that the exemption would be
consistent with the public interest.
The Commission is proposing to use its section 4(c) exemptive
authority here to provide registered entities with greater procedural
flexibility than is contained in the Act. For instance, pursuant to
proposed rule 38.4, designated contract markets may request
[[Page 14267]]
approval of their contracts following certification of those contracts,
notwithstanding the Act's limitation of the Commission's approval
authority to ``prior'' approval. Furthermore, the Commission is
proposing a less burdensome certification procedure than that provided
in the Act. The Commission believes that providing this additional
flexibility to registered entities is consistent with the public
interest. The Commission invites public comment on this finding.
V. Cost-Benefit Analysis
Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new regulation under the Act. The Commission is
applying the cost-benefit provisions of section 15 for the first time
in this rulemaking and understands that, by its terms, section 15 as
amended does not require the Commission to quantify the costs and
benefits of a new regulation or to determine whether the benefits of
the proposed regulation outweigh its costs. Nor does it require that
each proposed rule be analyzed in isolation when that rule is a
component of a larger package of rules or rule revisions. Rather,
section 15 simply requires the Commission to ``consider the costs and
benefits'' of its action.
The amended section 15 further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas of concern
and could in its discretion determine that, notwithstanding its costs,
a particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The new regulatory framework constitutes a package of related rule
provisions. The Commission has considered their costs and benefits as a
totality. The rules impose reporting, recordkeeping and other
informational requirements on trading facilities that are either
mandated by or fully consistent with the new provisions of the CFMA.
The Commission has considered the costs and benefits of this rule
package in light of the specific areas of concern identified in the
CFMA:
1. Protection of market participants and the public. In general,
the proposed rules would be expected to cost little in terms of
diminishing the protection of market participants and the public. The
rules impose limited costs in terms of informational requirements. The
countervailing benefit of these costs, however, is that the Commission
will have the necessary information to perform its oversight functions
and thus carry out its mandate of assuring the continued existence of
competitive and efficient markets.
2. Efficiency and competition. The rules are expected to benefit
competition and market efficiency broadly by providing more options for
market structure and greater legal certainty for covered instruments.
The rules do not impose a cost on market efficiency or competition.
3. Financial integrity of futures markets. The rules permit but do
not require clearing for DTFs and contract markets. Nevertheless, the
proposed rules require that such markets have and disclose their
framework for financial integrity. Thus, consistent with the statute,
the benefits of clearing are available but not mandated, and the
facility may establish a financial integrity framework appropriate to
its market.
4. Price discovery. Consistent with the statute, markets that serve
a price discovery function are required to disseminate publicly certain
market information. While such a requirement may impose a cost on
markets required to disseminate such information, the cost would be
expected to be minimal since such price discovery markets are likely to
make available such information anyway in the interest of attracting
additional liquidity to the market. Moreover, many markets use this
price information as a source of revenue and would therefore make it
available even in the absence of a requirement to do so. Nevertheless,
this information provides a great benefit to the public in terms of
ensuring the supply of economic guidance to commodity producers and
users and is important to a market participant's ability to protect him
or herself from fraudulent and other abusive practices.
5. Sound risk management practices. It is anticipated that the
creation of the new regulatory structure will encourage better risk
management practices by making available additional market outlets and
more customized products for risk management purposes. The added
competition for offering these products will tend to reduce the cost of
risk management.
6. Other public interest considerations. The rules also include an
antifraud rule for certain retail foreign exchange transactions and
bucket shops that may not otherwise be regulated. The Commission
believes that this provision will benefit market participants and the
public and will further serve the public interest by deterring illegal
behavior. The nonrepudiation provisions included in the rules benefit
the public interest by furthering legal certainty.
After considering these factors, the Commission has determined to
propose the revisions to its rules discussed above. The Commission
invites public comment on its application of the new cost-benefit
provision. Commenters also are invited to submit any data that they may
have quantifying the costs and benefits of the proposed rules with
their comment letters.
VI. Related Rulemakings
As part of the final rules promulgating the new regulatory
framework,\18\ the Commission also issued final rules and rule
amendments that would have applied to market intermediaries and to
clearing organizations.\19\ They too, for the most part, were withdrawn
following the enactment of the CFMA.\20\
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\18\ Implementation of the CFMA requires the Commission to
undertake a number of rulemakings in addition to those that were
part of the Commission's new regulatory framework, such as rules
relating to security futures products. Moreover, the initial rules
of the new regulatory framework contemplated a number of subsequent
rulemakings, such as permitting risk-based net capital requirements
for intermediaries. Those rulemaking proceedings are separate from
the rules that are referenced herein and also will be considered by
the Commission within the coming year.
\19\ See Rules Relating to Intermediaries of Commodity Interest
Transactions, 65 FR 77993 (Dec. 13, 2000), and A New Regulatory
Framework for Clearing Organizations, 65 FR 78020 (Dec. 13, 2000).
\20\ With respect to those rules concerning the investment of
customer funds, the Commission determined to move forward their
effective date to December 28, 2000, as well as to make certain
technical corrections to the rule amendments. See 65 FR 82270 (Dec.
28, 2000).
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Upon further consideration, the Commission has determined that many
of the withdrawn final rules and rule amendments relating to
intermediaries are substantively unaffected by the CFMA's statutory
revisions. Accordingly, the Commission intends, at a future date, to
repropose and readopt those rules and rule amendments relating to
intermediaries that are not implicated by the statutory revisions to
the Act, with any necessary technical, conforming changes. These rules
and rule amendments address, among other things, the definition of the
[[Page 14268]]
term ``principal,'' the addition of a principal, certified financial
reports, ethics training, disclosure, account opening procedures,
trading standards, reporting requirements, and offsetting positions.
The Commission also intends to repropose rules for clearing
organizations shortly, with the intention of promulgating final rules
for registered derivatives clearing organizations. The Commission
encourages interested persons to review the Federal Register releases
discussing the background and purpose of the rules and rule amendments
mentioned above for further information.\21\
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\21\ See 65 FR 77993 and 65 FR 78020. See also 65 FR 39008 and
65 FR 39027 (June 22, 2000) (proposing rules).
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VII. Implementation Issues; Comment Period and No-action
The amendments to the Act contained in the CFMA generally became
effective on December 21, 2000, the date that the CFMA was enacted into
law.\22\ In light of the need to promulgate implementing regulations
without delay, the Commission encourages commenters to submit their
comments as early as possible during the comment period. The early
filing of comments will assist the Commission in acting expeditiously
to adopt the necessary implementing regulations. In any event, comments
should be filed with the Commission by the end of the comment period.
To the extent that the promulgation of implementing regulations is
necessary to effectuate certain statutory provisions, any extension of
the comment period likely would be contrary to the public interest and
contrary to the intent of Congress that these statutory changes be made
effective without delay.
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\22\ Certain provisions of the CFMA, however, have a delayed
effective date. The Commission will adopt implementing rules for
those provisions of the CFMA at a later date.
---------------------------------------------------------------------------
In light of the Congressional intent to implement these statutory
changes without delay, during this transition period between the
effective date of the amendments to the Act and the adoption of final
implementing regulations, the Commission will not bring any enforcement
action against any person who complies with the rules proposed herein.
Persons that do comply with the proposed rules, however, will be
required to bring their conduct into compliance with the final rules to
the extent that the final rules differ from the proposed rules.
VIII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires federal agencies, in promulgating rules, to consider the
impact of those rules on small entities. The rules adopted herein would
affect contract markets and other trading facilities. The Commission
has previously established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its rules on
small entities in accordance with the RFA.\23\ In its previous
determinations, the Commission has concluded that contract markets are
not small entities for the purpose of the RFA.\24\ The Commission is
proposing to determine that the other trading facilities covered by
these rules, for reasons similar to those applicable to contract
markets, are not small entities for purposes of the RFA. In any event,
the rules being proposed today authorize these trading facilities to
operate in a less regulated environment than may currently be the case;
consequently, these rules should not have any, or result in only a de
minimus, increase in the regulatory requirements that apply to contract
markets and other trading facilities.
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\23\ 47 FR 18618-21 (Apr. 30, 1982).
\24\ 47 FR 18618, 18619 (discussing contract markets).
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Accordingly, the Commission does not expect the rules, as proposed
herein, to have a significant economic impact on a substantial number
of small entities. Therefore, the Acting Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed amendments will not have a significant economic impact on a
substantial number of small entities. The Commission invites the public
to comment on this finding and on its proposed determination that the
trading facilities covered by these rules would not be small entities
for purposes of the RFA.
B. Paperwork Reduction Act of 1995
This proposed rulemaking contains information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3504(h)), the Commission has submitted a copy of this section to
the Office of Management and Budget (OMB) for its review.
Collection of Information: Rules Relating to Part 37, Establishing
Procedures for Entities to be Registered as Derivatives Transaction
Execution Facilities (DTFs), OMB Control Number 3038-0053. The proposed
rules will not change the burden previously approved by OMB.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 200.
Annual reporting burden: 2,000.
Collection of Information: Rules Relating to Part 38, Establishing
Procedures for Entities to become Designated as Contract Markets, OMB
Control Number 3038-0052. The proposed rules will not change the burden
previously approved by OMB.
The estimated burden was calculated as follows:
Estimated number of respondents: 10.
Annual responses by each respondent: 1.
Total annual responses: 10.
Estimated average hours per response: 300.
Annual reporting burden: 3,000.
Collection of Information: Rules Pertaining to Large Trader
Reports, OMB Control Number 3038-0009. The proposed rules will not
change the burden previously approved by OMB.
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.
Collection of Information: Rules Relating to Part 36, Establishing
Procedures for Exempt Markets, 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: 1.
Annual reporting burden: 10.
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
[[Page 14269]]
for the proper performance of the functions of the Commission,
including whether the information will have a practical use;
� Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
� Enhancing the quality, usefulness, and clarity of the
information to be collected; and
� Minimizing the burden of collecting information on those
who are to respond, including through the use of appropriate automated
electronic, mechanical, or other technological collection techniques or
other forms of information technology; e.g., permitting electronic
submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington DC 20581, (202) 418-5160.
List of Subjects
17 CFR Part 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 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 40
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
17 CFR Part 41
Security Futures, Commodity Futures Trading Commission.
17 CFR Part 100
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 166
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
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 Act, as amended by the Commodity Futures Modernization
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000), and
in particular, sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c, 5d, 6 and
8a thereof, the Commission hereby proposes to amend Chapter I of Title
17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 is proposed to be amended to
read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 5, 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, as amended by the
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L.
No. 106-554, 114 Stat. 2763 (2000).
2. Section 1.1 is proposed to be revised to read follows:
Sec. 1.1 Fraud in or in connection with transactions in foreign
currency subject to the Commodity Exchange Act.
(a) Scope. The provisions of this subsection shall be applicable to
accounts, agreements, or transactions described in section 2(c)(1) of
the Act, to the extent that the Commission exercises jurisdiction over
such accounts, agreements, or transactions as provided in section
2(c)(2)(B) of the Act (except that this section shall not be applicable
to persons described in section 2(c)(2)(B)(ii)(II) or
2(c)(2)(B)(ii)(III) of the Act).
(b) Fraudulent conduct prohibited. It shall be unlawful for any
person, directly or indirectly, in or in connection with any account,
agreement, or transaction that is subject to paragraph (a) of this
section:
(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 or cause to be entered for any person any false
record; or
(3) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
3. Section 1.3 is proposed to be amended by revising the
undesignated introductory paragraph to read as follows:
Sec. 1.3 Definitions.
Words used in the singular form in the rules and regulations in
this chapter shall be deemed to import the plural and vice versa, as
the context may require. The following terms, as used in the Commodity
Exchange Act, or in the rules and regulations in this chapter, shall
have the meanings hereby assigned to them, unless the context otherwise
requires:
* * * * *
4. 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 designated contract market 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. In addition, upon request, a designated
contract market shall provide to the Commission information regarding
the name of any person guaranteeing such transactions or exercising any
control over the trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a designated
contract market on which transactions in futures or option 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.
5.-6. Sections 1.41, 1.41b, 1.43, 1.45, 1.50 and 1.51 are proposed
to be removed and reserved.
[[Page 14270]]
PART 15--REPORTS--GENERAL PROVISIONS
7. 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, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
8. Section 15.05 is proposed to be amended by revising the heading
and 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 designated contract market or derivatives transaction
execution facility that permits a foreign broker to intermediate
contracts, agreements or transactions, or permits a foreign trader to
effect contracts, agreements or transactions on the facility or
exchange, shall be deemed to be the agent of the foreign broker and any
of its customers for whom the transactions were executed, or the
foreign trader, for purposes of accepting delivery and service of any
communication issued by or on behalf of the Commission to the foreign
broker, any of its customers or the foreign trader with respect to any
contracts, agreements or transactions executed by the foreign broker or
the foreign trader on the designated contract market or derivatives
transaction execution facility. Service or delivery of any
communication issued by or on behalf of the Commission to a designated
contract market or derivatives transaction execution facility shall
constitute valid and effective service upon the foreign broker, any of
its customers, or the foreign trader. A designated contract market or
derivatives transaction execution facility which has been served with,
or to which there has been delivered, a communication issued by or on
behalf of the Commission to a foreign broker, any of its customers, or
a foreign trader shall transmit the communication promptly and in a
manner which is reasonable under the circumstances, or in a manner
specified by the Commission in the communication, to the foreign
broker, any of its customers or the foreign trader.
(f) It shall be unlawful for any designated contract market or
derivatives transaction execution facility to permit a foreign broker,
any of its customers or a foreign trader to effect contracts,
agreements or transactions on the facility unless the designated
contract market or derivatives transaction execution facility prior
thereto informs the foreign broker, any of its customers or the foreign
trader in any reasonable manner the facility deems to be appropriate,
of the requirements of this section.
(g) The requirements of paragraphs (e) and (f) of this section
shall not apply to any contracts, transactions or agreements traded on
any designated contract market or derivatives transaction execution
facility if the foreign broker, any of its customers or the foreign
trader has duly executed and maintains in effect a written agency
agreement in compliance with this paragraph with a person domiciled in
the United States and has provided a copy of the agreement to the
designated contract market or derivatives transaction execution
facility prior to effecting any contract, agreement or transaction on
the facility. This agreement must authorize the person domiciled in the
United States to serve as the agent of the foreign broker, any of its
customers or the foreign trader for purposes of accepting delivery and
service of all communications issued by or on behalf of the Commission
to the foreign broker, any of its customers or the foreign trader and
must provide an address in the United States where the agent will
accept delivery and service of communications from the Commission. This
agreement must be filed with the Commission by the designated contract
market or derivatives transaction execution facility prior to
permitting the foreign broker, any of its customers or the foreign
trader to effect any transactions in futures or option contracts.
Unless otherwise specified by the Commission, the agreements required
to be filed with the Commission shall be filed with the Secretary of
the Commission at Three Lafayette Centre, 1155 21st Street, N.W.,
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 designated contract market or derivatives transaction
execution facility knows or should know that the agreement has expired,
been terminated, or is no longer in effect, the designated contract
market or derivatives transaction execution facility shall notify the
Secretary of the Commission immediately. If the written agency
agreement expires, terminates, or is not in effect, the designated
contract market or derivatives transaction execution facility and the
foreign broker, any of its customers or the foreign trader are subject
to the provisions of paragraphs (e) and (f) of this section.
(h) The provisions of paragraphs (e), (f) and (g) of this section
shall not apply to a designated contract market or derivatives
transaction execution facility on which all transactions in futures or
option contracts or other instruments subject to the Act pursuant to
section 5a(g) of the Act of foreign brokers, their customers or foreign
traders are executed through or the resulting transactions are
maintained in accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to
the provisions of paragraphs (a), (b), (c) and (d) of this section.
9. Part 36 is proposed to be revised to read as follows:
PART 36--EXEMPT MARKETS
Sec.
36.1 Scope.
36.2 Exempt boards of trade.
36.3 Exempt commercial markets.
Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, as amended by the
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L.
106-554, 114 Stat. 2763 (2000).
Sec. 36.1 Scope.
The provisions of this part apply to any board of trade or
electronic trading facility eligible for exemption under sections 5d
and 2(h)(3) through (5) of the Act, respectively.
Sec. 36.2 Exempt boards of trade.
(a) Eligible commodities. Commodities eligible under section
5d(b)(1) of the Act to be traded by an exempt board of trade are:
(1) Commodities having--
(i) A nearly inexhaustible deliverable supply;
(ii) A deliverable supply that is sufficiently large, and a cash
market sufficiently liquid, to render any contract traded on the
commodity highly unlikely to be susceptible to the threat of
manipulation; or
(iii) No cash market.
(2) The commodities that meet the criteria of paragraph (a)(1) of
this section are:
(i) The commodities defined in section 1a(13) of the Act as
``excluded commodities'' (other than a security, including any group or
index thereof or any interest in, or based on the value of, any
security or group or index of securities); and
(ii) Such other commodity or commodities as the Commission may
determine by rule, regulation or order.
(b) Notification. Boards of trade operating under section 5d of the
Act as
[[Page 14271]]
exempt boards of trade shall so notify the Commission. This
notification shall be filed with the Secretary of the Commission at its
Washington, DC headquarters, in either electronic or hard copy form,
shall be labeled as ``Notification of Operation as Exempt Board of
Trade,'' and shall include:
(1) The name and address of the exempt board of trade; and
(2) The name and telephone number of a contact person.
(c) Additional requirements. (1) A board of trade notifying the
Commission that it meets the criteria of section 5d of the Act and
elects to operate as an exempt board of trade shall not represent to
any person that it is registered with, designated, recognized, licensed
or approved by the Commission.
(2) If the Commission finds by order, after notice and an
opportunity for a hearing through submission of written data, views and
arguments, that the facility serves as a significant source for the
discovery of prices in the cash market for the underlying commodity,
the facility must on a daily basis disseminate publicly trading volume,
opening and closing price ranges, open interest and other trading data
to the extent appropriate to that market with respect to transactions
executed in reliance on the exemption as specified in the order.
Sec. 36.3 Exempt commercial markets.
(a) Notification. An electronic trading facility relying upon the
exemption in section 2(h)(3) of the Act shall notify the Commission of
its intention to do so. This notification, and subsequent notification
of any material changes in the information initially provided, shall be
filed with the Secretary of the Commission at its Washington, DC
headquarters, in either electronic or hard copy form, shall be labeled
as ``Notification of Operation as Exempt Commercial Market,'' and shall
include the information and certifications specified in section
2(h)(5)(A) of the Act.
(b) Required information. (1) A facility operating in reliance on
the exemption in section 2(h)(3) of the Act, initially and on an on-
going basis, must provide the Commission with access to the facility's
trading protocols and electronic access to transactions conducted on
the facility in reliance on such exemption. Alternatively, the facility
may attach its initial trading protocols and any amendments thereto in
hard copy form to the notification required in paragraph (a) of this
section and may provide in a form and manner acceptable to the
Commission, as determined by the Commission in response to a petition
by the exempt market relying upon the exemption in section 2(h)(3) of
the Act, information regarding transactions by large traders on the
facility.
(2) Special calls. (i) All information required upon special call
of the Commission under section 2(h)(5)(B)(iii) of the Act shall be
prepared in the form and manner and in accordance with the
instructions, and shall be transmitted at the time and to the office of
the Commission, as may be specified in the call.
(ii) The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls as set forth in section
2(h)(5)(B)(iii) of the Act to the Director of the Division of Trading
and Markets and to the Director of Economic Analysis to be exercised by
either Director or by such other employee or employees as the Director
may designate. The directors may submit to the Commission for its
consideration any matter that has been delegated in this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
(3) Subpoenas to foreign persons. A foreign person whose access to
a trading facility is limited or denied at the direction of the
Commission based on the Commission's belief that the foreign person has
failed timely to comply with a subpoena as provided under section
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt
hearing under the procedures provided in Sec. 21.03(g) and (h) of this
chapter.
(c) Additional requirements. (1) An electronic trading facility
relying upon the exemption in section 2(h)(3) of the Act shall not
represent to any person that it is registered with, designated,
recognized, licensed or approved by the Commission.
(2) If the Commission finds by order, after notice and an
opportunity for a hearing through submission of written data, views and
arguments, that the facility performs a significant price discovery
function for transactions in the cash market for the underlying
commodity, the facility must disseminate publicly price, trading volume
and other trading data to the extent appropriate with respect to
transactions executed in reliance on the exemption as specified in the
order.
(3) The facility must require that each participant agree to comply
with all applicable laws and the facility must have a reasonable basis
for believing that authorized participants are ``eligible commercial
entities'' as defined in section 1a(11) of the Act.
10. Part 37 is proposed to be added to read as follows:
PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES
Sec.
37.1 Scope and definition.
37.2 Exemption.
37.3 Requirements for underlying commodities.
37.4 Election to trade excluded and exempt commodities.
37.5 Procedures for registration.
37.6 Compliance with core principles.
37.7 Additional requirements.
37.8 Information relating to transactions on derivative transaction
execution facilities.
37.9 Enforceability.
Appendix A to Part 37--Application Guidance
Appendix B to Part 37--Guidance on Compliance with Core Principles
Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 6(i), 7a and 12a, as
amended by the Commodity Futures Modernization Act of 2000, Appendix
E of Pub. L. 106-554, 114 Stat. 2763 (2000).
Sec. 37.1 Scope and definition.
(a) Scope. The provisions of this part apply to any board of trade
or trading facility operating as a registered derivatives transaction
execution facility.
(b) Definition. As used in this part, the term ``eligible
commercial entity'' means, and shall include, in addition to a party or
entity so defined in section 1a(11) of the Act, a registered floor
trader or floor broker trading for its own account, whose trading
obligations are guaranteed by a registered futures commission merchant.
Sec. 37.2 Exemption.
Contracts, agreements or transactions traded on a derivatives
transaction execution facility registered as such with the Commission
under section 5a of the Act, the facility and the facility's operator
are exempt from all Commission regulations for such activity, except
for the requirements of this part 37 and Secs. 1.3, 1.31, 15.05, 33.10,
part 40 and part 190 of this chapter; and as applicable to the market,
parts 15 through 21 of this chapter, which are applicable to a
registered derivatives transaction execution facility as though they
were set forth in this section and included specific reference to
derivatives transaction execution facilities.
[[Page 14272]]
Sec. 37.3 Requirements for underlying commodities.
(a) Trading facilities limited to eligible traders. Trading
facilities limited to eligible traders as defined by section 5a(b)(3)
of the Act, may trade any contract of sale of a commodity for future
delivery (or option on such a contract) on any of the following
underlying commodities:
(1) Commodities having--
(i) A nearly inexhaustible deliverable supply;
(ii) A deliverable supply that is sufficiently large that the
contract is highly unlikely to be susceptible to the threat of
manipulation; or
(iii) No cash market.
(iv) The commodities defined in section 1a(13) of the Act as
``excluded commodities,'' meet the criteria of paragraphs (a)(1)(i)
through (iii) of this section.
(2)(i) Commodities that are a security futures product, and
(ii) The registered derivatives transaction execution facility is a
national securities exchange registered under the Securities Exchange
Act of 1934;
(3)(i) Commodities for which the Commission has determined, based
on the market characteristics, surveillance history, self-regulatory
record, and capacity of the facility, that trading in the contract (or
option) based on that commodity is highly unlikely to be susceptible to
the threat of manipulation.
(ii) The Commission may make such a determination by rule,
regulation or order, after notice and an opportunity for a hearing
through submission of written data, views and arguments. A registered
derivative transaction execution facility may request that the
Commission make such an individualized determination by filing with the
Commission at its Washington, DC headquarters a petition that includes:
(A) The terms and conditions of the product to be listed; and
(B) A demonstration, supported by data, that the underlying
commodity has a sufficiently liquid and deep cash market and a
surveillance history based on actual trading experience and in light of
any self-regulatory undertakings of the facility, to provide assurance
that the contract or product is highly unlikely to be manipulated. The
demonstration should address the following specific factors to the
extent that the factor is not self-evident:
(1) A high level of cash-market liquidity;
(2) Cash-market bid-ask spreads that are narrow relative to traded
values;
(3) Relatively frequent cash market transactions involving
participants that represent major segments of the industry;
(4) The absence of material impediments to participation in the
cash market by commercial entities;
(5) Transfer of ownership of the cash commodity that is easily and
readily accomplished at minimal cost;
(6) A pattern of cash market pricing that exhibits continuity and
the absence of frequent, sharp price changes such that a person cannot
readily move materially the price of the product in normal cash market
channels;
(7) A history of actual trading experience that the contract or
product's terms and conditions provide for a deliverable supply that is
adequate to minimize the threat of market abuses such as price
manipulation and distortions, congestion, and defaults; and
(8) Procedures to effectively oversee the market, including a large
trader reporting system, as well as a history of active surveillance to
prevent or mitigate market problems; or
(4) Commodities that are agricultural commodities enumerated in
section 1a(4) of the Act that have been so approved by the Commission
under the procedures of paragraph (c) of this section;
(b) Trading facilities limited to eligible commercial entities. Any
commodity, other than the agricultural commodities enumerated in
section 1a(4) of the Act, is eligible under section 5a(b)(2)(F) of the
Act to be traded on a derivatives transaction execution facility that
limits participants on the facility to eligible commercial entities as
defined by Sec. 37.1(b) trading for their own account. Provided,
however, an agricultural commodity enumerated in section 1a(4) of the
Act may be so approved by the Commission under the procedures of
paragraph (c) of this section.
(c) Enumerated agricultural commodities. [Reserved]
Sec. 37.4 Election to trade excluded and exempt commodities.
A board of trade that is or elects to become a registered
derivatives transaction execution facility may, pursuant to section
5a(g) of the Act, trade agreements, contracts, or transactions that are
excluded or exempt from the Act pursuant to sections 2(c), 2(d), 2(g),
or 2(h).
Sec. 37.5 Procedures for registration.
(a) Notification by contract markets. To operate as a derivatives
transaction execution facility pursuant to section 5a of the Act, a
board of trade, facility or entity that is designated as a contract
market, must:
(1) Comply with the core principles for operation under section
5a(d) of the Act and the provisions of this part 37; and
(2) Notify the Commission of its intent to so operate by filing
with the Commission at its Washington, DC headquarters a copy of the
facility's rules, which may be trading protocols, and a certification
by the contract market that it meets:
(i) The requirements for trading of section 5a(b) of the Act; and
(ii) The criteria for registration under section 5a(c) of the Act.
(b) Registration by application. A board of trade, facility or
entity shall be deemed to be registered as a derivatives transaction
execution facility thirty days after receipt by the Commission of an
application for registration as a derivatives transaction execution
facility unless notified otherwise during that period, or, as
determined by Commission order, registered upon conditions, if:
(1) The application demonstrates that the applicant satisfies the
requirements for trading and the criteria for registration of sections
5a(b) and 5a(c) of the Act, respectively;
(2) The submission is labeled, ``Application for DTF
Registration'';
(3) The submission includes:
(i) The derivatives transaction execution facility's rules, which
may be trading protocols;
(ii) Any agreements entered into or to be entered into between or
among the facility, its operator or its participants, technical manuals
and other guides or instructions for users of such facility,
descriptions of any system test procedures, tests conducted or test
results, and descriptions of the trading mechanism or algorithm used or
to be used by such facility, to the extent such documentation was
otherwise prepared; and
(iii) To the extent that compliance with the requirements for
trading or the criteria for recognition is not self-evident, a brief
explanation of how the rules or trading protocols satisfy each of the
conditions for registration;
(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 the time
provisions of and procedures under section 6 of the Act.
[[Page 14273]]
(c) Guidance for applicants. Appendix A to this part provides
guidance to applicants for registration as a derivatives transaction
execution facility on how the conditions for registration in section
5a(b) and 5a(c) of the Act could be satisfied.
(d) Termination of fast track review. During the thirty-day period
for review pursuant to paragraph (b) of this section, the Commission
shall notify the applicant seeking registration that the Commission is
terminating review under this section and will review the proposal
under the time period and procedures of section 6 of the Act, if it
appears that the application's form or substance fails to meet the
requirements of this part. This termination notification will state the
nature of the issues raised and the specific condition of registration
that the applicant would violate, appears to violate, or the violation
of which cannot be ascertained from the application. Within ten days of
receipt of this termination notification, the applicant seeking
registration may request that the Commission render a decision whether
to register the derivatives transaction execution facility or to
institute a proceeding to deny the proposed application under
procedures specified in section 6 of the Act by notifying the
Commission that the applicant seeking registration views its submission
as complete and final as submitted.
(e) Request for withdrawal of application for registration or
withdrawal of registration. An applicant to be registered, or a
registered derivatives transaction execution facility may withdraw its
application or its registration by filing with the Commission at its
Washington, DC, headquarters such a request. Withdrawal from
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities or events occurring during
the time that the application for registration was pending with, or
that the facility was registered by, the Commission.
(f) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Trading
and Markets and separately to the Director of Economic Analysis or the
Director's delegatee, with the concurrence of the General Counsel or
the General Counsel's delegatee, authority to exercise the functions
provided under paragraph (b) of this section.
(2) The directors may submit to the Commission for its
consideration any matter that has been delegated in this paragraph.
(3) Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (f)(1)
of this section.
Sec. 37.6 Compliance with core principles.
(a) In general. To maintain registration as a derivatives
transaction execution facility upon commencing operations by listing
products for trading or otherwise and on a continuing basis thereafter,
the derivatives transaction execution facility must have the capacity
to be, and be, in compliance with the core principles of section 5a(d)
of the Act.
(b) New derivatives transaction execution facilities. (1)
Certification of compliance. Unless an applicant for registration has
chosen to make a voluntary demonstration under paragraph (b)(2) of this
section, a newly registered derivatives transaction execution facility
at the time it commences operations must certify to the Commission that
it has the capacity to, and will, operate in compliance with the core
principles under section 5a(d) of the Act.
(2) Voluntary demonstration of compliance. An applicant for
registration may choose to make a voluntary demonstration of its
capacity to operate in compliance with the core principles as follows:
(i) At least thirty days prior to commencing operations, the
applicant for registration must file with the Commission at its
Washington, D.C. headquarters, either separately or with the
application required by Sec. 37.4, a submission that includes:
(A) The label, ``Demonstration of Compliance with Core Principles
for Operation;''
(B) The derivatives transaction execution facility's rules, which
may be trading protocols, that enable or empower the facility to comply
with the core principles;
(C) Any agreements entered into or to be entered into between or
among the facility, its operator or its participants that enable or
empower the facility to comply with the core principles, including
where applicable, technical manuals and other guides or instructions
for users of the facility; and
(D) To the extent that capacity to comply with a core principle is
not self-evident, a brief explanation of how the facility has the
capacity to meet the core principle.
(ii) Unless the applicant requests an extension of time, the
applicant shall be deemed to have demonstrated its capacity to comply
with the core principles thirty days after receipt by the Commission,
unless notified otherwise.
(iii) If it appears that the applicant has failed to make the
requisite showing, the Commission will so notify the applicant at the
end of that period. Upon commencement of operations by the derivatives
transaction execution facility, such a notice may be considered by the
Commission in a determination to issue a notice of violation of core
principles under section 5c(d) of the Act.
(c) Existing derivatives transaction execution facilities. Upon
request by the Commission, a registered derivatives transaction
execution facility shall file with the Commission such data, documents
and other information as the Commission may specify in its request that
demonstrates that the registered derivatives transaction execution
facility is in compliance with one or more core principles as specified
in the request or that is requested by the Commission to enable the
Commission to satisfy its obligations under the Act.
(d) Guidance regarding compliance with core principles. A
derivatives transaction execution facility may meet the following core
principles of section 5a(d) of the Act as specified in this paragraph:
(1) Compliance with rules. The core principle regarding compliance
with rules under section 5a(d)(2) of the Act may be met, as appropriate
to the facility, through the effective monitoring of limitations on
access to the facility;
(2) Monitoring of trading. The core principle regarding monitoring
of trading under section 5a(d)(3) of the Act may be met, as appropriate
to the market and the products traded thereon, by providing information
to the Commission as requested to satisfy the Commission's obligations
under the Act;
(3) Disclosure of general information. The core principle regarding
disclosure of general information relevant to participation in trading
on the facility under section 5a(d)(4)(D) of the Act also includes
providing to market participants on a fair, equitable and timely basis
information regarding prices, bids and offers, and such other
information that the Commission may determine by rule, regulation or
order, after notice and an opportunity for a hearing through submission
of written data, views and arguments;
(4) Daily publication of trading information. The Commission will
determine by order, after notice and an opportunity for a hearing
through submission of written data, views and arguments, whether the
requirement of the core principle on publication of trading information
under section
[[Page 14274]]
5a(d)(5) of the Act applies to a particular product or products traded
on a facility;
(5) Fitness. Appropriate minimum standards for participants having
direct access to the facility under the core principle on fitness
pursuant to section 5a(d)(6) of the Act also includes natural persons
that directly or indirectly have greater than a ten percent ownership
interest in the facility; and
(6) In general. Appendix B to this part provides guidance to
registered derivatives transaction execution facilities on how the core
principles under section 5a(d) of the Act could be satisfied.
Sec. 37.7 Additional requirements.
(a) Products. Notwithstanding the provisions of section 5c(c) of
the Act and Sec. 40.2 of this chapter, derivative transaction execution
facilities need only notify the Commission of the listing of new
products for trading, posting of new product descriptions, terms and
conditions or trading protocols or providing for a new system product
functionality, by filing with the Commission at its Washington, D.C.
headquarters, a submission labeled ``DTF Notice of Product Listing''
that includes the text of the product's terms or conditions, product
description, trading protocol or description of the system
functionality or by electronic notification of the foregoing 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, posting or implementation of the trading protocol or
system functionality.
(b) Material modifications. Notwithstanding the provisions of
section 5c(c) of the Act, registered derivative transaction execution
facilities need not certify rules or rule amendments under Sec. 40.6 of
this chapter, and must only notify the Commission prior to placing into
effect or amending such a rule, which includes trading protocols, by:
(1) Filing with the Commission at its Washington, D.C. headquarters
at the time traders or participants in the market are notified, but
(unless taken as an emergency action) in no event later than the close
of business on the business day preceding implementation of the rule, a
submission labeled, ``DTF Rule Notice.'' The submission shall include
the text of the rule or rule amendment, (deletions and additions must
be indicated); or
(2) By electronic notification to the Commission of the rule to be
placed into effect or to be changed, in a format approved by the
Secretary of the Commission, at the time traders or participants in the
market are notified, but (unless taken as an emergency action) in no
event later than the close of business on the business day preceding
implementation. Provided, however, the derivatives transaction
execution facility need not notify the Commission of rules or rule
amendments for which no certification is required under Sec. 40.6(c) of
this chapter.
(3) The derivatives transaction execution facility must maintain
documentation regarding all changes to rules, terms and conditions or
trading protocols.
(c) Voluntary request for Commission approval of rules or products.
(1) A board of trade or trading facility seeking to be registered as,
or registered as, a derivatives transaction execution facility, may
request that the Commission approve under section 5c(c) of the Act, 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, prior to their implementation or,
notwithstanding the provisions of section 5c(c)(2) of the Act, at
anytime thereafter, under the procedures of Secs. 40.5 or 40.3 of this
chapter, as applicable. A derivatives transaction execution facility
may label a product in its rules as, ``Listed for trading pursuant to
Commission approval,'' if the product and its terms or conditions have
been approved by the Commission and it may label as, ``Approved by the
Commission,'' only those rules that have been so approved.
(2) An applicant for registration, or a registered derivatives
transaction execution facility may request that the Commission consider
under the provisions of section 15(b) of the Act any of the derivatives
transaction execution facility's rules or policies, including both
operational rules and the terms or conditions of products listed for
trading, at the time of registration or thereafter.
(d) Identify participants. Registered derivative transaction
execution facilities must 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. In addition,
upon request, a derivative transaction execution facility shall provide
to the Commission information regarding the name of any person
exercising control over the trading of such foreign trader. Provided,
however, this paragraph shall not apply to a derivatives transaction
execution facility insofar as transactions in futures or option
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 Sec. 1.37 of this
chapter.
(e) Identify persons subject to fitness requirement. Upon request
by the Commission, a registered derivatives transaction execution
facility shall furnish to the Commission a current list of persons
subject to the fitness requirements of section 5a(d)(6) of the Act.
Sec. 37.8 Information relating to transactions on derivatives
transaction execution facilities.
(a) Special calls for information from derivatives transaction
execution facilities. Upon special call by the Commission, a registered
derivatives transaction execution facility shall provide to the
Commission such information related to its business as a derivatives
transaction execution 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.
(b) Special calls for information from futures commission
merchants. Upon special call by the Commission, each person registered
as a futures commission merchant that carries or has carried an account
for a customer on a derivatives transaction execution facility shall
provide information to the Commission concerning such accounts or
related positions carried for the customer on that or other facilities
or markets, in the form and manner and within the time specified by the
Commission in the special call.
(c) Special calls for information from participants. Upon special
call by the Commission, any person who enters into or has entered into
an agreement, contract or transaction on a derivatives transaction
execution facility shall provide information to the Commission
concerning such agreements, contracts or transactions or related
agreements, contracts or transactions, or concerning related positions
on other facilities or markets, in the form and manner and within the
time specified by the Commission in the special call.
(d) Delegation of authority. The Commission hereby delegates, until
the Commission orders otherwise, the authority set forth in paragraphs
(a) through (c) of this section to the Directors of the Division of
Trading and Markets and separately to the Director of Economic Analysis
or such other employee or employees as the Directors may designate from
time to time. The Directors may submit to the
[[Page 14275]]
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.
Sec. 37.9 Enforceability.
An agreement, contract or transaction entered into on, or pursuant
to, the rules of a registered derivatives transaction execution
facility shall not be void, voidable, subject to rescission or
otherwise invalidated or rendered unenforceable as a result of:
(a) A violation by the registered derivatives transaction execution
facility of the provisions of section 5a of the Act or this part 37; or
(b) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to disapprove, alter, supplement, or require a registered
derivatives transaction execution facility to adopt a specific term or
condition, trading rule or procedure, or to take or refrain from taking
a specific action.
Appendix A to Part 37--Application Guidance
This appendix provides guidance to applicants for registration
as derivatives transaction execution facilities under section 5a(c)
of the Act and Sec. 37.5. The guidance following each registration
criterion is illustrative only of the types of matters an applicant
may address, as applicable, and is not intended to be a mandatory
checklist. Addressing the issues and questions set forth in this
appendix would help the Commission in its consideration of whether
the application has met the criteria for registration. To the extent
that compliance with, or satisfaction of, a criterion for
registration is not self-explanatory from the face of the
derivatives transaction execution facility's rules, which may be
terms and conditions or trading protocols, the application should
include an explanation or other form of documentation demonstrating
that the applicant meets the registration criteria of section 5a(c)
of the Act and Sec. 37.5.
Registration Criterion 1 of section 5a(c) of the Act: IN
GENERAL--To be registered as a registered derivatives transaction
execution facility, the board of trade shall be required to
demonstrate to the Commission only that the board of trade meets the
criteria specified in subsection (b) and this subsection.
A board of trade preparing to submit to the Commission an
application to operate as a registered derivatives transaction
execution facility is encouraged to contact Commission staff for
guidance and assistance in preparing its application. Applicants may
submit a draft application for review prior to the submission of an
actual application without triggering the application review
procedures of Sec. 37.5.
Registration Criterion 2 of section 5a(c) of the Act: DETERRENCE
OF ABUSES--The board of trade shall establish and enforce trading
and participation rules that will deter abuses and has the capacity
to detect, investigate, and enforce those rules, including means
to--(A) obtain information necessary to perform the functions
required under this section; or (B) use technological means to--(i)
provide market participants with impartial access to the market; and
(ii) capture information that may be used in establishing whether
rule violations have occurred.
An application of a board of trade to operate as a registered
derivatives transaction execution facility should include
arrangements and resources for effective and affirmative rule
enforcement, including documentation of the facility's authority to
do so. The submission should include documentation on the ability of
the facility either to obtain necessary information or to provide
participants with impartial access and capture information for use
in establishing possible rule violations.
Registration Criterion 3 of section 5a(c) of the Act: TRADING
PROCEDURES--The board of trade shall establish and enforce rules or
terms and conditions defining, or specifications detailing, trading
procedures to be used in entering and executing orders traded on the
facilities of the board of trade. The rules may authorize--(A)
transfer trades or office trades; (B) an exchange of--(i) futures in
connection with a cash commodity transaction; (ii) futures for cash
commodities; or (iii) futures for swaps; or (C) a futures commission
merchant, acting as principal or agent, to enter into or confirm the
execution of a contract for the purchase or sale of a commodity for
future delivery if the contract is reported, recorded, or cleared in
accordance with the rules of the registered derivatives transaction
execution facility or a derivatives clearing organization.
(a) A submission of a board of trade to operate as an electronic
registered derivatives transaction execution facility should include
the system's trade-matching algorithm and order entry procedures. A
submission involving a trade-matching algorithm that is based on
order priority factors other than price and time should include a
brief explanation of the algorithm.
(b) A board of trade's specifications on initial and periodic
objective testing and review of proper system functioning, adequate
capacity, and security for any automated systems should be included
in its submission. 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''), and subsequently adopted by the
Commission on November 21, 1990 (55 FR 48670), are appropriate
guidelines for an electronic trading facility to apply to electronic
trading systems. Any program of objective testing and review of the
system should be performed by a qualified independent professional.
(c) A registered derivatives transaction execution facility that
authorizes transfer trades or office trades; an exchange of futures
for physicals or futures for swaps; or any other non-competitive
transactions, including block trades, should have rules particularly
authorizing such transactions and establishing appropriate
recordkeeping requirements. Block trading rules should ensure that
the block trading does not operate in a manner that compromises the
integrity of the prices or price discovery on the relevant market.
Registration Criterion 4 of section 5a(c) of the Act: FINANCIAL
INTEGRITY OF TRANSACTIONS--The board of trade shall establish and
enforce rules or terms and conditions providing for the financial
integrity of transactions entered on or through the facilities of
the board of trade, and rules or terms and conditions to ensure the
financial integrity of any futures commission merchants and
introducing brokers and the protection of customer funds.
(a) A board of trade operating as a registered derivatives
transaction execution facility should provide for the financial
integrity of transactions by setting appropriate minimum financial
standards for users and/or members, appropriate margin forms and
levels, and appropriate default rules and procedures. If cleared,
transactions executed on the facility must be cleared through a
derivatives clearing organization. The Commission believes ensuring
and enforcing the financial integrity of transactions and
intermediaries, and the protection of customer funds should include
monitoring compliance with the facility's minimum financial
standards. In order to monitor for minimum financial requirements, a
facility should routinely receive and promptly review financial and
related information.
(b) A registered derivatives transaction execution facility that
allows customers that qualify as ``eligible traders'' under the
definition found in section 5a(b)(3) of the Act only by trading
through a futures commission merchant pursuant to section
5a(b)(3)(B), should have rules concerning the protection of customer
funds that address appropriate minimum financial standards for
intermediaries, the segregation of customer and proprietary funds,
the custody of customer funds, the investment standards for customer
funds, related recordkeeping procedures and related intermediary
default procedures.
Appendix B to Part 37--Guidance on Compliance With Core Principles
1. This appendix provides guidance concerning the core
principles with which a registered derivatives transaction execution
facility must comply to maintain registration under section 5a(d) of
the Act and Sec. 37.5(a). This guidance is illustrative only and is
not intended to be a mandatory checklist.
2. If a registered derivatives transaction execution facility
chooses to certify that it has the capacity to, and upon initiation
will, operate in compliance with the core principles under section
5a(d) of the Act and Sec. 37.6, it should consider the issues set
forth in this appendix prior to certification.
3. Alternatively, if a registered derivatives transaction
execution facility chooses pursuant to Sec. 37.6(b)(2) to provide
the
[[Page 14276]]
Commission with a demonstration of its compliance with core
principles, addressing the issues set forth in this appendix would
help the Commission in its consideration of such compliance. To the
extent that compliance with, or satisfaction of, the core principles
is not self-explanatory from the face of the derivatives transaction
execution facility's rules, which may be terms and conditions or
trading protocols, a submission under Sec. 37.6(b)(2) should include
an explanation or other form of documentation demonstrating that the
derivatives transaction execution facility complies with the core
principles.
Core Principle 1 of section 5a(d) of the Act: IN GENERAL--To
maintain the registration of a board of trade as a derivatives
transaction execution facility, a board of trade shall comply with
the core principles specified in this subsection. The board of trade
shall have reasonable discretion in establishing the manner in which
the board of trade complies with the core principles.
A board of trade newly registered to operate as a derivatives
transaction execution facility must certify or satisfactorily
demonstrate its capacity to operate in compliance with the core
principles under section 5a(d) of the Act prior to the commencement
of its operations. The Commission also may require that a board of
trade operating as a registered derivatives transaction execution
facility demonstrate to the Commission that it is operating in
compliance with one or more core principles.
Core Principle 2 of section 5a(d) of the Act: COMPLIANCE WITH
RULES--The board of trade shall monitor and enforce the rules of the
facility, including any terms and conditions of any contracts traded
on or through the facility and any limitations on access to the
facility.
(a) A board of trade operating as a registered derivatives
transaction execution facility should have arrangements, resources
and authority for effectively and affirmatively enforcing its rules
(which, in the case of a facility that restricts traders to eligible
commercial entities, may be the effective monitoring of limitations
on access to the facility), 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,
limit or suspend, and terminate a member/participant's activities or
access or, in the case of a derivatives transaction execution
facility restricting its traders to eligible commercial entities,
the authority and ability to terminate a member/participant's
activities or access. In either case, any termination should be
carried out pursuant to clear and fair standards.
Core Principle 3 of section 5a(d) of the Act: MONITORING OF
TRADING--The board of trade shall monitor trading in the contracts
of the facility to ensure orderly trading in the contract and to
maintain an orderly market while providing any necessary trading
information to the Commission to allow the Commission to discharge
the responsibilities of the Commission under the Act.
(a) Arrangements and resources for effective trade monitoring
programs should facilitate, on both a routine and nonroutine 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 board of trade operating as a registered derivatives
transaction execution facility should have the authority to collect
the information and documents necessary to reconstruct trading for
appropriate market analysis as it carries out its programs to ensure
orderly trading and to maintain an orderly market. The facility also
should have the authority to intervene as necessary to maintain an
orderly market.
(b) Alternatively, if a board of trade operating as a registered
derivatives transaction execution facility restricts contracts
traded pursuant to those under Secs. 37.3(a)(1) and 37.3(b), it may
choose to satisfy this core principle by providing information to
the Commission as requested by the Commission to satisfy its
obligations under the Act. The facility should have the authority to
collect or capture and retrieve all necessary information.
Core Principle 4 of section 5a(d) of the Act: DISCLOSURE OF
GENERAL INFORMATION--The board of trade shall disclose publicly and
to the Commission information concerning--(A) contract terms and
conditions; (B) trading conventions, mechanisms, and practices; (C)
financial integrity protections; and (D) other information relevant
to participation in trading on the facility.
A board of trade operating as a registered derivatives
transaction execution facility should have arrangements and
resources for the disclosure and explanation of contract terms and
conditions, trading conventions, trading mechanisms, trading
practices, system functioning, system capacity, system security,
system testing and review, and financial integrity protections,
including whether eligible contract participants will have the right
to opt out of segregation of customer funds. The facility must also
disclose any limitations of liability (which may not include
limitations of liability for violations of the Act or Commission
regulations by fraud, or wanton or willful misconduct). Such
information may be made publicly available through the derivatives
transaction execution facility's website. The facility should also
make information regarding prices, bids and offers, or other
information as determined by the Commission, readily available to
market participants on a fair, equitable and timely basis.
Furthermore, the facility should make available information
concerning steps taken by the facility in response to an emergency.
Core Principle 5 of section 5a(d) of the Act: DAILY PUBLICATION
OF TRADING INFORMATION--The board of trade shall make public daily
information on settlement prices, volume, open interest, and opening
and closing ranges for contracts traded on the facility if the
Commission determines that the contracts perform a significant price
discovery function for transactions in the cash market for the
commodity underlying the contracts.
A board of trade operating as a registered derivatives
transaction execution facility should provide to the public
information regarding settlement prices, price range, trading
volume, open interest and other related market information for all
applicable contracts, as determined by the Commission. The
Commission will determine by order, after notice and an opportunity
for a hearing through submission of written data, views and
arguments, whether the requirement of the core principle on
publication of trading information under section 5a(d)(5) of the Act
applies to a particular product or products traded on a facility.
Provision of information for any applicable contract could be
through such means as providing the information to a financial
information service or by timely placing the information on a
facility's website.
Core Principle 6 of section 5a(d): FITNESS STANDARDS--The board
of trade shall establish and enforce appropriate fitness standards
for directors, members of any disciplinary committee, members, and
any other persons with direct access to the facility, including any
parties affiliated with any of the persons described in this
paragraph.
A derivatives transaction execution facility should have
appropriate eligibility criteria for the categories of persons set
forth in the core principle that would include standards for fitness
and for the collection and verification of information supporting
compliance with such standards. Minimum standards of fitness for
persons who have member voting privileges, governing obligations or
responsibilities, or who exercise disciplinary authority are those
bases for refusal to register a person under section 8a(2) of the
Act, or a history of serious disciplinary offenses, such as those
which would be disqualifying under Sec. 1.63 of this chapter.
Eligible contract participants or eligible commercial entities who
have direct access but do not have these privileges, obligations,
responsibilities or disciplinary authority could satisfy minimum
fitness standards by meeting the standards that they must meet to
qualify under the Act's respective definitions of eligible contract
participants or eligible commercial entities. Natural persons who
directly or indirectly have greater than a ten percent interest in a
facility should meet the fitness standards applicable to members
with voting rights. A demonstration of the fitness of the
applicant's directors, members, or natural persons who directly or
indirectly have a greater than ten percent interest in a facility
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 7 of section 5a(d) of the Act: CONFLICTS OF
INTEREST--The board of trade shall establish and enforce rules to
minimize conflicts of interest in the decision making process of the
derivatives transaction execution facility and establish a process
for resolving such conflicts of interest.
[[Page 14277]]
The means to address conflicts of interest in decision-making of
a board of trade operating as a registered derivatives transaction
execution facility should include methods to ascertain the presence
of conflicts of interest and to make decisions in the event of such
a conflict. The Commission also believes that a board of trade
operating as a registered derivatives transaction execution facility
should provide for appropriate limitations on the use or disclosure
of material non-public information gained through the performance of
official duties by board members, committee members and facility
employees or gained through an ownership interest in the facility.
Core Principle 8 of section 5a(d) of the Act: RECORDKEEPING--The
board of trade shall maintain records of all activities related to
the business of the derivatives transaction execution facility in a
form and manner acceptable to the Commission for a period of 5
years.
Section 1.31 of this chapter governs recordkeeping obligations
under the Act and the Commission's regulations thereunder. In order
to provide broad flexible performance standards for recordkeeping,
Sec. 1.31 was updated and amended by the Commission in 1999.
Accordingly, Sec. 1.31 itself establishes the guidance regarding the
form and manner for keeping records.
Core Principle 9 of section 5a(d) of the Act: ANTITRUST
CONSIDERATIONS--Unless necessary or appropriate to achieve the
purposes of this Act, the board of trade shall endeavor to avoid--
(A) adopting any rules or taking any actions that result in any
unreasonable restraint of trade; or (B) imposing any material
anticompetitive burden on trading on the derivatives transaction
execution facility.
A board of trade seeking to operate as a registered derivatives
transaction execution facility may request that the Commission
consider under the provisions of section 15(b) of the Act any of the
board of trade's rules, which may be trading protocols or policies,
and including both operational rules and the terms or conditions of
products listed for trading, at the time it submits its registration
application or thereafter. The Commission intends to apply section
15(b) of the Act to its consideration of issues under this core
principle in a manner consistent with that previously applied to
contract markets.
11. Chapter I of 17 CFR is amended by adding new Part 38 as
follows:
PART 38--DESIGNATED CONTRACT MARKETS
Sec.
38.1 Scope.
38.2 Exemption.
38.3 Procedures for designation by application.
38.4 Procedures for listing products and implementing contract
market rules.
38.5 Information relating to contract market compliance.
38.6 Enforceability.
Appendix A to Part 38--Application Guidance
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance with Core Principles
Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, as amended by the
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L.
106-554, 114 Stat. 2763 (2000).
Sec. 38.1 Scope.
The provisions of this part 38 shall apply to every board of trade
or trading facility that has been designated as a contract market in a
commodity under section 6 of the Act. Provided, however, nothing in
this provision affects the eligibility of designated contract markets
to operate under the provisions of parts 36 or 37 of this chapter.
Sec. 38.2 Exemption.
Agreements, contracts, or transactions traded on a designated
contract market under section 6 of the Act, the contract market and the
contract market's operator are exempt from all Commission regulations
for such activity, except for the requirements of this part 38 and
Secs. 1.3, 1.31, 1.38, 33.10, part 9, parts 15 through 21, part 40, and
part 190 of this chapter.
Sec. 38.3 Procedures for designation by application.
(a) Application. A board of trade or trading facility shall be
deemed to be designated as a contract market sixty days after receipt
by the Commission of an application for designation unless notified
otherwise during that period, or, as determined by Commission order,
designated upon conditions, if:
(1) The application demonstrates that the applicant satisfies the
criteria for designation of section 5(b) of the Act, the core
principles for operation under section 5(d) of the Act and the
provisions of this part 38;
(2) The application is labeled as being submitted pursuant to this
part 38;
(3) The application includes a copy of the applicant's rules and,
to the extent that compliance with the conditions for designation is
not self-evident, a brief explanation of how the rules satisfy each of
the conditions for designation;
(4) The applicant does not amend or supplement the designation
application, except as requested by the Commission or for correction of
typographical errors, renumbering or other nonsubstantive revisions,
during that period; 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.
(b) Guidance regarding application for designation. An applicant
for contract market designation may meet the following conditions for
designation as specified in this paragraph:
(1) Prevention of market manipulation. The designation criterion to
prevent market manipulation under section 5(b)(2) of the Act also
includes the requirement that the designated contract market have a
dedicated regulatory department, or delegation of that function;
(2) Fair and equitable trading. The designation criterion requiring
fair and equitable trading rules under section 5(b)(3) of the Act also
includes fair, equitable and timely availability to market participants
of information regarding prices, bids and offers;
(3) Disciplinary procedures. The designation criterion to enforce
disciplinary procedures under section 5(b)(6) of the Act may be
satisfied by an organized exchange or a trading facility with respect
to non-member participants of the contract market by expelling or by
denying future access to such a person found to have violated the
contract market's rules;
(4) Governance fitness standards. The requirement to establish
appropriate minimum fitness standards for participants in a facility
having direct access to the facility under the core principle on
fitness pursuant to section 5(d)(14) of the Act includes natural
persons that directly or indirectly have greater than a ten percent
ownership interest in the facility; and
(5) In general. Appendix A to this part provides guidance to
applicants for designation as contract markets on how the criteria for
designation under section 5(b) of the Act can be satisfied and Appendix
B to this part provides guidance to applicants for designation and
designated contract markets on how the core principles of section 5(d)
of the Act can be satisfied;
(c) Termination of fast track review. During the sixty-day period
for review pursuant to paragraph (a) of this section, the Commission
shall notify the applicant seeking designation that the Commission is
terminating review under this section and will review the proposal
under the time period and procedures of section 6 of the Act, if it
appears that the application's form or substance fails to meet the
requirements of this part. This termination notification will state the
nature of the issues raised and the specific condition of designation
that the applicant would violate, appears to violate, or the violation
of which cannot be ascertained from the application. Within ten days of
receipt of this termination notification, the applicant seeking
designation may request that the Commission render a decision whether
to designate the
[[Page 14278]]
contract market or to institute a proceeding to deny the proposed
application under procedures specified in section 6 of the Act by
notifying the Commission that the applicant views its submission as
complete and final as submitted.
(d) Request for withdrawal of application for designation or
vacation of designation. An applicant to be designated, or a designated
contract market, may withdraw its application or vacate its designation
under section 7 of the Act by filing with the Commission at its
Washington, D.C., headquarters such a request. Withdrawal from
registration or vacation of designation shall not affect any action
taken or to be taken by the Commission based upon actions, activities
or events occurring during the time that the application for
designation was pending with, or that the facility was designated by,
the Commission.
(e) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Division
of Trading and Markets and separately to the Director of Economic
Analysis or the Directors' delegatee, with the concurrence of the
General Counsel or the General Counsel's delegatee, authority to notify
the entity seeking designation under paragraph (a) of this section that
review under those procedures is being terminated or to designate the
entity as a contract market upon conditions.
(2) The Directors may submit to the Commission for its
consideration any matter that has been delegated in this paragraph.
(3) Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (e)(1)
of this section.
Sec. 38.4 Procedures for listing products and implementing contract
market rules.
(a) Request for Commission approval of rules and products. An
applicant for designation, or a designated contract market, may request
that the Commission approve under section 5c(c) of the Act, 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, prior to their implementation or,
notwithstanding the provisions of section 5c(c)(2) of the Act, at
anytime thereafter, under the procedures of Secs. 40.5 or 40.3 of this
chapter, as applicable. A designated contract market may label a
product in its rules as, ``Listed for trading pursuant to Commission
approval,'' if the product and its terms or conditions have been
approved by the Commission and it may label as, ``Approved by the
Commission,'' only those rules that have been so approved.
(b) Self-certification of rules and products. Rules of a designated
contract market and subsequent amendments thereto, including both
operational rules and the terms or conditions of products listed for
trading on the facility, not voluntarily submitted for prior Commission
approval pursuant to paragraph (a) of this section must be submitted to
the Commission with a certification that the rule, rule amendment or
product complies with the Act or rules thereunder pursuant to the
procedures of Secs. 40.6 and 40.2 of this chapter, as applicable.
Provided, however, any rule or rule amendment that would, for a
delivery month having open interest, materially change a term or
condition of a contract for future delivery in an agricultural
commodity enumerated in section 1a(4) of the Act, or of an option on
such a contract or commodity, must be submitted to the Commission prior
to its implementation for review and approval under Sec. 40.4 of this
chapter.
(c) An applicant for designation, or a designated contract market,
may request that the Commission consider under the provisions of
section 15(b) of the Act any of the contract market's rules or
policies, including both operational rules and the terms or conditions
of products listed for trading.
Sec. 38.5 Information relating to contract market compliance.
(a) Upon request by the Commission, a designated contract market
shall file with the Commission such information related to its business
as a contract market, 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 request.
(b) Upon request by the Commission, a designated contract market
shall file with the Commission a written demonstration, containing such
supporting data, information and documents, in the form and manner and
within such time as the Commission may specify, that the designated
contract market is in compliance with one or more core principles as
specified in the request.
Sec. 38.6 Enforceability.
An agreement, contract or transaction entered into on, or pursuant
to the rules of a designated contract market shall not be void,
voidable, subject to rescission or otherwise invalidated or rendered
unenforceable as a result of:
(a) A violation by the designated contract market of the provisions
of section 5 of the Act or this part 38; or
(b) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement, or require a designated contract market
to adopt a specific term or condition, trading rule or procedure, or to
take or refrain from taking a specific action.
Appendix A to Part 38--Application Guidance
This appendix provides guidance for applicants for designation
as a contract market under section 5(b) of the Act and Sec. 38.3.
The guidance following each designation criterion is illustrative
only of the types of matters an applicant may address, as
applicable, and is not intended to be a mandatory checklist.
Addressing the issues and questions set forth in this appendix would
help the Commission in its consideration of whether the application
has met the criteria for designation. To the extent that compliance
with, or satisfaction of, a criterion for designation is not self-
explanatory from the face of the contract market's rules, which may
be trading protocols or terms and conditions, the application should
include an explanation or other form of documentation demonstrating
that the applicant meets the designation criteria of section 5(b) of
the Act.
Designation Criterion 1 of section 5(b) of the Act: IN GENERAL--
To be designated as a contract market, the board of trade shall
demonstrate to the Commission that the board of trade meets the
criteria specified in this subsection.
A board of trade preparing to submit to the Commission an
application for designation as a contract market is encouraged to
contact Commission staff for guidance and assistance in preparing an
application. Applicants may submit a draft application for review
and feedback prior to the submission of an actual application
without triggering the application review procedures of Sec. 38.3.
Designation Criterion 2 of section 5(b) of the Act: PREVENTION
OF MARKET MANIPULATION--The board of trade shall have the capacity
to prevent market manipulation through market surveillance,
compliance, and enforcement practices and procedures, including
methods for conducting real-time monitoring of trading and
comprehensive and accurate trade reconstructions.
A designation application should demonstrate a capacity to
prevent market manipulation, including that the contract market has
trading and participation rules deterring abuses and a dedicated
regulatory department, or an effective delegation of that function.
Designation Criterion 3 of section 5(b) of the Act: FAIR AND
EQUITABLE TRADING--The board of trade shall establish and enforce
trading rules to ensure fair and
[[Page 14279]]
equitable trading through the facilities of the contract market, and
the capacity to detect, investigate, and discipline any person that
violates the rules. The rules may authorize--(A) transfer trades or
office trades; (B) an exchange of--(i) futures in connection with a
cash commodity transaction; (ii) futures for cash commodities; or
(iii) futures for swaps; or (C) a futures commission merchant,
acting as principal or agent, to enter into or confirm the execution
of a contract for the purchase or sale of a commodity for future
delivery if the contract is reported, recorded, or cleared in
accordance with the rules of the contract market or a derivatives
clearing organization.
(a) Ensuring fair and equitable trading on a contract market,
among other things, includes:
(1) Providing to market participants, on a fair, equitable and
timely basis, information regarding prices, bids and offers; and
(2) Limitations of contract market liability (or of any of its
officers, directors, employees, licensors, contractors and/or
affiliates) only if such limitations of liability do not arise from
a person's violation of the Act or Commission regulations by fraud,
or wanton or willful misconduct.
(b) A contract market that authorizes transfer trades or office
trades; an exchange of futures for physicals or futures for swaps;
or any other non-competitive transactions, including block trades,
should have rules particularly authorizing such transactions and
establishing appropriate recordkeeping requirements.
Designation Criterion 4 of section 5(b) of the Act: TRADE
EXECUTION FACILITY--The board of trade shall--(A) establish and
enforce rules defining, or specifications detailing, the manner of
operation of the trade execution facility maintained by the board of
trade, including rules or specifications describing the operation of
any electronic matching platform; and (B) demonstrate that the trade
execution facility operates in accordance with the rules or
specifications.
(a) An application of a board of trade to be designated as a
contract market should include the system's trade-matching algorithm
and order entry procedures. An application involving a trade-
matching algorithm that is based on order priority factors other
than price and time should include a brief explanation of the
algorithm.
(b) A designated contract market's specifications on initial and
periodic objective testing and review of proper system functioning,
adequate capacity and security for any automated systems should be
included in its application. A board of trade should submit in the
contract market application, information on the objective testing
and review carried out on its automated system. 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 an electronic
trading facility to apply to electronic trading systems. Any program
of objective testing and review of the system should be performed by
a qualified independent professional.
Designation Criterion 5 of section 5(b) of the Act: FINANCIAL
INTEGRITY OF TRANSACTIONS--The board of trade shall establish and
enforce rules and procedures for ensuring the financial integrity of
transactions entered into by or through the facilities of the
contract market, including the clearance and settlement of the
transactions with a derivatives clearing organization.
(a) A designated contract market should provide for the
financial integrity of transactions by setting appropriate minimum
financial standards for users and/or members, appropriate margin
forms and levels, and appropriate default rules and procedures.
Clearing of transactions executed on the contract market should be
provided through a derivatives clearing organization. The Commission
believes ensuring and enforcing the financial integrity of
transactions and intermediaries, and the protection of customer
funds should include monitoring compliance with the contract
market's minimum financial standards. In order to monitor for
minimum financial requirements, a contract market should routinely
receive and promptly review financial and related information.
(b) A designated contract market should have rules concerning
the protection of customer funds that address appropriate minimum
financial standards for intermediaries, the segregation of customer
and proprietary funds, the custody of customer funds, the investment
standards for customer funds, related recordkeeping procedures and
related intermediary default procedures.
Designation Criterion 6 of section 5(b) of the Act: DISCIPLINARY
PROCEDURES--The board of trade shall establish and enforce
disciplinary procedures that authorize the board of trade to
discipline, suspend, or expel members or market participants that
violate the rules of the board of trade, or similar methods for
performing the same functions, including delegation of the functions
to third parties.
The disciplinary procedures established by a designated contract
market should give the contract market both the authority and
ability to discipline and limit or suspend a member's activities as
well as the authority and ability to terminate a member's activities
pursuant to clear and fair standards. The authority to discipline or
limit or suspend a member or participant's activities could be found
in a contract market's rules, user agreements or other means. An
organized exchange or a trading facility could satisfy this
criterion for non-members by expelling or denying future access to
such persons upon a finding that such a person has violated the
board of trade's rules.
Designation Criterion 7 of section 5(b) of the Act: PUBLIC
ACCESS--The board of trade shall provide the public with access to
the rules, regulations, and contract specifications of the board of
trade.
A board of trade operating as a contract market may provide
information to the public by placing the information on its web
site.
Designation Criterion 8 of section 5(b) of the Act: ABILITY TO
OBTAIN INFORMATION--The board of trade shall establish and enforce
rules that will allow the board of trade to obtain any necessary
information to perform any of the functions described in this
subsection, including the capacity to carry out such international
information-sharing agreements as the Commission may require.
A designated contract market should have 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 contract market. Appropriate
information-sharing agreements could be established with other
boards of trade or the Commission could act in conjunction with the
contract market to carry out such information sharing.
Appendix B to Part 38--Guidance on, and Acceptable Practices in,
Compliance with Core Principles
1. This appendix provides guidance concerning the core
principles with which a board of trade must comply to maintain
designation under section 5(d) of the Act and Secs. 38.3 and 38.5.
The guidance is provided in subsection (a) following each core
principle and it can be used to demonstrate to the Commission core
principle compliance, under Secs. 38.3(a) and 38.5. The guidance for
each core principle is illustrative only of the types of matters a
board of trade may address, as applicable, and is not intended to be
a mandatory checklist. Addressing the issues and questions set forth
in this appendix would help the Commission in its consideration of
whether the board of trade is in compliance with the core
principles. To the extent that compliance with, or satisfaction of,
a core principle is not self-explanatory from the face of the board
of trade's rules, which may be terms and conditions or trading
protocols, an application pursuant to Sec. 38.3, or a submission
pursuant to Sec. 38.5 should include an explanation or other form of
documentation demonstrating that the board of trade complies with
the core principles.
2. Acceptable practices meeting the requirements of the core
principles are set forth in subsection (b) following each core
principle. Boards of trade that follow the specific practices
outlined under subsection (b) for any core principle in this
appendix will meet the applicable core principle. Subsection (b) is
for illustrative purposes only, and does not state the exclusive
means for satisfying a core principle.
Core Principle 1 of section 5(d) of the Act: IN GENERAL--To
maintain the designation of a board of trade as a contract market,
the board of trade shall comply with the core principles specified
in this subsection. The board of trade shall have reasonable
discretion in establishing the manner in which it complies with the
core principles.
A board of trade applying for designation as a contract market
must satisfactorily demonstrate its capacity to operate in
compliance with the core principles under section 5(d) of the Act
and Sec. 38.3. The Commission may require that a board of trade
[[Page 14280]]
operating as a contract market demonstrate to the Commission that it
is in compliance with one or more core principles.
Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH
RULES--The board of trade shall monitor and enforce compliance with
the rules of the contract market, including the terms and conditions
of any contracts to be traded and any limitations on access to the
contract market.
(a) Application Guidance. (1) A designated contract market
should have arrangements and resources for effective trade practice
surveillance programs, with the authority to collect information and
documents on both a routine and non-routine basis including the
examination of books and records kept by members/participants of the
contract market. The arrangements and resources should facilitate
the direct supervision of the market and the analysis of data
collected. Trade practice surveillance programs could be carried out
by the contract market itself or through delegation to a third
party. If the contract market out-sources its trade practice
surveillance program to a third party, such third party should have
the capacity and authority to carry out such program, and the
contract market should retain appropriate supervisory authority over
the third party.
(2) A designated contract market 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/participant's
activities as well as the authority and ability to terminate a
member/participant's activities pursuant to clear and fair
standards. An organized exchange or a trading facility could satisfy
this criterion for non-members by expelling or denying such persons
future access upon a finding that such a person has violated the
board of trade's rules.
(b) Acceptable Practices. An acceptable trade practice
surveillance program generally would include:
(1) Maintenance of data reflecting the details of each
transaction executed on the contract market;
(2) Electronic analysis of this data routinely to detect
potential trading violations;
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to the contract market's
attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend the activities of a member or
participant pursuant to clear and fair standards. See, e.g., 17 CFR
part 8.
Core Principle 3 of section 5(d) of the Act: CONTRACTS NOT
READILY SUBJECT TO MANIPULATION--The board of trade shall list on
the contract market only contracts that are not readily susceptible
to manipulation.
(a) Application Guidance. Contract markets may list new products
for trading by self-certification under Sec. 40.2 of this chapter or
may submit products for Commission approval under Sec. 40.3 and part
40, Appendix A, of this chapter.
(b) Acceptable Practices. Guideline No. 1, 17 CFR Part 40,
Appendix A may be used as guidance in meeting this core principle
for both new product listings and existing listed contracts.
Core Principle 4 of section 5(d) of the Act: MONITORING OF
TRADING.--The board of trade shall monitor trading to prevent
manipulation, price distortion, and disruptions of the delivery or
cash-settlement process.
(a) Application Guidance. A contract market could prevent market
manipulation through a dedicated regulatory department, or by
delegation of that function to an appropriate third party.
(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 designated contract market 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 (1) to the size and ownership of
deliverable supplies--the existing supply and the future or
potential supply, and (2) 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 traders' activity and potential power in a market,
at a minimum, every contract market 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
contract markets, an effective surveillance program for contract
markets 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, contract markets may find it more efficient to
use information available from the Commission's LTRS data for
position monitoring.
Core Principle 5 of section 5(d) of the Act: POSITION
LIMITATIONS OR ACCOUNTABILITY--To reduce the potential threat of
market manipulation or congestion, especially during trading in the
delivery month, the board of trade shall adopt position limitations
or position accountability for speculators, where necessary and
appropriate.
(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 a contract market
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, contract markets 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) A contract market 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 position accountability rules
include those with large open-interest, high daily trading volumes
and liquid cash markets.
(5) Contract markets should have aggregation rules that apply to
those accounts under common control, those with common ownership,
i.e., where there is a ten percent or greater financial interest,
and those traded according to an express or implied agreement.
Contract markets will be permitted to set more stringent aggregation
policies. For example, one major board of trade has adopted a policy
of automatically aggregating the position of members of the same
household, unless they were granted a specific waiver. Contract
markets may grant exemptions to their position limits for bona fide
hedging (as defined in Sec. 1.3(z) of this chapter) and may grant
exemptions for reduced risk positions, such as spreads, straddles
and arbitrage positions.
(6) Contract markets should establish a program for effective
monitoring and
[[Page 14281]]
enforcement of these limits. One acceptable enforcement mechanism is
a program whereby traders apply for these exemptions by the contract
market 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. Contract markets 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. A contract market 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 contract market
approve a specific maximum higher level.
(7) Contract markets with many products with large numbers of
traders should have an automated means of detecting traders'
violations of speculative limits or exemptions. Contract markets
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 should have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The contract market 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 contract market position limits that have
been approved by the Commission is also a violation of section 4a(e)
of the Act.
Core Principle 6 of section 5(d) of the Act: EMERGENCY
AUTHORITY--The board of trade shall adopt rules to provide for the
exercise of emergency authority, in consultation or cooperation with
the Commission, where necessary and appropriate, including the
authority to--(A) liquidate or transfer open positions in any
contract; (B) suspend or curtail trading in any contract; and (C)
require market participants in any contract to meet special margin
requirements.
(a) Application Guidance. A designated contract market should
have clear procedures and guidelines for contract market decision-
making regarding emergency intervention in the market, including
procedures and guidelines to carry out such decision-making without
conflicts of interest. A contract market should also have the
authority to intervene as necessary to maintain markets with fair
and orderly trading as well as procedures for carrying out the
intervention. Procedures and guidelines should also include
notifying the Commission of the exercise of a contract market's
regulatory emergency authority, preventing conflicts of interest,
and documenting the contract market's decision-making process and
the reasons for using its emergency action authority. Information on
steps taken under such procedures should be included in a submission
of a certified rule under Sec. 40.6 of this chapter and any related
submissions for rule approval pursuant to Sec. 40.5 of this chapter,
when carried out pursuant to a contract market's emergency
authority.
(b) Acceptable Practices. As is necessary to address perceived
market threats, the contract market, 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 a reduction in positions, extend or shorten
the expiration date or the trading hours, suspend or curtail trading
on the market, order the transfer of customer contracts and the
margin for such contracts from one member of the contract market to
another, or alter the delivery terms or conditions.
Core Principle 7 of section 5(d) of the Act: AVAILABILITY OF
GENERAL INFORMATION--The board of trade shall make available to
market authorities, market participants, and the public information
concerning--(A) the terms and conditions of the contracts of the
contract market; and (B) the mechanisms for executing transactions
on or through the facilities of the contract market.
(a) Application Guidance. A designated contract market 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 providing 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 8 of section 5(d) of the Act: DAILY PUBLICATION
OF TRADING INFORMATION--The board of trade shall make public daily
information on settlement prices, volume, open interest, and opening
and closing ranges for actively traded contracts on the contract
market.
(a) Application Guidance. A contract market should provide to
the public information regarding settlement prices, price range,
volume, open interest and other related market information for all
actively traded contracts, as determined by the Commission, on a
fair, equitable and timely basis. The Commission believes that
section 5(d)(8) requires contract markets to publicize trading
information for any non-dormant contract. Provision of information
for any applicable contract could be through such means as provision
of the information to a financial information service and by timely
placement of the information on a contract market's web site.
(b) Acceptable Practices. [Reserved]
Core Principle 9 of section 5(d) of the Act: EXECUTION OF
TRANSACTIONS--The board of trade shall provide a competitive, open,
and efficient market and mechanism for executing transactions.
(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 designated contract market'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 designated contract market to apply to
electronic trading systems. Any program of objective testing and
review of the system should be performed by a qualified independent
professional. 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 designated contract market that determines to allow block
trading should ensure that the block trading does not operate in a
manner that compromises the integrity of prices or price discovery
on the relevant market.
(b) Acceptable Practices. A professional that is a certified
member of the Informational Systems Audit and Control Association
experienced in the industry would be an example of an acceptable
party to carry out testing and review of an electronic trading
system.
Core Principle 10 of section 5(d) of the Act: TRADE
INFORMATION--The board of trade shall maintain rules and procedures
to provide for the recording and safe storage of all identifying
trade information in a manner that enables the contract market to
use the information for purposes of assisting in the prevention of
customer and market abuses and providing evidence of any violations
of the rules of the contract market.
(a) Application Guidance. A designated contract market should
have arrangements and resources for recording of full data entry and
trade details and the safe storage of audit trail data. A designated
contract market should have systems sufficient to enable the
contract market to use the information for purposes of assisting in
the prevention of customer and market abuses through reconstruction
of trading.
(b) Acceptable Practices. (1) The goal of an audit trail is to
detect and deter customer and market abuse. An effective contract
market audit trail should capture and retain sufficient trade-
related information to permit contract market staff to detect
trading abuses and to reconstruct all transactions within a
reasonable period of time. An audit trail should include specialized
electronic surveillance programs that 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 contract market must create and maintain an electronic
transaction history database that contains information
[[Page 14282]]
with respect to transactions effected on the designated contract
market.
(2) An acceptable audit trail, therefore, should include the
following: original source documents, transaction history,
electronic analysis capability, and safe storage capability. A
contract market whose audit trail satisfies the following acceptable
practices would satisfy Core Principle 9.
(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 (whether filled,
unfilled or cancelled, each of which should be retained or
electronically captured), such records reflect the terms of the
order, an account identifier that relates back to the account(s)
owner(s), and the time of order entry. For floor-based contract
markets, 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 17.
Core Principle 11 of section 5(d) of the Act: FINANCIAL
INTEGRITY OF CONTRACTS--The board of trade shall establish and
enforce rules providing for the financial integrity of any contracts
traded on the contract market (including the clearance and
settlement of the transactions with a derivatives clearing
organization), and rules to ensure the financial integrity of any
futures commission merchants and introducing brokers and the
protection of customer funds.
(a) Application Guidance. Clearing of transactions executed on a
designated contract market should be provided through a Commission-
designated clearing facility. In addition, a designated contract
market should maintain the financial integrity of its transactions
by maintaining minimum financial standards for its members 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
designated contract market should routinely receive and promptly
review financial and related information. Rules concerning the
protection of customer funds should address the segregation of
customer and proprietary funds, the custody of customer funds, the
investment standards for customer funds, related recordkeeping and
related intermediary default procedures.
(b) Acceptable Practices. [Reserved]
Core Principle 12 of section 5(d) of the Act: PROTECTION OF
MARKET PARTICIPANTS--The board of trade shall establish and enforce
rules to protect market participants from abusive practices
committed by any party acting as an agent for the participants.
(a) Application Guidance. A designated contract market 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. The contract market should have methods and resources
appropriate to the nature of the trading system and the structure of
the market to detect trade practice abuses.
(b) Acceptable Practices. [Reserved]
Core Principle 13 of section 5(d) of the Act: DISPUTE
RESOLUTION--The board of trade shall establish and enforce rules
regarding and provide facilities for alternative dispute resolution
as appropriate for market participants and any market
intermediaries.
(a) Application Guidance. A designated contract market 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) Under Core Principle 13, a
designated contract market is required to provide for dispute
resolution mechanisms that are appropriate to the nature of the
market.
(2) In order to satisfy acceptable standards, a designated
contract market should provide a customer dispute resolution
mechanism that is fundamentally fair and is equitable. An acceptable
customer dispute resolution mechanism would 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 contract market, and
(v) Notice to the parties of the fees and costs that may be
assessed.
(3) The procedure employed also should be voluntary, and could
permit counterclaims as provided in Sec. 166.5 of this chapter.
(4) If the designated contract market also provides a procedure
for the resolution of disputes that do not involve customers (i.e.,
member-to-member disputes), the procedure for resolving such
disputes must be independent of and shall not interfere with or
delay the resolution of customers' claims or grievances.
(5) A designated contract market 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 designated contract
market does delegate that responsibility, the contract market 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 14 of section 5(d) of the Act: GOVERNANCE FITNESS
STANDARDS--The board of trade shall establish and enforce
appropriate fitness standards for directors, members of any
disciplinary committee, members of the contract market, and any
other persons with direct access to the facility (including any
parties affiliated with any of the persons described in this
paragraph).
(a) Application Guidance. (1) A designated contract market
should have appropriate eligibility criteria for the categories of
persons set forth in the Core Principle that should include
standards for fitness and for the collection and verification of
information supporting compliance with such standards. Minimum
standards of fitness for persons who have member voting privileges,
governing obligations or responsibilities, or who exercise
disciplinary authority are those bases for refusal to register a
person under section 8a(2) of the Act or a history of serious
disciplinary offenses, such as those that would be disqualifying
under Sec. 1.63 of this chapter. Participants who have direct access
to trade on the contract market, but do not have these privileges,
obligations, responsibilities or disciplinary authority could
satisfy minimum fitness standards by meeting the standards that they
must meet to qualify as a ``participant.'' Natural persons who
directly or indirectly have greater than a ten percent interest in a
designated contract market should meet the fitness standards
applicable to members with voting rights.
(2) The Commission believes that such standards should include
providing the Commission with fitness information for such persons,
whether registration information, certification to the fitness of
such persons, an affidavit of such persons' fitness by the contract
market's counsel or other information substantiating the fitness of
such persons. If a contract market 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 his or her position.
(b) Acceptable Practices. [Reserved]
Core Principle 15 of section 5(d) of the Act: CONFLICTS OF
INTEREST--The board of trade shall establish and enforce rules to
minimize conflicts of interest in the decision making process of the
contract market and establish a process for resolving such conflicts
of interest.
The means to address conflicts of interest in decision-making of
a contract market should include methods to ascertain the presence
of conflicts of interest and to make decisions in the event of such
a conflict. In addition, the Commission believes that the
[[Page 14283]]
contract market should provide for appropriate limitations on the
use or disclosure of material non-public information gained through
the performance of official duties by board members, committee
members and contract market employees or gained through an ownership
interest in the contract market.
Core Principle 16 of section 5(d) of the Act: COMPOSITION OF
BOARDS OF MUTUALLY OWNED CONTRACT MARKETS--In the case of a mutually
owned contract market, the board of trade shall ensure that the
composition of the governing board reflects market participants.
The composition of a mutually-owned contract market should
fairly represent the diversity of interests of the contract market's
market participants.
Core Principle 17 of section 5(d) of the Act: RECORDKEEPING--The
board of trade shall maintain records of all activities related to
the business of the contract market in a form and manner acceptable
to the Commission for a period of 5 years.
(a) Application Guidance. [Reserved]
(b) Acceptable Practices. Section 1.31 of this chapter governs
recordkeeping obligations under the Act and the Commission's
regulations thereunder. In order to provide broad flexible
performance standards for recordkeeping, Sec. 1.31 was updated and
amended by the Commission in 1999. Accordingly, Sec. 1.31 itself
establishes the guidance regarding the form and manner for keeping
records.
Core Principle 18 of section 5(d) of the Act: ANTITRUST
CONSIDERATIONS--Unless necessary or appropriate to achieve the
purposes of this Act, the board of trade shall endeavor to avoid--
(A) adopting any rules or taking any actions that result in any
unreasonable restraints of trade; or (B) imposing any material
anticompetitive burden on trading on the contract market.
(a) Application Guidance. An entity seeking designation as a
contract market may request that the Commission consider under the
provisions of section 15(b) of the Act any of the entity's rules,
including trading protocols or policies, and including both
operational rules and the terms or conditions of products listed for
trading, at the time of designation or thereafter. The Commission
intends to apply section 15(b) of the Act to its consideration of
issues under this core principle in a manner consistent with that
previously applied to contract markets.
(b) Acceptable Practices. [Reserved]
12. Chapter I of 17 CFR is proposed to be amended by adding new
Part 40 as follows:
PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING
ORGANIZATIONS
Sec.
40.1 Definitions.
40.2 Listing products for trading by certification.
40.3 Voluntary submission of new products for Commission review
and approval.
40.4 Amendments to terms or conditions of enumerated agricultural
contracts.
40.5 Voluntary submission of rules for Commission review and
approval.
40.6 Self-certification of rules by designated contract markets
and registered derivatives clearing organizations.
40.7 Delegations.
Appendix A to Part 40--Guideline No. 1.
Appendix B--Schedule of fees.
Appendix C--Information that a foreign board of trade should submit
when seeking no-action relief to offer and sell, to persons located
in the United States, a futures contract on a foreign securities
index traded on that foreign board of trade.
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6c, 7, 7a, 8 and 12a, as
amended by the Commodity Futures Modernization Act of 2000, Appendix
____ of Pub. L. No. 106-554, 114 Stat. 2763 (2000).
Sec. 40.1 Definitions.
As used in this part:
Contract market includes a clearing organization that clears trades
for the contract market, unless reference also is made within the same
section of the Code of Federal Regulations to derivatives clearing
organization, as defined in Sec. 39.1 of this chapter.
Dormant contract means any commodity futures or option contract or
other instrument in which no trading has occurred in any future or
option expiration for a period of six complete calendar months;
provided, however, no contract or instrument shall be considered to be
dormant until the end of 60 complete calendar months following initial
listing.
Emergency means any occurrence or circumstance which, in the
opinion of the governing board of the contract market or derivatives
transaction execution facility, requires immediate action and threatens
or may threaten such things as the fair and orderly trading in, or the
liquidation of or delivery pursuant to, any agreements, contracts or
transactions on such a trading facility, including any manipulative or
attempted manipulative activity; any actual, attempted, or threatened
corner, squeeze, congestion, or undue concentration of positions; any
circumstances which may materially affect the performance of
agreements, contracts or transactions traded on the trading facility,
including failure of the payment system or the bankruptcy or insolvency
of any participant; any action taken by any governmental body, or any
other board of trade, market or facility which may have a direct impact
on trading on the trading facility; and any other circumstance which
may have a severe, adverse effect upon the functioning of a designated
contract market or derivatives transaction execution facility.
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
term and condition, trading protocol, agreement or instrument
corresponding thereto, in whatever form adopted, and any amendment or
addition thereto or repeal thereof, made or issued by a contract
market, derivatives transaction execution facility or derivatives
clearing organization or by the governing board thereof or any
committee thereof.
Terms and conditions mean any definition of the trading unit or the
specific commodity underlying a contract for the future delivery of a
commodity or commodity option contract, specification of settlement or
delivery standards and procedures, and establishment of buyers' and
sellers' rights and obligations under the contract. Terms and
conditions include provisions relating to the following:
(1) Quality or quantity standards for a commodity and any
applicable premiums or discounts;
(2) Trading hours, trading months and the listing of contracts;
(3) Minimum and maximum price limits and the establishment of
settlement prices;
(4) Position limits and position reporting requirements;
(5) Delivery points and locational price differentials;
(6) Delivery standards and procedures, including alternatives to
delivery and applicable penalties or sanctions for failure to perform;
(7) Settlement of the contract; and
(8) Payment or collection of commodity option premiums or margins.
Sec. 40.2 Listing products for trading by certification.
To list a new product for trading, to list a product for trading
that has become dormant, or to accept for clearing a product (not
traded on a designated contract market or a derivatives transaction
execution facility), a registered entity must file with the Commission
at its Washington, D.C., headquarters no later than the close of
business of the business day preceding the product's listing or
acceptance for clearing, either in electronic or hard-copy form, a copy
of the product's rules, including its terms and conditions, and a
certification by the registered entity that the trading product or
other instrument complies with the Act and rules thereunder.
[[Page 14284]]
Sec. 40.3 Voluntary submission of new products for Commission review
and approval.
(a) Request for approval. A designated contract market or
registered derivatives transaction execution facility may request under
section 5c(c)(2) of the Act that the Commission approve new products
under the following procedures:
(1) The submitting entity labels the request as ``Request for
Commission Product Approval'';
(2) The request for product approval is for a commodity other than
a security future or a security futures product as defined in sections
1a(31) or 1a(32) of the Act, respectively;
(3) The submission complies with the requirements of Appendix A to
this part--Guideline No. 1;
(4) The submission includes the fee required under Appendix B to
this part.
(b) Forty-five day review. All products submitted for Commission
approval under this paragraph shall be deemed approved by the
Commission forty-five days after receipt by the Commission, or at the
conclusion of such extended period as provided under paragraph (c) of
this section, unless notified otherwise within the applicable period,
if:
(1) The submission complies with the requirements of paragraphs
(a)(1) of this section; and
(2) The submitting entity does not amend the terms or conditions of
the proposed product or supplement the request for approval, except as
requested by the Commission or for correction of typographical errors,
renumbering or other such nonsubstantive revisions, during that period.
Any voluntary, substantive amendment by the requestor will be treated
as a new submission under this section.
(c) Extension of time. The Commission may extend the forty-five day
review period in paragraph (b) of this section for:
(1) An additional forty-five days, if within the initial forty-five
day review period, the Commission notifies the submitting entity that
the proposed rule raises novel or complex issues that 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; or
(2) Such period as the submitting entity so instructs the
Commission in writing.
(d) Notice of non-approval. The Commission at any time during its
review under this section may notify the submitting entity that it will
not, or is unable to, approve the product or instrument. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or regulations, including the form or
content requirements of paragraph (a) of this section, that the
proposed rule would violate, appears to violate or the violation of
which cannot be ascertained from the submission.
(e) Effect of non-approval. (1) Notification to a submitting entity
under paragraph (d) of this section of the Commission's refusal to
approve a proposed product or instrument does not prejudice the entity
from subsequently submitting a revised version of the product or
instrument for Commission approval or from submitting the product or
instrument as initially proposed pursuant to a supplemented submission.
(2) Notification to a submitting entity under paragraph (d) of this
section of the Commission's refusal to approve a proposed rule or rule
amendment shall be presumptive evidence that the entity may not
truthfully certify under Sec. 40.2 that the same, or substantially the
same, product does not violate the Act or rules thereunder.
Sec. 40.4 Amendments to terms or conditions of enumerated agricultural
contracts.
Designated contract markets and registered derivatives transaction
execution facilities must submit for Commission approval under the
procedures of Sec. 40.5, prior to its implementation, any rule or rule
amendment that would, for a delivery month having open interest,
materially change a term or condition as defined in Sec. 40.1(f), of a
contract for future delivery in an agricultural commodity enumerated in
section 1a(4) of the Act, or of an option on such a contract or
commodity. Provided, however, the following rules or rule amendments
would not be material changes:
(a) Changes in trading hours;
(b) Changes in lists of approved delivery facilities pursuant to
previously set standards or criteria;
(c) Changes to terms and conditions of options on futures other
than those relating to last trading day, expiration date, option strike
price delistings, and speculative position limits; and
(d) Reductions in the minimum price fluctuation (or ``tick'').
Sec. 40.5 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. A registered entity may request
pursuant to section 5c(c) of the Act that the Commission approve any
rule or proposed rule or rule amendment under the following procedures:
(1) Three copies of each rule or rule amendment submission under
this section shall be furnished in hard copy form to the Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581 or electronically in a format specified by
the Secretary of the Commission. Each request for approval under this
section shall be in the following order and shall:
(i) Label the submission as ``Request for Commission rule
approval'';
(ii) Set forth the text of the rule or proposed rule (in the case
of a rule amendment, deletions and additions must be indicated);
(iii) Describe the proposed effective date of a proposed rule and
any action taken or anticipated to be taken to adopt the proposed rule
by the registered entity or by its governing board or by any committee
thereof, and cite the rules of the entity that authorize the adoption
of the proposed rule;
(iv) 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 registered entity'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;
(v) Note and briefly describe any substantive opposing views
expressed with respect to the proposed rule that were not incorporated
into the proposed rule prior to its submission to the Commission; and
(vi) Identify any Commission regulation that the Commission may
need to amend, or sections of the Act or Commission regulations that
the Commission may need to interpret in order to approve 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 amendment
to the Commission's rule or interpretation.
(2) [Reserved]
(b) Forty-five day review. All rules submitted for Commission
approval under paragraph (a) of this section shall be deemed approved
by the Commission under section 5c(c) of the Act, forty-five days after
receipt by the Commission, or at the conclusion of such extended period
as provided under paragraph (c)
[[Page 14285]]
of this section, unless notified otherwise within the applicable
period, if:
(1) The submission complies with the requirements of paragraphs
(a)(1)(i) through (vi) of this section, and
(2) 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. Any amendment or
supplementation not requested by the Commission will be treated as the
submission of a new filing under this section.
(c) Extensions of time. The Commission may extend the review period
in paragraph (b) of this section for:
(1) An additional forty-five days, if the Commission, within the
initial forty-five day review period, notifies the submitting entity
that the proposed rule raises novel or complex issues that 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; or
(2) Such additional period as the submitting entity has so
instructed the Commission in writing.
(d) Notice of non-approval. The Commission at any time during its
review under this section may notify the submitting entity that it will
not, or is unable to, approve the proposed rule or rule amendment. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or regulations, including the form or
content requirements of this section, that the proposed rule would
violate, appears to violate or the violation of which cannot be
ascertained from the submission.
(e) Effect of non-approval. (1) Notification to a registered entity
under paragraph (d) of this section of the Commission's refusal to
approve a proposed rule or rule amendment of a registered entity does
not prejudice the entity from subsequently submitting a revised version
of the proposed rule or rule amendment for Commission approval or from
submitting the rule or rule amendment as initially proposed pursuant to
a supplemented submission.
(2) Notification to a registered entity under paragraph (d) of this
section of the Commission's refusal to approve a proposed rule or rule
amendment of a registered entity shall be presumptive evidence that the
entity may not truthfully certify that the same, or substantially the
same, proposed rule or rule amendment does not violate the Act or rules
thereunder.
(f) Expedited approval. Notwithstanding the provisions of paragraph
(b) of this section, changes to terms and conditions of a product that
are consistent with the Act and Commission regulations and with
standards approved or established by the Commission in a written
notification to the registered entity of the applicability of this
paragraph (f) shall be deemed approved by the Commission at such time
and under such conditions as the Commission shall specify in the
notice, provided, however, that the Commission may, at any time, alter
or revoke the applicability of such a notice to any particular product.
Sec. 40.6 Self-certification of rules by designated contract markets
and registered derivatives clearing organizations.
(a) Required certification. A designated contract market or a
registered derivatives clearing organization may implement any new rule
or rule amendment only if:
(1) The rule or rule amendment does not materially change a term or
condition of a contract for future delivery of an agricultural
commodity enumerated in section 1a(4) of the Act or an option on such a
contract or commodity in a delivery month having open interest;
(2) The designated contract market or registered derivatives
clearing organization has filed a submission for the rule or rule
amendment, and the Commission has received the submission at its
Washington, D.C. headquarters by close of business on the business day
preceding implementation of the rule; provided, however, rules or rule
amendments implemented under procedures of the governing board to
respond to an emergency as defined in Sec. 40.1(d), must be filed with
the Commission at the time of implementation of the rule or rule
amendment, if implementation is sooner than the next business day; and
(3) The rule submission includes:
(i) The label, ``Rule Certification'' or, in the case of a rule or
rule amendment that responds to an emergency, ``Emergency Rule
Certification'';
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of implementation;
(iv) A brief explanation of any substantive opposing views not
incorporated into the rule; and
(v) A certification by the entity that the rule complies with the
Act and regulations thereunder.
(b) Stay. The Commission may stay the effectiveness of a rule
implemented pursuant to paragraph (a) of this section during the
pendency of Commission proceedings for filing a false certification or
to alter or amend the rule pursuant to section 8a(7) of the Act. The
decision to stay the effectiveness of a rule in such circumstances
shall not be delegable to any employee of the Commission.
(c) Notification of rule amendments. Notwithstanding the rule
certification requirement of section 5c(c)(1) of the Act, and
paragraphs (a)(2) and (a)(3) of this section, a designated contract
market or a registered derivatives clearing organization may place the
following rules or rule amendments into effect without certification to
the Commission if the following conditions are met:
(1) The designated contract market or registered derivatives
clearing organization provides to the Commission at least weekly a
summary notice of all rule changes made effective pursuant to this
paragraph during the preceding week. Such notice must be labeled
``Weekly Notification of Rule Changes'' and need not be filed for weeks
during which no such actions have been taken. One copy of each such
submission shall be furnished in hard copy to the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street N.W.,
Washington, DC 20581, or electronically in a format specified by the
Secretary of the Commission; and
(2) The rule governs:
(i) Nonmaterial revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
approved entities and other such nonsubstantive revisions of a
product's terms and conditions that have no effect on the economic
characteristics of the product;
(ii) Delivery standards set by third parties. Changes to grades or
standards of commodities deliverable on a product that are established
by an independent third party and that are incorporated by reference as
product terms, provided that the grade or standard is not established,
selected or calculated solely for use in connection with futures or
option trading and such changes do not affect deliverable supplies or
the pricing basis for the product;
(iii) Index products. Routine changes in the composition,
computation, or method of selection of component entities of an index
(other than a stock index) referenced and defined in the product's
terms, that do not affect the pricing basis of the index, which are
made by an independent third party whose business relates to the
collection or dissemination of price information and that was not
formed solely for the
[[Page 14286]]
purpose of compiling an index for use in connection with a futures or
option product; or
(iv) Option contract terms. Changes to option contract rules
relating to the strike price listing procedures, strike price
intervals, and the listing of strike prices on a discretionary basis.
(3) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of section 5c(c)(1) of the Act and
of paragraphs (a)(2) and (a)(3) of this section, designated contract
markets and registered derivatives clearing organizations may place the
following rules or rule amendments into effect without certification or
notice to the Commission if the following conditions are met:
(i) The designated contract market or registered derivatives
clearing organization maintains documentation regarding all changes to
rules; and
(ii) The rule governs:
(A) 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;
(B) 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, Board
of Directors or Committee composition requirements, or procedures or
requirements relating to conflicts of interest;
(C) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays, and changes to facilities housing the market, trading floor
or trading area; and
(D) Standards of decorum. Standards of decorum or attire or similar
provisions relating to admission to the floor, badges, or visitors, but
not the establishment of penalties for violations of such rules.
Sec. 40.7 Delegations.
(a) Procedural matters. (1) Review of products or rules. The
Commission hereby delegates, until it orders otherwise, to the Director
of the Division of Trading and Markets and separately to the Director
of Economic Analysis or to the Director's delegatee with the
concurrence of the General Counsel or the General Counsel's delegatee,
authority to request under Sec. 40.3(b)(2) or Sec. 40.5(b)(2) that the
entity requesting approval amend the proposed product, rule or rule
amendment or supplement the submission, to notify a submitting entity
under Sec. 40.3(c) or Sec. 40.5(c) that the time for review has been
extended, and to notify the submitting entity under Sec. 40.3(d) or
Sec. 40.5(d) that the Commission is not approving, or is unable to
approve, the proposed product, rule or rule amendment.
(2) Emergency rules. The Commission hereby delegates authority to
the Director of the Division of Trading and Markets, or the delegatees
of the Director, authority to receive notification and the required
certification of emergency rules under Sec. 40.6(a)(2).
(b) Approval authority. The Commission hereby delegates, until the
Commission orders otherwise, to the Director of the Division of Trading
and Markets and separately to the Director of Economic Analysis, with
the concurrence of the General Counsel or the General Counsel's
delegatee, to be exercised by either of such Directors or by such other
employee or employees of the Commission under the supervision of such
Directors as may be designated from time to time by the Directors, the
authority to approve, pursuant to section 5c(c)(3) of the Act and
Sec. 40.5, rules or rule amendments of a designated contract market,
registered derivatives transaction execution facility or registered
derivatives clearing organization that:
(1) Relate to, but do not materially change, the quantity, quality,
or other delivery specifications, procedures, or obligations for
delivery, cash settlement, or exercise under an agreement, contract or
transaction approved for trading by the Commission; daily settlement
prices; clearing position limits; requirements or procedures for
governance of a registered entity; procedures for transfer trades;
trading hours; minimum price fluctuations; and maximum price limit and
trading suspension provisions;
(2) Reflect routine modifications that are required or anticipated
by the terms of the rule of a registered entity;
(3) [Reserved].
(4) Are in substance the same as a rule of the same or another
registered entity which has been approved previously by the Commission
pursuant to section 5c(c)(3) of the Act;
(5) Are consistent with a specific, stated policy or interpretation
of the Commission; or
(6) Relate to the listing of additional trading months of approved
contracts.
(c) The Directors may submit to the Commission for its
consideration any matter that has been delegated pursuant to paragraph
(a) or (b) of this section.
(d) Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated in
paragraph (a) or (b) of this section to the Directors.
* * * * *
Appendix B--Schedule of fees
(a) Applications for product approval. Each application for
product approval under Sec. 40.3 must be accompanied by a check or
money order made payable to the Commodity Futures Trading Commission
in an amount to be determined annually by the Commission and
published in the Federal Register.
(b) Checks and applications should be sent to the attention of
the Office of the Secretariat, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC
20581. No checks or money orders may be accepted by personnel other
than those in the Office of the Secretariat.
(c) Failure to submit the fee with an application for product
approval will result in return of the application. Fees will not be
returned after receipt.
* * * * *
12-a. Appendix A to Part 5 is redesignated as Appendix A to Part 40
and the heading is revised; Appendix E to Part 5 is redesignated as
Appendix C to Part 40; and Part 5 is removed and reserved. The revised
heading reads as follows:
Appendix A to Part 40--Guideline No. 1
13. Chapter I of 17 CFR is proposed to be amended by adding new
Part 41 as follows:
PART 41--SECURITY FUTURES
Sec.
41.1 [Reserved]
PART 166--CUSTOMER PROTECTION RULES
14. The authority citation for Part 166 is proposed to be revised
to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,
12a, 21, and 23, as amended by the Commodity Futures Modernization
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
15. Sec. Section 166.5 is proposed to be added to read as follows:
Sec. 166.5 Dispute settlement procedures.
(a) Definitions. (1) The term claim or grievance as used in this
section shall mean any dispute that:
(i) Arises out of any transaction executed on or subject to the
rules of a designated contract market,
[[Page 14287]]
(ii) Is executed or effected through a member of such facility, a
participant transacting on or through such facility or an employee of
such facility, and
(iii) Does not require for adjudication the presence of essential
witnesses or third parties over whom the facility does not have
jurisdiction and who are not otherwise available.
(iv) The term claim or grievance does not include disputes arising
from cash market transactions that are not a part of or directly
connected with any transaction for the purchase or sale of any
commodity for future delivery or commodity option.
(2) The term customer as used in this section includes an option
customer (as defined in Sec. 1.3(jj) of this chapter) and any person
for or on behalf of whom a member of a designated contract market, or a
participant transacting on or through such designated contract market,
except another member of or participant in such designated contract
market. Provided, however, a person who is an ``eligible contract
participant'' as defined in section 1a(12) of the Act shall not be
deemed to be a customer within the meaning of this section.
(3) The term Commission registrant as used in this section means a
person registered under the Act as a futures commission merchant,
introducing broker, floor broker, commodity pool operator, commodity
trading advisor, or associated person.
(b) Voluntariness. The use by customers and eligible contract
participants of dispute settlement procedures shall be voluntary as
provided in paragraphs (c) and (g) of this section.
(c) Customers. No Commission registrant shall enter into any
agreement or understanding with a customer in which the customer
agrees, prior to the time a claim or grievance arises, to submit such
claim or grievance to any settlement procedure except as follows:
(1) Signing the agreement must not be made a condition for the
customer to utilize the services offered by the Commission registrant.
(2) If the agreement is contained as a clause or clauses of a
broader agreement, the customer must separately endorse the clause or
clauses containing the cautionary language and provisions specified in
this section. A futures commission merchant or introducing broker may
obtain such endorsement as provided in Sec. 1.55(d) of this chapter for
the following classes of customers only:
(i) A plan defined as a government plan or church plan in section
3(32) or section 3(33) of title I of the Employee Retirement Income
Security Act of 1974 or a foreign person performing a similar role or
function subject as such to comparable foreign regulation; and
(ii) A person who is a ``qualified eligible participant'' or a
``qualified eligible client'' as defined in Sec. 4.7 of this chapter.
(3) The agreement may not require any customer to waive the right
to seek reparations under section 14 of the Act and part 12 of this
chapter. Accordingly, such customer must be advised in writing that he
or she may seek reparations under section 14 of the Act by an election
made within 45 days after the Commission registrant notifies the
customer that arbitration will be demanded under the agreement. This
notice must be given at the time when the Commission registrant
notifies the customer of an intention to arbitrate. The customer must
also be advised that if he or she seeks reparations under section 14 of
the Act and the Commission declines to institute reparations
proceedings, the claim or grievance will be subject to the pre-existing
arbitration agreement and must also be advised that aspects of the
claim or grievance that are not subject to the reparations procedure
(i.e, do not constitute a violation of the Act or rules thereunder) may
be required to be submitted to the arbitration or other dispute
settlement procedure set forth in the pre-existing arbitration
agreement.
(4) The agreement must advise the customer that, at such time as he
or she may notify the Commission registrant that he or she intends to
submit a claim to arbitration, or at such time as such person notifies
the customer of its intent to submit a claim to arbitration, the
customer will have the opportunity to elect a qualified forum for
conducting the proceeding.
(5) Election of forum. (i) Within ten business days after receipt
of notice from the customer that he or she intends to submit a claim to
arbitration, or at the time a Commission registrant notifies the
customer of its intent to submit a claim to arbitration, the Commission
registrant must provide the customer with a list of organizations whose
procedures meet Acceptable Practices established by the Commission for
dispute resolution, together with a copy of the rules of each forum
listed. The list must include:
(A) The designated contract market, if available, upon which the
transaction giving rise to the dispute was executed or could have been
executed;
(B) A registered futures association; and
(C) At least one other organization that will provide the customer
with the opportunity to select the location of the arbitration
proceeding from among several major cities in diverse geographic
regions and that will provide the customer with the choice of a panel
or other decision-maker composed of at least one or more persons, of
which at least a majority are not members or associated with a member
of the designated contract market or employee thereof, and that are not
otherwise associated with the designated contract market (mixed panel):
Provided, however, that the list of qualified organizations provided by
a Commission registrant that is a floor broker need not include a
registered futures association unless a registered futures association
has been authorized to act as a decision-maker in such matters.
(ii) The customer shall, within forty-five days after receipt of
such list, notify the opposing party of the organization selected. A
customer's failure to provide such notice shall give the opposing party
the right to select an organization from the list.
(6) Fees. The agreement must acknowledge that the Commission
registrant will pay any incremental fees that may be assessed by a
qualified forum for provision of a mixed panel, unless the arbitrators
in a particular proceeding determine that the customer has acted in bad
faith in initiating or conducting that proceeding.
(7) Cautionary Language. The agreement must include the following
language printed in large boldface type:
Three Forums Exist for the Resolution of Commodity Disputes:
Civil Court litigation, reparations at the Commodity Futures Trading
Commission (CFTC) and arbitration conducted by a self-regulatory or
other private organization.
The CFTC recognizes that the opportunity to settle disputes by
arbitration may in some cases provide many benefits to customers,
including the ability to obtain an expeditious and final resolution
of disputes without incurring substantial costs. The CFTC requires,
however, that each customer individually examine the relative merits
of arbitration and that your consent to this arbitration agreement
be voluntary.
By signing this agreement, you: (1) May be waiving your right to
sue in a court of law; and (2) are agreeing to be bound by
arbitration of any claims or counterclaims which you or [name] may
submit to arbitration under this agreement. You are not, however,
waiving your right to elect instead to petition the CFTC to
institute reparations proceedings under Section 14 of the Commodity
Exchange Act with respect to any dispute that may be arbitrated
pursuant to this agreement. In the event a dispute arises, you will
be notified if [name] intends to submit the dispute to arbitration.
If you believe a violation of the Commodity
[[Page 14288]]
Exchange Act is involved and if you prefer to request a section 14
``Reparations'' proceeding before the CFTC, you will have 45 days
from the date of such notice in which to make that election.
You need not sign this agreement to open or maintain an account
with [name]. See 17 CFR 166.5.
(d) Enforceability. A dispute settlement procedure may require
parties utilizing such procedure to agree, under applicable state law,
submission agreement or otherwise, to be bound by an award rendered in
the procedure, provided that the agreement to submit the claim or
grievance to the procedure was made in accordance with paragraph (c) or
(g) of this section or that the agreement to submit the claim or
grievance was made after the claim or grievance arose. Any award so
rendered shall be enforceable in accordance with applicable law.
(e) Time limits for submission of claims. The dispute settlement
procedure established by a designated contract market shall not include
any unreasonably short limitation period foreclosing submission of
customers' claims or grievances or counterclaims.
(f) Counterclaims. A procedure established by a designated contract
market under the Act for the settlement of customers' claims or
grievances against a member or employee thereof may permit the
submission of a counterclaim in the procedure by a person against whom
a claim or grievance is brought. The designated contract market may
permit such a counterclaim where the counterclaim arises out of the
transaction or occurrence that is the subject of the customer's claim
or grievance and does not require for adjudication the presence of
essential witnesses, parties, or third persons over whom the designated
contract market does not have jurisdiction. Other counterclaims arising
out of a transaction subject to the Act and rules promulgated
thereunder for which the customer utilizes the services of the
registrant may be permissible where the customer and the registrant
have agreed in advance to require that all such submissions be included
in the proceeding, and if the aggregate monetary value of the
counterclaims is capable of calculation.
(g) Eligible contract participants. (1) A person who is an
``eligible contract participant'' as defined in section 1a(12) of the
Act may negotiate any term of an agreement or understanding with a
Commission registrant in which the eligible contract participant
agrees, prior to the time a claim or grievance arises, to submit such
claim or grievance to any settlement procedure, except that signing the
agreement must not be made a condition for the eligible contract
participant to use the services offered by the registrant.
(2) The agreement may require an eligible contract participant, to
waive the right to seek reparations under section 14 of the Act and
part 12 of this chapter.
(3) If the agreement is contained as a clause or clauses of a
broader agreement, the eligible contract participant must separately
endorse the clause or clauses containing the agreement; Provided,
however, a futures commission merchant may obtain such endorsement as
provided in Sec. 1.55(d) of this chapter.
PART 170--REGISTERED FUTURES ASSOCIATIONS
Subpart A--Standards Governing Commission Review of Applications
for Registration as a Futures Association Under Section 17 of the
Act
16. The authority citation for Part 170 is proposed to be revised
to read as follows:
Authority: 7 U.S.C. 6p, 12a, and 21, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
17. 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 that 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
18. Part 180 is proposed to be removed.
Issued in Washington, D.C., this 2nd day of March, 2001, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
Concurring Statement of Commissioner Thomas J. Erickson
A New Regulatory Framework for Trading Facilities, Intermediaries, and
Clearing Organizations
I concur with the release of these proposed rules. First, the
Commodity Futures Modernization Act of 2000 (``CFMA'') \1\ is now
law, and it is imperative that the Commission provide some
regulatory structure and guidance so that the intent behind the CFMA
might be fully effectuated. Second, the CFMA represents profound
change for the derivatives industry, and I therefore believe that it
is important to solicit as much comment as is possible from as broad
a cross-section of the public as is possible. This brings me to my
primary concern.
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\1\ See Consolidated Appropriations Act 2001, Appendix E, Pub.
L. No. 106-554, 114 Stat. 2763 (2000).
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Over the past year, this Commission has devoted a tremendous
amount of time and resources to devising a new regulatory
framework,\2\ working with Congress on the CFMA, and drafting
today's proposed rules which implement the CFMA. Throughout this
process, the Commission has provided draft rules to certain
interested parties for their review and comment--at times, prior to
their publication in the Federal Register for general comment.
Certainly, discussion and dialogue with the industry is to be
encouraged, and I am pleased that the Commission has reached out to
the industry and made every effort to accommodate its views.
However, I fear that this process has given great weight to the
views of a select few, depriving the Commission of an opportunity to
hear from the broader community of interests on a broader range of
issues. In particular, I believe the Commission would benefit from
input on two additional issues: disclosure and fraud.
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\2\ See A New Regulatory Framework for Multilateral Transaction
Execution Facilities, Intermediaries and Clearing Organizations
(final rulemaking), 65 FR. 77961 (Dec. 13, 2000); A New Regulatory
Framework for Clearing Organizations (final rulemaking), 65 FR 78020
(Dec. 13, 2000); Exemption for Bilateral Transactions (final rules),
65 FR 78030 (Dec. 13, 2000); and Rules Relating to Intermediaries of
Commodity Interest Transactions (final rules), 65 FR 77993 (Dec. 13,
2000). The final rules were subsequently withdrawn following the
passage of the CFMA. See A New Regulatory Framework for Multilateral
Transaction Execution Facilities, Intermediaries and Clearing
Organizations; Rules Relating to Intermediaries of Commodity
Interest Transactions; A New Regulatory Framework for Clearing
Organizations; Exemption for Bilateral Transactions (final rules;
partial withdrawal), 65 FR 82272 (Dec. 28, 2000).
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Disclosure
The CFMA is based largely on a regulatory reform package
initially proposed by the Commission. From the very inception of
this reform effort, the Commission has referred to its new
regulatory framework as a
[[Page 14289]]
``disclosure-based'' system.\3\ The Commission today rightly asks
whether, in the case of exempt markets, it should require that
exempt entities affirmatively disclose to traders that the facility
and trading on the facility are not regulated or approved by the
Commission. It seems self-evident to me that rules implementing such
a disclosure-based system ought to require disclosure. I would
further suggest that it may be appropriate for the Commission to
consider requiring all trading facilities at each of the tiers of
regulation to disclose to their participants the type of regulation
to which they are subject (if any). I am interested in hearing
comment regarding the merits of a disclosure obligation. In the
absence of such an obligation, should the Commission publish a
listing of exchange markets identifying their regulatory status?
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\3\ See A New Regulatory Framework: Report of the Commodity
Futures Trading Commission Task Force, Feb. 2000, p. 2 (describing
the taskforce's mission as providing recommendations regarding,
among other things, ``moving the Commission * * * from merit to
disclosure-based regulation''); A New Regulatory Framework for
Multilateral Transaction Execution Facilities, Intermediaries and
Clearing Organizations (proposed rulemaking), 65 FR 38985, 38986
(June 22, 2000) (``the proposed framework to a large degree relies
more heavily on disclosure rather than merit regulation''); A New
Regulatory Framework for Multilateral Transaction Execution
Facilities, Intermediaries and Clearing Organizations (final
rulemaking), 65 FR 77961, 77962 (Dec. 13, 2000) (``the new framework
relies more heavily on disclosure rather than merit regulation'');
see also id. at 77974.
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Fraud
One of the points about which there has been a great deal of
discussion from the earliest days of the reform effort involves the
Commission's antifraud authority. In the past, the Commission has
had difficulty applying the antifraud provisions of the Act in some
novel situations. In particular, the Commission's efforts to address
fraud against retail customers has been hamstrung by some courts'
interpretation of Section 4b of the Commodity Exchange Act.\4\ Given
the inevitability of new market structures and classes of
participants, the Commission has been wise to consider how its
antifraud authority might be clarified through rulemaking.
Nevertheless, throughout the reform process, the Commission has
repeatedly heard from industry representatives that this would be a
bad idea.
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\4\ See Commodity Trend Service, Inc. v. Commodity Futures
Trading Comm'n, 233 F.3d 981 (7th Cir. 2000) (Section 4b held not to
apply to a financial publisher because the prohibition on fraud in
connection with certain contracts of sale of a commodity for future
delivery made for or on behalf of any other person applies only to
brokers or others who have an agency relationship with their
clients).
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With the passage of the CFMA, members of Congress acknowledged
the problems faced by the Commission in enforcing its antifraud
provisions and stated their understanding that Section 4b was
intended to be read broadly so as to give the Commission maximum
enforcement authority.\5\ This intent is reflected in the ``Findings
and Purpose'' section of the CFMA. That provision explicitly
provides that, among other things, it is the purpose of the Act ``to
protect all market participants from fraudulent or other abusive
sales practices and misuses of customer assets * * *.'' \6\
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\5\ ``It is the intent of Congress in retaining Section 4b in
this bill that the provision not be limited to fiduciary, broker-
client or other agency-like relationships. Section 4b provides the
Commission with broad authority to police fraudulent conduct within
its jurisdiction, whether occurring in boiler rooms and bucket
shops, or in the e-commerce and other markets that will develop
under this new statutory framework.'' 146 Cong. Rec. S11924 at
S11926 (daily ed. Dec. 15, 2000) (statement of Sen. Lugar). See also
146 Cong. Rec. H12488 at H12489 (daily ed. Dec. 15, 2000)(statement
of Rep. Ewing) (same).
\6\ Consolidated Appropriations Act 2001, Appendix ____, Pub. L.
No. 106-554 Sec. 108, 114 Stat. 2763 (2000) (amending Section 3 of
the Commodity Exchange Act (7 U.S.C. 5)).
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Today, the Commission proposes rules that include a free-
standing fraud provision. But the proposed rule, Rule 1.1, applies
only to forex bucket shops because of expressed concerns about a
broader rule of application. I believe it is in the public interest
to propose a more comprehensive antifraud rule. While I concur
generally with the publication of these proposed rules and certainly
support the Commission asserting its authority under the CFMA to
address forex bucket shops, I would like to hear precisely why
adoption of such a comprehensive fraud rule in any way violates the
public interest, overrides the intent of Congress, or oversteps the
Commission's authority.
Dated: March 2, 2001.
Thomas J. Erickson,
Commissioner.
[FR Doc. 01-5618 Filed 3-8-01; 8:45 am]
BILLING CODE 6351-01-U