[Federal Register: August 10, 2001 (Volume 66, Number 155)]
[Rules and Regulations]
[Page 42255-42289]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au01-19]
[[Page 42255]]
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Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 5, 15, et al.
Trading Facilities, Intermediaries and Clearing Organizations; New
Regulatory Framework; Final Rule
17 CFR Part 40
Fees for Product Review and Approval; Final Rule
[[Page 42256]]
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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: Final rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is promulgating final rules to implement those provisions of the
Commodity Futures Modernization Act of 2000 (CFMA) relating to trading
facilities. The CFMA profoundly altered federal regulation of commodity
futures and option markets. The new statutory framework establishes two
categories of markets subject to Commission regulatory oversight,
designated contract markets and registered derivatives transaction
execution facilities, and two categories of exempt markets, exempt
boards of trade and exempt commercial markets. These rules establish
administrative procedures necessary to implement the CFMA, interpret
certain of the CFMA's provisions and provide guidance on compliance
with various of its requirements. In addition, the Commission, under
its exemptive authority, in a limited number of instances is providing
relief from, or greater flexibility than, the CFMA's provisions.
Rules implementing the CFMA relating to clearing organizations were
recently proposed in a separate notice of proposed rulemaking (66 FR
24308 (May 14, 2001)), and rules pertaining to intermediaries which
were previously withdrawn will be reproposed at a later time.
EFFECTIVE DATE: October 9, 2001.
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Nancy E. Yanofsky, Assistant Chief Counsel, Division of Economic
Analysis; Alan L. Seifert, Deputy Director, or Riva Spear 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
A. Overview
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 of sale of a commodity for future
delivery or commodity options.\1\ The final rules were to become
effective on February 12, 2001.
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\1\ See also 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). These three related rule packages in their entirety
constituted the Commission's new regulatory framework.
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Before the Commission's new regulatory framework became effective,
however, Congress on December 15, 2000, passed, and President Clinton
on December 21, 2000, signed into law, the Commodity Futures
Modernization Act of 2000 (CFMA) \2\, which substantially amended the
Commodity Exchange Act, 7 U.S.C. 1 et seq. (Act). 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 categories of markets exempt from regulation,
exempt boards of trade and exempt commercial markets.
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\2\ P.L. 106-554, 114 Stat. 2763
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The CFMA, in both its broad contours and in many of its specific
provisions, codified the Commission's new regulatory framework without
significant change. However, it varied from the rules implementing the
framework in a number of details and rendered unnecessary a number of
those rules by enacting their provisions into law. The Commission,
therefore, withdrew most of the final rules in order to determine their
consistency with the Act as amended.\3\ 65 FR 82272. On March 9, 2001,
the Commission proposed new rules conforming to and implementing the
amended statutory scheme with respect to transaction execution
facilities. 66 FR 14262.\4\
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\3\ The Commission determined not to withdraw rules concerning
the investment of customer funds, but rather moved forward their
effective date to December 28, 2000. See 65 FR 82270 (Dec. 28,
2000).
\4\ The Commission separately proposed rules implementing the
CFMA with respect to Commission-regulated derivatives clearing
organizations. 66 FR 24308 (May 14, 2001). Implementation of the
CFMA also 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. Those rulemaking proceedings are separate from the rules
being adopted herein. Finally, rules relating to intermediaries that
were included in the new regulatory framework withdrawn in December,
but which are not required by the CFMA, will be reproposed by the
Commission at a later date.
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B. The Proposed Rules
The Commission proposed a new part 38 relating to contract markets
that, as proposed, would exempt contract markets operating under part
38 from all Commission rules not specifically reserved.\5\ Part 38 also
proposed application and approval procedures for new contract markets,
including a 60-day fast-track approval procedure as well as procedures
for product listing and amendments. Proposed part 38 also contained a
number of rules explaining the Commission's interpretation of several
statutory requirements.
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\5\ It should be noted that rules that are not being reserved
with respect to their application to contract markets (or DTFs) will
still apply to intermediaries, or clearing organizations, and
contract market members, if relevant to those entities. See, e.g.,
Commission rule 1.35.
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Proposed part 37 construed section 5a of the Act, which provides
for registration of DTFs. The proposed rules identified the commodities
eligible to be traded on a DTF as a matter of right under section
5a(b)(2)(A) through (C) of the Act, as those defined as "excluded"
commodities in section 1a(13) of the Act.\6\ Part 37 also proposed a
procedure under which a specific DTF could petition to list contracts
on additional commodities. The Commission also proposed a number of
provisions providing greater administrative flexibility in the
registration \7\ and oversight of DTFs than provided for in the Act, as
amended. Proposed appendices to parts 37 and 38 provided general
guidance for complying with the rules.
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\6\ Section 1a(13) of the Act 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.
\7\ As proposed, existing contract markets need only 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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The Commission also proposed a new part 36 relating to exempt
boards of trade and exempt commercial markets. Transactions entered
into by eligible commercial entities in exempt commodities \8\ traded
on an electronic trading facility, are exempt commercial markets under
section 2(h)(3) of the Act.\9\ Markets that satisfy the initial and
[[Page 42257]]
ongoing requirements of sections 2(h)(3) through (5) of the Act, as
amended, are excluded from the Act's other requirements. The Commission
proposed rules in part 36 to implement the notification requirements of
section 2(h)(5)(A) of the Act, and the information requirements for
exempt commercial markets consistent with section 2(h)(5)(B) of the
Act.
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\8\ See section 1a(14) of the Act.
\9\ 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.
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In part 36, the Commission also proposed rules implementing Section
5d of the Act, which establishes the category of "exempt board of
trade." Commission rule 36.2 proposed 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. In addition, rule
36.2(b) proposed the form and manner of the notification to the
Commission provided for under section 5d of the Act.
The Commission also proposed an antifraud provision, proposed rule
1.1, pursuant to its authority in sections 3 and 8a(5) of the Act. This
proposed anti-fraud rule would apply to foreign currency transactions
described in section 2(c)(1) of the Act.
Finally, the Commission proposed to delete Part 180 of its rules
governing arbitration of disputes arising on contract markets, and
reproposed its withdrawn rule 166.5, incorporating the new provision
added by the CFMA, which permits an FCM to require an eligible contract
participant to waive the right to reparations as a condition of using
the FCM's services.
C. Overview of Comments
The Commission received a total of 20 comments \10\ from a range of
commenters, including a government agency, an association of state
securities regulators, a self-regulatory organization,\11\ five futures
exchanges,\12\ a derivatives clearing organization,\13\ eight trade
associations,\14\ a trading firm, an attorney and a group of energy
firms.\15\
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\10\ In this Notice of Final Rulemaking, comment letters (CL)
are referenced by the letter's file number and page. These letters
are available through the Commission's internet web site, http://www.cftc.gov.
\11\ They are: United States Department of the Treasury
(Treasury) (CL 14), North American Securities Administrators
Association, Inc. (NASAA) (CL 2), and National Futures Association
(NFA) (CL 16), respectively.
\12\ They are: Board of Trade of the City of New York, Inc.
(NYBOT) (CL 5),; Chicago Board of Trade (CBT) (CL 7),; New York
Mercantile Exchange (NYMEX) (CL 10), Minneapolis Grain Exchange
(MGE) (CL 15), and Chicago Mercantile Exchange (CME) (CL 18).
\13\ Board of Trade Clearing Corporation (BOTCC) (CL 1).
\14\ They are: International Swaps and Derivatives Association,
Inc. (ISDA) (CL 3), @Markets (CL 6), National Grain and Feed
Association (NGFA) (CL 9), Futures Industry Association (FIA) (CL
11), the Silver Users Association (SUA) (CL 12), National Grain
Trade Council (NGTC) (CL 17), Association of the Bar of the City of
New York (NY Bar) (CL 19) and Securities Industry Association (SIA)
(CL 20).
\15\ They are: Advance Trading, Inc. (CL 13), Thomas Muth, Esq.
(CL 8), and Energy Group (CL 4), respectively. In addition to the
written comments, the proposed rules were discussed at a March 28,
2001, meeting of the Commission's Agricultural Advisory Committee
(AAC), chaired by Commissioner David D. Spears. A transcript of the
AAC meeting is also included in the Commission's comment file and is
available on the Commission's website.
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Most commenters generally supported the proposed rules, especially
those provisions that offered greater flexibility than provided by the
CFMA. Commenters also expressed support for the guidance regarding
compliance with the core principles applicable to contract markets and
DTFs. Many commenters offered specific recommendations for
clarification of the rules or requested that the Commission clarify how
the rules would be applied in specific circumstances.
II. The Final Rules
A. Part 38--Contract Markets
Part 38 governs trading on designated contract markets. Under rule
38.2, contract markets operating under this part are exempt from all
Commission rules not specifically reserved. Rule 38.3 contains
application and approval procedures for new contract markets, including
a 60-day fast-track approval procedure. The designation procedures,
which include Commission authority to designate a contract market upon
conditions, require applicants to (1) demonstrate that they satisfy the
criteria for designation under section 5(b) of the Act and the core
principles for operation under section 5(d) of the Act; (2) to include
a copy of the contract market's rules; and (3) to provide a brief
explanation of how the conditions for designation are satisfied to the
extent that compliance with the conditions for designation is not self-
evident.
Based upon its experience in processing applications for
designation following proposal of these rules,\16\ the Commission is
modifying final rule 38.3 to make clear that an applicant may instruct
the Commission in writing at the time of application, to review the
application under the procedures of section 6 of the Act, which provide
for approval within 180 days, rather than under the rule's fast-track
review procedures. This is different than the proposed rule, which
provided that an applicant could instruct the Commission in writing
"during the review period" to review the application under the
statutory review procedure.\17\ Absent such a written instruction, the
application will be reviewed under the fast-track procedures, as was
proposed.\18\
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\16\ In its notice of proposed rulemaking, the Commission stated
that during the transition period between the effective date of the
CFMA and the adoption of final implementing regulations, it would,
in effect, permit applications to be filed under the procedures as
proposed. 66 FR 14268.
\17\ Two applicants have indicated that they preferred for their
applications to be processed more slowly than provided for under the
fast-track rules and that the rule explicitly should permit
applicants to so indicate at the time the application is filed. The
Commission agrees.
\18\ The Commission is making a similar clarification to rule
37.5(b)(5), relating to applications for registration as a DTF.
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The Commission is modifying proposed rule 38.4 (also based upon its
administrative experience) to provide that the operational rules of an
applicant for contract market designation and the terms or conditions
of any products to be listed for trading that have been filed for
voluntary Commission approval with the application or while it is
pending shall be deemed approved by the Commission no earlier than at
the time that the facility itself is deemed to be designated. This
proviso has been added to final rule 38.4 to conform the time for
review and approval of the rules of an applicant--in cases where the
applicant voluntarily requests Commission approval of its operational
or product-related rules--with the review period for the application
for contract market designation itself.
In response to a number of comments, proposed rule 38.3(b)(2) is
being modified. The rule as proposed would have interpreted the
designation requirement on fair and equitable trading to include making
available to market participants timely information on prices, bids and
offers. A number of commenters suggested that the proposed requirement
be modified to apply in a
[[Page 42258]]
manner "appropriate to the market." \19\ As the CBT suggested:
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\19\ The suggested revision applies equally to proposed rule
37.6(d)(3) relating to DTFs, which has a similar provision.
while it may be expected that an electronic market would be able to
routinely capture and disseminate bids and offers entered into the
trading system, as well as execution prices, it is difficult for an
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open outcry market to do the same.
CL 7-7. See also CL 10-3 and CL 18-3.
The Commission agrees and is modifying the final rule by including
the "appropriate to the market" language that it had previously
included in the withdrawn rules.\20\ Currently, most open-outcry
markets generally capture price changes only. By including the
"appropriate to the market" language, the Commission intends to make
clear that it is not applying to open-outcry markets a standard for
disseminating such information that is higher than the one presently in
effect. However, the Commission expects that electronic trading systems
can, and appropriately will, capture such information for every
transaction, not just for those involving a price change.
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\20\ The Commission also is making conforming changes to Part
38, Appendix A, Criterion 3 and to Part 37, Appendix B, Core
Principle 4.
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CBT asked the Commission to clarify application of the core
principle on fitness under section 5(d)(14) of the Act. That provision
of the Act requires contract markets to apply 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." Regarding "direct access," CBT noted:
automated order routing systems may enable numerous customers to
send their orders directly to a trading floor or to an electronic
trading system. Such trades may be intermediated and/or guaranteed
by a clearing FCM. The CBOT does not believe that the Commission
intended to require markets to impose fitness requirements on such
customers.
CL 7-8. See also CL 5-4, CL 19-5.
Generally, the core principles are intended to apply to contract
markets (and DTFs) regardless of the form of business organization.\22\
Section 5(d)(14) requires persons who exercise governance
responsibilities or control of the trading facility to meet a fitness
requirement.\22\ In a mutually-owned enterprise, members would exercise
such governance authority. In a demutualized contract market, the
facility's owner or owners would have such authority.\23\ CBT correctly
observes that customers having direct trading access through an
automated order entry routing system or otherwise do not exercise a
member's governance authority.\24\ The Commission interprets the core
principle on fitness under section 5(d)(14) of the Act as not requiring
contract markets to establish fitness standards for customers as a
consequence of their using direct order routing systems to trade.
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\21\ But see section 5(d)(16) of the Act, which unlike the other
core principles, applies only to mutually-owned contract markets.
\22\ Thus, directors, members of disciplinary committees, and
members are required to meet a fitness requirement. Section 1a(24)
defines a member as a person "owning or holding membership in * * *
the contract market, or having trading privileges on the contract
market."
\23\ The Commission clarified the core principle's application
with respect to demutualized contract markets by making explicit
that the core principle on fitness requires a demutualized contract
market to establish fitness requirements for all natural persons
that directly or indirectly have greater than a ten percent
ownership interest in the facility. See proposed rule 38.3(b)(4).
\24\ CL 7-8. See also comments of NYBOT, CL 5-4, and NY Bar, CL
19-5.
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NY Bar raised a similar concern, stating that:
Appendix A to Part 38 in Designation Criterion 6 states that a
contract market must have authority to discipline "market
participants." It should be made clear that this does not apply to
customers of members.
CL 19-5. See also CL 5-5.
The Commission does not agree. Designation criterion 6 (Section
5(b)(6) of the Act) provides, in part, that:
a 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.
Contract markets have the authority to deny access to persons who
violate their rules, either directly, or indirectly through their
members. The Commission also recognizes, however, that a contract
market might encounter difficulty in enforcing fines or other sanctions
to remedy violations of its rules by persons trading on a market that
do not have a significant ownership interest in the facility.
Accordingly, the Commission proposed in rule 38.3(b)(3) to make 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." 66 FR 14263, n. 7.
Part 38, Appendix A, reflects rule 38.3(b)(3)'s interpretation of
designation criterion 6 that a contract market need only have authority
to deny access to such persons.
Nevertheless, the Commission is modifying rule 38.3(b)(3) and
Appendix A, in light of NY Bar's comment, to clarify that the denial of
access may be either direct by order to the market participant or
indirect by order to contract market members. The Commission is also
clarifying that the capacity to expel or deny access to a member with
trading privileges but having no, or only nominal equity interest in
the facility, also satisfies the requirements of designation criterion
6. In this regard, the definition of "member" in section 1a(24) of
the Act includes persons with trading privileges. Such persons may have
trading privileges under a "user agreement" with the facility or
trading platform or by virtue of a non-equity "membership" of only
nominal value. Levying fines or imposing other types of sanctions
against non-equity "members" may be as difficult as imposing such
remedies against non-member market participants.\25\
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\25\ NY Bar also suggested that Part 38, Appendix A, clarify
that "a contract market is not required to establish minimum
financial standards for customers of intermediaries." The
Commission has modified the text by removing the term "user,"
based on the understanding that the statutory meaning of "member"
includes those only having trading privileges on the facility.
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Core principle 4 requires contract markets to monitor trading to
prevent manipulation. Part 38, Appendix B, provided that contract
markets, as an acceptable practice, should have access to clearing
information. BOTCC points out that, because a contract market's
provider of clearing services may be a completely independent entity,
the clearing entity should be required to provide such information to a
contract market "only in furtherance of the contract market's self-
regulatory responsibilities and only upon a showing of need or other
good cause." CL 1-2. CBT disagreed, reasoning that, "it is crucial to
the performance of a contract market's trade monitoring function that
it retains such access without any restrictions or any special showing
of need." CL 7-6; CL 10-3. The Commission agrees that a contract
market must be able to obtain such information without limitation.
Accordingly, contract markets, by contract, must provide for such
unimpeded access to information from third-parties performing clearing
functions for the contract market.
NYBOT asked the Commission to modify the guidance for the
designation criterion on the financial integrity of
[[Page 42259]]
transactions. NYBOT argued that contract market rules are not required
by the Act and are unnecessary because futures commission merchants
continue to be subject to the segregation and related recordkeeping
requirements of section 4d of the Act and Commission rules thereunder.
CL 5-3. The Commission disagrees. The CFMA specifically requires
contract markets (and DTFs) to establish and enforce rules addressing
the financial integrity of transactions executed on or through the
board of trade or facility.\26\
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\26\ See Designation Criterion 5 of section 5(b) of the Act,
providing that a contract market "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."
See also section 5a(c) of the Act, Registration Criterion 4,
governing the financial integrity of transactions entered into on a
DTF. The Commission notes that, in conformance with its notice of
proposed rulemaking with respect to clearing, 66 FR 24308, it has
modified the guidance for Designation Criterion 5 to reflect that
transactions executed on a contract market, if cleared, must be
cleared with a derivatives clearing organization DCO registered with
the Commission, absent Commission action pursuant to its section
4(c) exemptive authority.
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The Commission anticipates that contract markets will continue to
be able to fulfill their self-regulatory responsibilities concerning
the financial responsibility of intermediaries through existing
mechanisms, including audits conducted by designated self-regulatory
organizations. The Commission has clarified this point in Appendix B,
in the application guidance to Core Principle 11, and has noted
explicitly that, "A contract market may delegate to a designated self-
regulatory organization responsibility for receiving financial reports
and for conducting compliance audits pursuant to the guidelines set
forth in rule 1.52." Accordingly, rule 1.52 has been added to the
rules reserved under Commission rule 38.2.\27\
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\27\ The Commission also has modified Part 38, Appendix A,
Designation Criterion 5, and Part 37, Appendix A, Registration
Criterion 4, by referring to the form of margin rather than to
margin "levels." In this regard, it should be noted that the
Commission is not mandating specific margining systems. Compare CL
18 at 3. In addition, the Commission has made a number of conforming
or technical textual changes to Part 38, Appendix B, in response to
the comments of MGE, NY Bar, NYBOT, and NYMEX. As modified, Appendix
B states explicitly that Core Principle 7, which relates to public
disclosure of certain information, may be satisfied through timely
placement of the information on the facility's web site. The
language relating to Core Principle 6 (emergency authority) now
reads, "minimize the effects of conflicts of interest." Core
Principle 9 has been modified to make clear that the qualified
independent professional testing of a system need not be performed
by a third-party provider, and the discussion related to Core
Principle 10 (trade information) now reads "transaction executed
on" rather than "effected on." The Commission also clarified the
discussion of position limits under Core Principle 5 and of trade
information under Core Principle 10.
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B. Part 37--DTFs
New part 37 implements section 5a of the Act, which provides for
registration of DTFs. Rule 37.2 exempts DTFs from all Commission
regulations applicable to a trading facility that are not reserved,\28\
and makes clear that the reserved regulations apply as though DTFs were
specifically referenced therein. Rule 37.3 identifies the commodities
eligible to be traded on a DTF under section 5a(b)(2)(A) through (C) of
the Act as those defined as "excluded" commodities in section 1a(13)
of the Act.\29\
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\28\ As noted in footnote 5 above, rules that also have
application to intermediaries or clearing organizations would still
apply to those entities even though they are not being reserved with
respect to their application to DTFs.
\29\ Section 5a(b)(2)(A) through (C) of the Act, as amended,
provides that a DTF 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[.]
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. 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.
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Rule 37.3 also establishes a procedure whereby a specific DTF may
make an individualized 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. Rule 37.3(a)(6) lists the factors that are relevant in
making such a showing.
New part 37 provides greater administrative flexibility than the
CFMA in the registration and oversight of DTFs, including provisions
that (1) permit the Commission to register a DTF upon conditions; (2)
provide a fast-track review procedure for applications for
registration; and (3) permit applicants for DTF registration
voluntarily to demonstrate their capacity to comply with the core
principles for operation.\30\ The Commission has provided two
appendices giving general guidance regarding applying for registration
and compliance with core principles.
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\30\ Existing contract markets need not make such a
demonstration. They simply must notify the Commission of their
intent to operate as a DTF, and file with the Commission the DTF's
rules (or a list of its rules) and a certification that they meet
all of the requirements for registration as a DTF.
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Rule 37.6(d) includes interpretations of certain core principles.
For example, it provides that an electronic trading platform used by
eligible commercial entities only, may satisfy the requirement to
monitor trading in a manner "appropriate to the market" by assuring
compliance with its rules regarding access limitation; that the core
principle on monitoring trading may be met, appropriate to the market,
by providing information to the Commission as requested; and that the
core principle concerning fitness standards applies to natural persons
who directly or indirectly have greater than a ten percent ownership
interest in a non-member-owned facility. Rule 37.7 includes several
special call provisions for requesting information from a DTF, or its
market intermediaries or participants. Finally, the Commission has used
its section 4(c) exemptive authority to give DTFs greater procedural
flexibility in amending their rules.
The Commission, based upon administrative experience in processing
applications for registration following proposal of the rules, is
modifying the time period for voluntary approval of the applicant's
operating rules and for one product to be listed for trading on the
facility. Upon registration as a DTF, the facility may list products
for trading that meet the automatic eligibility and other requirements
by notification to the Commission. Alternatively, it may submit new
products for voluntary approval under the forty-five day fast-track
review period of rule 40.3. Although no commenter specifically raised
the issue, the Commission, after further consideration occasioned by
inquiries from potential applicants, is modifying rule 37.7 by adding a
new paragraph (c)(2) to provide that the facility's operating rules, if
Commission approval is requested, and one initial contract, if
submitted for voluntary approval with an application for DTF
registration, will be deemed approved in thirty days, rather than the
normal forty-five day period under rule 40.3(b). This modification will
enable an applicant for DTF registration to have its operating rules
and one product considered by the Commission for approval under the
same time-frame as the registration application itself. Because this is
an exception to the normal review period, it is being limited to one
product only. Such a submission for voluntary product approval must
comply in all
[[Page 42260]]
other respects with the requirements of rule 40.3.\31\
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\31\ Product approval is voluntary, and an applicant is not
required to submit any of its products for Commission approval.
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In addition, commenters made a number of suggestions for
modification of, or raised issues relating to, the rules as proposed.
These comments relate to eligibility of persons for trading,
eligibility of commodities for trading, and interpretations regarding
several of the registration criteria and core principles. Several
commenters also suggested a number of specific textual clarifications.
1. Trader Eligibility
The Commission proposed to include registered floor brokers and
floor traders as eligible for trading on a commercial DTF. See proposed
rule 37.1(b). CBT, NYMEX, and @Markets supported this proposal. NY Bar,
however, opposed the proposed rule's requirement that an FCM guarantee
the trades of such a qualifying floor broker or floor trader, arguing
that "[i]t should be sufficient if the floor trader or floor broker is
simply `qualified,' i.e., that an FCM has agreed to accept all of the
broker or trader's trades, instead of being fully guaranteed." CL 19-
3; see also CL 5-3. The Commission does not agree that "acceptance"
of all trades rather than a guarantee is sufficient. A guarantee
provides formal assurance that another's obligation will be fulfilled,
a level of assurance not necessarily provided by acceptance.\32\ The
Commission believes that this higher level of assurance is both
necessary and appropriate for eligibility by floor brokers and floor
traders as commercial entities, and is adopting the final rule as
proposed.
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\32\ Several exchanges, including CBT, NYMEX and CME, require
clearing guarantees for trades by non-clearing members.
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The Commission also requested comment on whether the definition of
"eligible commercial entity" under proposed rule 37.1(b) should be
amended to include individuals whose function in electronic markets is
similar to that provided by floor traders. A number of commenters
generally supported including individuals who perform market-making
functions on electronic trading facilities within the definition of
eligible commercial entity. See CL 6-2, CL 4-2. @Markets, for example,
opined that "B2B markets are in their infancy"; "certain markets may
find that individual market makers are a critical element in accruing
necessary liquidity"; and "in lieu of the registration requirement *
* *. such individuals [should] * * * meet the requirements for
membership established by the facility." CL 6-3.
NYBOT and NY Bar suggested that such a liquidity provider for
electronic markets should be considered to be any eligible contract
participant that "undertakes to maintain a bid and ask spread pursuant
to an agreement with, or the rules of, an electronic trading
facility." CL 5-1; CL 19-2. CBT suggested that the electronic market
equivalent of a floor trader would simply be a member that has its
trading guaranteed by an FCM, and that is subject to the trade practice
and disciplinary rules of exchanges. CL 7-4. However, that description
would be a meaningful distinction only in the context of an
intermediated market. Rather than attempting to establish a rule at
this time, NYMEX suggested that the Commission make such determinations
over time on a case-by-case basis for each facility seeking regulatory
relief in this area. CL 10-5. SIA, although supporting the concept of a
functional equivalent of a floor trader for electronic markets, noted
that "most corporate entities in that category would already fall
within the statutory definition of eligible commercial entity." CL 20-
3. In light of the wide range of recommended standards, the suggestion
by at least one commenter that existing categories already would cover
those likely to fall within the scope of a new category for electronic
market maker, and the lack of previous trading experience, the
Commission is of the view that the issue should be considered based
upon a fuller administrative record, after some trading experience with
this type of market has been observed.
NY Bar suggested that the Commission clarify that "[s]ection
37.3(b) is intended to permit a non-eligible commercial entity to
access a commercial entity [DTF] through any FCM or broker-dealer." CL
19-3. Access to trade on a DTF generally is limited to eligible traders
under rule 37.3(a). Eligible traders are either eligible contract
participants or non-eligible contract participants trading through a
registered FCM that: (1) is a member of a futures self-regulatory
association (or for a facility trading only security futures products,
a national securities association); (2) is a clearing member of a
derivatives clearing organization; and (3) has at least $20 million net
capital. See section 5a(b)(3) of the Act. Moreover, for transactions
other than security futures products, a DTF may by rule permit a
broker-dealer or a depository or Farm Credit System institution to act
as intermediary "on behalf of customers" if such entities do not hold
customer funds for more than one business day. See section 5a(e) of the
Act.
In contrast to these provisions, section 5a(a)(2)(F) of the Act
provides that a commercial DTF may trade any commodity (other than an
enumerated agricultural commodity)\33\ when access to trade on the
facility is limited to eligible commercial entities trading for their
own account. Based upon this statutory language, commercial DTFs under
rule 37.3(b) are limited to eligible commercial entities (as defined in
Sec. 37.1(b)) trading for their own account. Accordingly, commercials
may not execute their trades through an FCM, or any other intermediary,
when trading on a commercial DTF under rule 37.3(b).\34\
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\33\ The enumerated agricultural commodities are those listed in
section 1a(4) of the Act, and include, among others: wheat, cotton,
rice, corn, soybeans and the soybean complex, livestock, and frozen
concentrated orange juice.
\34\ Consistent with this provision, rule 37.1(b) includes floor
brokers within the definition of "eligible commercial entity" only
when trading for their own account.
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2. Commodity Eligibility
Consistent with section 5(e)(2) of the Act, the Commission
indicated in its notice of proposed rulemaking that it will determine
in a future rulemaking whether to permit and, if so, the appropriate
conditions for permitting, the enumerated agricultural commodities to
trade on a DTF. 66 FR 14264. A number of commenters responded by
suggesting that the enumerated agricultural commodities should be
permitted to trade on a DTF immediately. See CL 3-3, CL 9-1, CL 18-4.
The Commission intends to turn its attention to this issue at a later
date in a separate rulemaking.
As a class of excluded commodities, exempt securities are eligible
to be traded on a DTF. The Commission requested comment on whether
exempt securities trading on a DTF should be subject to additional
requirements, such as reporting requirements, not applicable to other
excluded commodities.\35\ CBT explained that it "has found large
trader reporting to be a useful tool for monitoring trading of futures
and options on exempt securities," but wanted "the form, levels and
timing of any such reporting" left
[[Page 42261]]
to the discretion of individual DTFs. CL 7-5.
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\35\ The proposed rules provided that commodities defined in
section 1a(13) of the Act as "excluded commodities" meet the
deliverable supply eligibility test for trading on a DTF. Such
excluded commodities include interest rates, currencies, securities,
security indexes, macroeconomic and other types of indexes, and
occurrences associated with an economic consequence beyond the
control of the traders.
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ISDA did not object "in principle" to the imposition of such
requirements, but cautioned against imposing regulatory requirements in
the absence of a "compelling public interest." CL 3-3. SIA suggested
that any large-trader reporting requirement should be consistent with
market practice in the relevant cash market and only upon request of
the Commission. CL 20-2.
On the other hand, the United States Department of the Treasury
(Treasury) expressed the opinion that all DTFs and contract markets
should enforce a large-trader reporting system for contracts based on
Treasury instruments. Treasury "reiterate(d) its belief that large
trader reporting requirements * * * reveal information that is useful
to regulators, and also have a deterrent effect." CL 14-2.
In light of all of the comments received, the Commission at this
time has determined not to impose routine large-trader requirements on
DTFs or their users for contracts based on Treasury instruments. Should
market conditions warrant, however, the Commission will invoke its
special call authority under Rule 37.8 to require such information for
these contracts as the Commission deems necessary, taking into
consideration the surveillance information routinely available with the
DTF. The Commission's special call could require, for example, ongoing
reporting of large-trader positions or other appropriate information.
In addition to excluded commodities and security futures products,
the Commission, under rule 37.3(a)(6), may make an individualized
determination by rule, regulation or order, that a commodity is
eligible to be traded on a DTF based on the commodity's characteristics
and surveillance history, and the self-regulatory record and capacity
of the facility on which it is to be traded. NYMEX questioned whether
such determinations were included under the thirty-day period that
applies to applications for DTF registration. If not, NYMEX requested
that "the Commission specify a comparable timeframe for such
determinations that would provide for resolution of such applications
in a reasonably expeditious manner." CL 10-2.
The timing of an individualized Commission determination of
commodity eligibility under rule 37.3(a)(6) is independent of a
facility's initial registration as a DTF. In this regard, the rules do
not require that a product be submitted for approval at the time the
facility is registered as a DTF. Accordingly, the thirty-day time
period for registration is independent of, and does not control, any
product-specific consideration. Moreover, the Commission proposes to
make case-by-case determinations with regard to eligibility of a
commodity to trade on a DTF after notice and an opportunity for hearing
through submission of written data, views and arguments. A number of
commenters, including NYMEX and NYBOT, suggested that a petitioning DTF
or applicant for DTF registration should be accorded the right to
request an opportunity to present oral views and testimony to the
Commission. CL 5-3, CL 10-3. The Commission concurs and will consider
granting such requests in appropriate instances. Such an opportunity to
present views, facts and argument orally before the Commission is not
consistent with a thirty-day deadline. Accordingly, recognizing the
potentially complex and highly individualistic nature of each
determination, the Commission is not modifying the final rule by
including a deadline. Nonetheless, the Commission intends to make these
determinations expeditiously.
NYMEX also requested that the Commission clarify that the relevant
approval criteria are "meaningful only in relative terms, i.e., in
comparison to other markets"; that "it is not necessary for a
contract to meet all of these factors"; and how these factors might be
interpreted for cash-settled or index-based contracts. CL 10-3. The
Commission believes that a demonstration that a commodity meets the
criteria of rule 37.3(a)(6)(ii) can be made either on an absolute basis
or relative to a market that clearly meets the requirement that a
"commodity is highly unlikely to be susceptible to the threat of
manipulation." \36\ The Commission will consider such a demonstration
based upon the totality of the showing, but will separately consider
the petitioner's surveillance history and self-regulatory record from
the commodity's general cash market characteristics. Nevertheless, the
Commission would consider undertakings for enhanced surveillance and
self-regulatory measures (beyond the required large-trader reporting
system), such as spot-month speculative position limits, as an
appropriate means to address instances where cash market
characteristics alone may not provide sufficient assurance that the
commodity is highly unlikely to be susceptible to the threat of
manipulation.
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\36\ In this regard, the excluded commodities defined in section
1a(13) of the Act clearly meet this standard, and may be used as a
benchmark for comparison.
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With regard to cash-settled contracts, the Commission is modifying
sub-paragraph 37.3(a)(6)(ii)(G) to make clear that the facility should
be able to show that the contract or product's terms and conditions
provide for a reliable and acceptable cash-settlement procedure that is
adequate to minimize the threat of market abuse. The other criteria
enumerated in paragraph (a)(6) apply equally to cash and physically
settled contracts.
3. Registration Procedures
Proposed rule 37.5(a)(2) would have required that a contract market
filing notice that it wishes to operate as a DTF include in its
submission a copy of the facility's rules. NYBOT opined that "this
should not be necessary, since the rules of the contract market would
already be on file with the Commission, unless and to the extent the
DTEF rules are different." CL 5-3; see also CL 15-4 (MGE). The
Commission is modifying the final rule to provide that the notification
need only list those rules of the contract market that also apply to
operation of the DTF.\37\
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\37\ The Commission is not modifying the provisions relating to
DTF applications for registration. The notification procedure is an
abbreviated procedure for existing contract markets. Applicants for
registration generally will not have pre-existing approved or
certified rulebooks.
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4. Interpretations of Registration Criteria and Core Principles
Guidance
The Commission proposed in its registration guidance in Appendix A
that "[i]f cleared, transactions executed on the facility must be
cleared through a derivatives clearing organization." However, in a
subsequent notice of proposed rulemaking to implement the CFMA with
respect to derivatives clearing organizations (DCO), the Commission
clarified that,
excluded or exempted contracts, including those elected pursuant
to section 5a(g) to be traded on a registered derivates transaction
execution facility, are not required to be cleared by a DCO,
although a clearing organization that clears these contracts may
voluntarily apply, pursuant to section 5b(b), to register with the
Commission as a DCO.
66 FR 24308 (May 14, 2001).
SIA, in commenting upon the guidance in Appendix A, asserted that
the registration guidance should be modified to recognize that
contracts that are traded on a DTF on an "opt-in" basis are not
required to be cleared by a DCO. CL 20 at 2. NY Bar asserted that a DTF
should be permitted to clear through any recognized clearing
organization including, e.g., clearing organizations
[[Page 42262]]
supervised by domestic and foreign banking authorities. CL 19-4-5. In
light of these comments, and the fact that no comments were submitted
in response to the Commission's clarification in the Federal Register
notice proposing rules for clearing organizations, the Commission is
modifying the guidance in Appendix A to make clear that agreements,
contracts and transactions in excluded or exempt commodities that are
traded on a DTF, if cleared, may be cleared through clearing
organizations other than DCOs registered with the Commission.
With regard to Appendix B for DTFs, Guidance on Compliance with
Core Principles, NYBOT and NY Bar suggested that the Commission add a
statement similar to one included in the guidance for contract markets
(Appendix B of part 38), that "[b]oards of trade that follow the
specific practices outlined . . . for any core principle below will
meet the applicable core principle." CL 5-4, CL 19-4. The guidance for
DTFs, however, in keeping with the less regulated nature of those
markets, is abbreviated and general in nature, and does not include the
same level of detail as the guidance for contract markets. Accordingly,
unlike the guidance for contract markets, the guidance for DTFs does
not outline specific acceptable practices.
NYBOT objected that the guidance on "minimum" fitness standards
under Core Principle 6 for persons who have member voting privileges,
governing obligations or responsibilities, or who exercise disciplinary
authority, is not provided for in the CFMA and is unnecessarily
onerous.\38\ CL 5-4. The Commission agrees in part and has modified the
guidance accordingly.\39\ The guidance in Appendix B relating to
minimum fitness standards interprets Section 5a(d)(6) of the Act, which
requires DTFs to "establish and enforce appropriate fitness
standards." In the Commission's view, the fitness standards for the
named categories of persons that should apply ats a minimum include the
statutory disqualifications in section 8a(2) of the Act. Of course,
DTFs remain free to impose higher fitness standards, including the
statutory disqualification standards of section 8a(3) of the Act.\40\
Persons who have governing obligations or responsibilities, or who
exercise disciplinary authority, should not have a significant history
of serious disciplinary offenses, such as those that would be
disqualifying under rule 1.63.
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\38\ NYBOT also asserted that there should not be any fitness
standards for natural persons who directly or indirectly have
greater than a ten percent interest in the facility and are merely
passive investors. This issue is addressed above in connection with
comments related to a similar provision applicable to contract
markets.
\39\ The Commission has made similar modifications to the
guidance governing designated contract markets contained in Part 38,
Appendix B, Core Principle 14.
\40\ The Commission notes that these minimum standards are
consistent with the fitness standards that Congress itself adopted
for exempt commercial markets. In this regard, section
2(h)(5)(A)(iii) of the Act requires an exempt commercial market to
certify to the Commission that "no executive officer or member of
the governing board of, or any holder of a 10 percent or greater
equity interest in, the facility is a person described in any of
subparagraphs (A) through (H) of section 8a(2)[.]"
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CME and NYMEX commented that disclosing information on system
security, as the proposed guidance on Core Principle 4 suggests, might
compromise a system's integrity. CL 10-4, CL 18-4. The guidance did not
intend that detailed, proprietary information on system security should
be disclosed, and in light of these comments, the Commission has
deleted this provision.\41\
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\41\ The Commission has made a similar modification to Part 38,
Appendix B, Core Principle 9. See comment of MGE, CL 15-3.
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C. Product Listing and Rule Amendments
Proposed part 40 would implement the procedural provisions of
Section 5c(c) of the Act for new contracts, new rules and rule
amendments.\42\ Based on administrative experience after the part 40
rules were proposed, the Commission is amending rule 40.4 to provide
contract markets greater certainty with respect to the approval of
rules governing contracts on enumerated agricultural commodities.
First, the Commission is adding to the list of non-material rule
changes the category of rule changes necessary to comply with a binding
court order, or with a rule or order of the Commission, or of another
federal regulatory authority. Second, the Commission is adding a
provision to the final rules that permits a contract market to submit
to the Commission any rule that the contract market believes not to be
material, but that is not listed as non-material in rule 40.4, and to
implement the rule ten days after submission, absent contrary notice
from the Commission. This procedure gives exchanges flexibility by
providing that the listed categories are non-exclusive and at the same
time provides a method to obtain certainty that the Commission agrees
that the rule change is not material.\43\
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\42\ In proposing these rules, the Commission noted that, in
light of the Congressional intent to implement the provisions of the
CFMA without delay, during the transition period between the
effective date of the CFMA and promulgation of final implementing
rules, the Commission would not take any enforcement action against
any person who complied with the implementing rules, as proposed. 66
FR 14268.
\43\ CBT correctly asserted that rules listing additional
delivery months for agricultural contracts should not be deemed to
be material under rule 40.4, and thus subject to the requirement of
prior approval. CL 7 at 2. Pursuant to section 5c(c)(B)(2) of the
Act, the listing of additional delivery months is not subject to the
prior approval requirement because such rules do not apply "to
contracts and delivery months which already have been listed for
trading and have open interest." 7 U.S.C. 7c(c)(2)(B).
CME asserted that the Commission should not retain the
distinctions between in-house changes and those made by third
parties with respect to delivery standards and index constructions
and calculations. It asserted that "there are sufficient safeguards
embodied in the core principles to make requirements at this level
of detail obsolete." CL 18 at 5. The Commission notes that it
exercised its section 4(c) authority to excuse independent third
party delivery and index changes from the statutory certification
requirement for all rule changes in recognition that such rule
changes are subject to the additional safeguard of being determined
by the action of an independent party, for purposes not solely
related to trading in derivatives contracts or to trading on the
exchanges.
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While commenters strongly endorsed the increased flexibility of the
proposed rules, see CL 7-2, CL 10-2, CL 18-1, several objected to
certain specific requirements. In response to these comments, the
Commission has decided to modify the proposed rules as discussed below.
1. Clearing
BOTCC objected to the provision of proposed rule 40.2, which would
have required a DCO to certify, with respect to a product that it
clears that is not traded on a contract market or a DTF, that the
trading product or instrument complies with the Act. BOTCC questioned
the Commission's authority to require this certification, and
questioned how a DCO could make such a certification "about a product
or instrument that it has not designed and for which it is providing
only a discrete set of services." CL 1-5. As an alternative, BOTCC
suggested that the Commission could require the DCO to certify that its
clearing of the product complies with the Act, although it questioned
the practical utility of such a certification.
Under section 5c(c) of the Act, a registered entity may elect to
"accept for clearing any new contract or other instrument, or may
elect to approve and implement any new rule or rule amendment" by
certifying to the Commission that "clearing of the new contract or
instrument, new rule or rule amendment complies with [the] Act." The
Commission is clarifying rule 40.2 to provide that a DCO may accept for
clearing any new contract or other
[[Page 42263]]
instrument by filing with the Commission: (i) the rules of the DCO that
permit it to accept the contract or other instrument for clearing
(including any rules establishing the terms and conditions of products
that make them acceptable for clearing); and (ii) a certification that
the clearing of the new contract or instrument (including any rules
establishing the terms and conditions of products that make them
acceptable for clearing) complies with the Act. By so certifying, the
DCO will be certifying not only that it is in compliance with the core
principles applicable to it, but that its rules permitting acceptance
for clearing (including any rules establishing terms of the product to
be accepted for clearing) comply with the Act. These filing and
certification requirements, as proposed, do not apply when a DCO
accepts a new product for clearing that is traded on a contract market
or a registered DTF.\44\
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\44\ BOTCC objected to including clearing organizations within
the definition of "contract market" under proposed rule 40.1.
BOTCC reasoned that this definition was unnecessary and confusing
since the Act now separately regulates trading facilities and
clearing organizations. CL 1-4. The Commission agrees and has
deleted the proposed definition from the final rules.
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2. Product Listing
CME objected to the requirement that trading facilities certify to
the Commission compliance with the Act when relisting dormant contracts
for trading. See proposed rule 40.2. CME argued that the proposed
certification requirement for dormant contracts is a "relic of the
days of more intensive regulatory administration." CL 18 at 5. The
Commission disagrees. Contracts become dormant only after five years
from initial listing \45\ and cash markets are likely to change during
that period. Consequently, the product as originally certified may no
longer be in compliance with the applicable core principles. The
recertification requirement is in keeping with the Commission's
oversight role.
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\45\ See proposed Commission rule 40.1, which defines "dormant
contract" as any futures or option contract in which no trading has
occurred for six months beginning five years after initial listing.
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3. Rule Submissions
Proposed rule 40.5 would have established procedures for the
voluntary submission of rules for Commission review and approval.\46\
CBT objected that this rule would result in a potentially longer review
process than was provided for under the Commission's fast track review
procedure prior to enactment of the CFMA. CL 7-2.
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\46\ Those procedures are also incorporated by reference in
proposed rule 40.4, which implements the statutorily-mandated review
and approval procedures for certain amendments to contracts
involving enumerated agricultural commodities.
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Proposed rule 40.5 provided for a 45-day review period of rules
submitted for Commission approval, with the possibility that the
Commission could extend the review period once, for another 45 days,
which would have comported with the statutory review period of 90 days.
On further reflection, the Commission has determined to retain the
review periods of its pre-CFMA fast track procedure: one 45-day initial
review period, with the possibility of one 30-day extension.\47\
When the Commission does not approve the rule of a registered
entity submitted to it for voluntary approval, proposed rule 40.5(d)
provided that the non-approval notice must briefly specify the nature
of the issues raised and the specific provision of the Act or
regulations, including the form or content requirement of rule 40.5,
that the facility's rule would violate, appears to violate, or the
violation of which could not be ascertained from the submission. Notice
of the Commission's refusal to approve a registered entity's rule would
have been presumptive evidence that the registered entity could not
truthfully certify that the same, or substantially the same, proposed
rule or rule amendment does did not violate the Act or rules
thereunder. See proposed rule 40.5(e).
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\47\ As suggested by NYBOT and NY Bar, the Commission is
modifying rule 40.6(a) by adding a parenthetical to make explicit
that the self-certification requirement of rule 40.6 applies to all
new rules or rule amendments of a contract market or DTF other than
those rules or rule amendments that have been approved by the
Commission under the voluntary approval procedures of rule 40.5. See
CL 5-6 and 19-7. This does not preclude a contract market or DTF
from voluntarily submitting a rule for Commission approval under
rule 40.5 that it has already implemented by certification under
rule 40.6.
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BOTCC argues that the presumption established by rule 40.5(e) is
ill-advised, procedurally flawed, discourages rule submissions and
should be withdrawn. CL 1-5. The Commission is not persuaded. The
presumption established by rule 40.5(e) is not a conclusive, but
rather, is a rebuttable presumption. If the registered entity were to
certify such a rule following notice of non-approval, the burden of
proceeding would rest with the Commission.\48\ In any administrative
proceeding brought by the Commission, the registered entity would have
an opportunity to supplement the record with evidence rebutting the
presumption. Moreover, as the proposed rule makes clear, nothing will
prejudice a registered entity's right to resubmit a revised rule or to
supplement the submission. Accordingly, the Commission does not believe
that this presumption will discourage voluntary rule submissions.
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\48\ In such a proceeding, the Commission would be required to
satisfy the applicable legal standard. In a proceeding to alter or
supplement the rules of a registered entity, the Commission would be
required to establish that such changes "are necessary or
appropriate for the protection of persons producing, handling,
processing, or consuming any commodity traded for future delivery on
such registered entity * * * or for the protection of traders or to
insure fair dealing in commodities traded for future delivery on
such registered entity." 7 U.S.C. 12a(7). In an administrative
enforcement proceeding alleging a false certification, the
Commission's findings of fact must be supported by "the weight of
the evidence." 7 U.S.C. 8(b).
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Proposed rule 40.6 provides that the Commission may stay the
effectiveness of a certified rule 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. CBT objected to the stay
provision on the grounds that section 8a(7) does not reference a stay
and that it is unnecessary and potentially detrimental for the
Commission to have such authority. CL 7-3; see also CL 18 at 2-3.
BOTCC, while expressing sympathy for the Commission's concern that an
improperly adopted rule not be permitted to remain in effect pending
the conclusion of the administrative proceeding, suggested that the
Commission modify the rule to specify that any stay will not affect
contracts and positions previously established in reliance on the
disputed rule and that the Commission endeavor to delay the
effectiveness of any such stay in order to give the registered entity
and market users an opportunity to make appropriate arrangements. CL 1-
6, note 4.
The Commission recognizes the potential market implications of a
stay of a previously implemented rule or rule amendment. The Commission
has not delegated this authority to its staff. The Commission intends
to invoke its stay authority cautiously, and only in the rare instance
when its use would be appropriate.
FIA requested confirmation that the Commission will solicit comment
on rules submitted for voluntary approval when warranted. CL 11-6-7.
The Commission confirms its intent to solicit public comment in such
cases and further confirms its intent to solicit public comment in
appropriate cases on
[[Page 42264]]
interpretations issued or approved under section 5c(a) of the Act.\49\
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\49\ BOTCC commented that the procedures governing amendments to
the terms and conditions of contracts involving enumerated
agricultural commodities, consistent with the Act, should apply only
when the contract is traded on a designated contract market, and not
when traded on a registered DTF pursuant to section 5a(g) of the
Act. CL 1-5. The Commission agrees and has amended rule 40.4
accordingly.
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4. Emergency Rule Submissions
CME commented that the proposed definition of emergency in proposed
rule 40.1 is too broad and particularly objected to including within
the definition "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." CME argued that this definition
could require the "declaration of an emergency if * * * the Federal
Reserve changes the fed funds rate." CL 18-5. The proposed language is
substantially identical to language included in the Commission's
current definition,\50\ and is consistent with the Act's definition of
emergency.\51\
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\50\ See 17 CFR 1.41(a)(4)(iv)(2001).
\51\ Section 8a(9) of the Act vests the Commission with
emergency authority. The term emergency is defined to include "in
addition to threatened or actual market manipulations and corners,
any act of the United States or a foreign government affecting a
commodity or any other major market disturbance which prevents the
market from accurately reflecting the forces of supply and demand
for such commodity."
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BOTCC, CME and NYMEX objected to the provisions of rule 40.6 that
would require a contract market or registered DCO to file emergency
rules at the time of implementation, if implementation is sooner than
the next business day. CL 1-7-8; CL 10-4; CL 18-5. CME commented that
this notification requirement "more closely resembles micromanagement
than oversight. It has the effect of requiring a DTEF to concern itself
with an administrative procedure rather than concentrating on the
emergency itself." CL 8-5
After considering these comments, the Commission has decided to
modify rule 40.6 to require the contract market or DCO to file rules
implemented pursuant to an emergency at the earliest possible time
after implementation of the rule (but in no event later than 24 hours
after implementation), if it is not practicable for the contract market
or DCO to file the rule prior to implementation.\52\
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\52\ This is consistent with the approach taken in the current
rules regarding the timing of notification of rules implemented
pursuant to an emergency. See 17 C.F.R. 1.41(f)(2)(i).
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D. Part 36--Exempt Markets
Part 36 applies 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.
Section 5d of the Act establishes the category of "exempt board of
trade." Commission rule 36.2 defines 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. In addition, rule 36.2(b) provides
the form and manner of the notification to the Commission provided for
under section 5d of the Act.
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.\53\ 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. The rules
implement the notification requirements of section 2(h)(5)(A) of the
Act and the information requirements for exempt commercial markets
consistent with section 2(h)(5)(B) of the Act.\54\ Generally, the part
36 rules incorporate by reference the statutory conditions that pertain
to these exemptions, including the statutory provisions relating to
eligibility.
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\53\ See, note 9 supra.
\54\ As proposed by rule 36.3(b), if an exempt commercial market
chooses not to satisfy its reporting requirements by providing the
Commission with electronic access to transactions conducted on the
facility, it may do so 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.
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1. Exempt Boards of Trade
Several commenters suggested that the Commission expand the
commodities eligible to be traded on exempt boards of trade (EBOT)
trading under proposed rule 36.2. ISDA stated that it "believes it is
important that the Commission indicate its intention to act with
dispatch in designating additional commodities that may be traded on an
exempt board of trade." CL 3-4. SIA suggested that the Commission
"does not need to foreclose the determination that other commodities
could satisfy the statutory standard for eligibility or to require in
all cases that such a determination be made by the CFTC, where such a
determination is not required by statute." CL 20-3. The Commission
believes that the commodities defined as excluded under section 1a(13)
of the Act clearly meet the statutory criteria to be traded on an EBOT.
The Commission has not foreclosed the possibility of finding additional
commodities eligible for trading on an EBOT at some future time by
rule, regulation or order.
2. Exempt Commercial Markets
With respect to the eligibility of traders to participate in exempt
commercial markets, Energy Group "suggest[ed] that the Commission
consider clarifying the definition of principal for the purposes of
principal-to-principal transactions to include eligible commercial
entities entering into transactions on behalf of other eligible
commercial entities." CL 4-2. As noted above, the Commission's
proposed rules relating to exempt commercial markets rely directly upon
the statutory definitions and conditions relating to the section
2(h)(3) exemption. Any interpretation by the Commission of the
definition of "principal" relating to eligible commercial entities
necessarily would include consideration of the use and meaning of that
term as it relates to other statutory exclusions or exemptions, and is
beyond the scope of this rulemaking.
With respect to the reporting requirements set forth in part 36,
see note 55 supra and accompanying text, @Markets expressed the view
that "regular and periodic" reports were beyond the scope of the
Commission's authority under section 2(h)(5)(B) of the Act and Energy
Group suggested that "the focus on meeting "large trader"
requirements is unnecessary for the Commission to fulfill its
responsibilities under the CFMA." CL 4-2. The Commission disagrees.
Section 2(h)(5)(B) of the Act requires that an exempt commercial market
provide the Commission with electronic access to the market. The access
requirement provides the Commission with information on a routine, on-
going basis, thereby serving many of the functions that large-trader
reports serve on the regulated markets. Using this access, the
Commission is able to surveil transactions on the market in order to
enforce its anti-manipulation authority. The alternative to providing
electronic access set forth in rule 36.3(b) is intended to offer exempt
markets a substitute, but generally equivalent, means of complying with
the statutory electronic access requirement.
Two commenters raised issues relating to proposed rule 36.3(c)(3),
[[Page 42265]]
under which a facility must require that each participant agree to
comply with all applicable law and must have a reasonable basis for
believing that its participants are eligible. BOTCC suggested that the
Commission clarify that the provision requiring each participant "to
agree to comply with all applicable law is intended to be limited to
applicable provisions of the Act and Commission regulations." CL 1-4;
see also CL 4-2 (Energy Group). That is indeed the intended meaning of
the rule.
Finally, @Markets requested that the Commission "confirm that an
exempt commercial market will be deemed to be a "board of trade" for
purposes of the confidentiality provisions of section 8(a) of the Act
and the relevant provisions of the Freedom of Information Act." CL 6-
4. Unlike contract markets and DTFs, which are specifically referred to
as "boards of trade" in the Act, exempt commercial markets are not
specifically referred to by the Act as "boards of trade." Compare
sections 5(a) and 5a(a) of the Act with section 2(h)(5) of the Act.
Nevertheless, section 8(a) of the Act generally prohibits the
Commission from publishing "data and information that would separately
disclose the business transactions or market positions of any person."
"Person" under section 1(a)(16) of the Act includes individuals,
associations, partnerships, corporations and trusts, and would thereby
apply to an exempt commercial market and to those trading thereon.
3. Common Provisions
Part 36 provides that both exempt boards of trade and exempt
commercial markets be required to disseminate publicly their trading
volume, opening and closing price ranges, open interest and other
trading data, to the extent appropriate to that market upon a
Commission finding that the facility serves as a significant source for
the discovery of prices in the cash market for the underlying
commodity. Rules 36.2(c)(2) and 36.3(c)(2) provide that the Commission
will make such a determination after notice and an opportunity for
hearing through submission of written data, views and arguments.
A number of commenters suggested modifications to the rule. BOTCC
noted that price information is an important source of revenue for
exchanges and suggested that the Commission revisit the public
dissemination requirement at a future time after "a fuller opportunity
to evaluate the appropriate balance of public interests entailed by
such requirement." CL 1-3. @Markets noted that although "neither the
Act nor the proposed rules define the standards that the Commission is
to employ in determining that a market performs a significant price
discovery function, [it] would expect to have the opportunity to
comment on appropriate standards prior to or in connection with any
such determination by the Commission under this section of the Act."
CL 6-2. Others commented that oral hearings should not be precluded in
appropriate cases. CL 5-2, CL 19-4.
The Commission agrees with the above comments. Although the
Commission has provided that its determination will be made through
notice and an opportunity for hearing through submission of written
data, views and comments, it is not precluded from convening a public
meeting to receive oral comment and argument in appropriate cases. The
Commission may determine sua sponte, or in response to a request by the
affected trading facility, or any interested member of the public, that
a public meeting to receive oral statements and arguments is in the
public interest and will assist it in its consideration of the relevant
issues. As part of its inquiry, the Commission would set forth the
standards that it would use in making its determination. The facility,
and other interested members of the public, would have an opportunity
to challenge those standards and to raise any other objections or
defenses to the issuance of an Order, including any possible adverse
impact on a facility's property rights that may stem from the proposed
order. The Commission is of the view that these issues are best
addressed in the context of a fully-developed administrative record,
rather than in the context of this generalized rulemaking. Accordingly,
the Commission is adopting the final rules on procedures relating to
price discovery determinations as proposed.
The Commission invited comment on whether exempt boards of trade
and exempt commercial markets should be required affirmatively to
disclose to traders that the facility and trading on the facility are
not regulated or approved by the Commission. 66 FR at 14266. Commenters
responding to this question generally opposed requiring facilities to
affirmatively make such disclosures. But see CL 10-5 (NYMEX); CL 12-2
(SUA). For example, Energy Group suggested that
[a]n exempt commercial market is open only to sophisticated
market participants who are familiar with distinctions among the
different facilities. Such participants would have no reason to
believe such a facility is regulated * * *. A representation
affirming that the facility is not regulated may cause confusion.
CL4-2. SIA and @Markets concurred with this view, noting respectively
that "[i]n light of the institutional character of these markets * * *
such disclosure is not necessary," and that "the participants in
these markets * * * can be expected to make appropriate inquiries
regarding a market before applying for trading privileges on the
facility." CL 20-3; CL 6-4.
The Commission agrees that eligible contract participants and
eligible commercial entities can be expected to make appropriate
inquiries regarding whether a market is regulated and is not requiring
exempt boards of trade or exempt commercial markets affirmatively to
disclose that they are not regulated or approved by the Commission.
E. Miscellaneous
1. Anti-Fraud
The Commission additionally proposed an anti-fraud provision,
proposed rule 1.1, pursuant to its authority in sections 3 and 8a(5) of
the Act. This proposed anti-fraud rule would apply to retail foreign
currency agreements, contracts and transactions described in section
2(c)(1) of the Act.
A number of the commenters particularly supported this proposed
rule. SUA noted that it was the clear intent of Congress that the
Commission "retain broad powers to protect against fraud and
manipulation" (CL 12 at 1). NYMEX "strongly support[ed] the proposed
new rule." (CL 10 at 4). CBT commented that the rule "addresses a
regulatory gap with regard to * * * unregulated entities." (CL 7 at
9). See also CL 11 at 6. NASAA, "welcome[d] the clarification of the
Commission's antifraud jurisdiction." CL 2 at 1.
ISDA, however, suggested that the Commission expand the exclusion
from the rule to include financial institutions, insurance companies,
financial holding companies and investment bank holding companies.\55\
Such entities need not be excluded from operation of the rule because
they are outside of its intended scope in the first instance.\56\
Accordingly, the Commission is adopting the rule as proposed.\57\
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\55\ The rule excludes broker-dealers, FCMs and their respective
affiliates.
\56\ Rule 1.1 on its face applies only to "the extent that the
Commission exercises jurisdiction over such accounts, agreements, or
transactions as provided in section 2(c)(2)(B)."
\57\ Separate from proposed rule 1.1, a number of commenters
offered a range of opinion in response to the request for comment by
Commissioner Thomas J. Erickson on the advisability of promulgating
a broader anti-fraud rule. 66 FR at 14288. SUA supported a broader
anti-fraud rule without qualification. CL 12 at 1. SIA did not
object "in concept" to clarification by the Commission of its
anti-fraud authority with respect to principal-to-principal
transactions. CL 20 at 4. ISDA, however, warned that the Commission
should proceed with caution in this area to avoid creating any
uncertainty with respect to the scope of its jurisdiction. CL 3 at
5. Finally, FIA expressed doubt whether an anti-fraud rule of more
general applicability would appreciably enhance the Commission's
authority to deter misconduct by persons subject to its
jurisdiction, or the public's ability to recover damages as a result
of such misconduct. CL 11 at 6.
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[[Page 42266]]
2. Delegation of Functions
NFA asked the Commission to clarify a contract market's and DTF's
ability to delegate functions under the core principles, noting that:
the CFMA specifically allows contract markets and [DTFs] to comply
with any of the core principles through delegation of functions to a
registered futures association or another registered entity * * *.
The Commission's current proposal, however, does not specifically
authorize a [DTF] to delegate these functions (although NFA believes
that the language is sufficiently broad to be interpreted to permit
this delegation.)
CL 16-1.
Section 5c(b) of the Act specifically provides that both contract
markets and DTFs may comply with any applicable core principle through
delegation of any relevant function to a registered futures association
or another registered entity. As NFA correctly notes, the rules as
proposed are "sufficiently broad to be interpreted to permit this
delegation." Id.
NFA further suggests that the Commission, by rule, limit entities
acceptable "for "outsourcing" of functions to registered futures
associations and registered entities because the statute so provides
and because "Congress recognized that the Commission must have some
authority over any entity carrying out these functions." Id. Section
5c(b) of the Act, however, limits only "delegations" of functions to
registered futures associations and to registered entities; it does not
restrict "outsourcing" of specified activities on a contract basis.
The Commission has long-recognized the ability of contract markets
to meet their self-regulatory obligations by using persons under
contract to perform specified duties. The Commission has conditioned
the use of outside contractors to perform duties in connection with
self-regulatory functions upon the contract market "maintaining a
sufficient degree of control over the persons under contract," and the
person under contract having "no conflict of interest." The
Commission has further provided that, when using contractors to fulfill
a self-regulatory function, it is the exchange's responsibility to
ensure that its obligations under the Act are met. Comm. Fut. L. Rep.
(CCH) para. 6430, CFTC, (May 13, 1975.) Accordingly, contract markets
have contracted for the performance of various services related to
their operations and self-regulatory responsibilities, including
compliance with various core principles. For example, contract markets
or DTFs reasonably may be expected to outsource to various contractors
functions relating to operating their trading platforms or to
disseminating information required to be made public.\58\
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\58\ Specifically, for example, the Merchants Exchange of St.
Louis contracted with a technology company to operate its matching
engine. A criterion for designation is that the contract market
"establish and enforce rules defining * * * the operation of any
electronic matching platform; and demonstrate that the trade
execution facility operates in accordance with the rules." See
section 5(b)(4) of the Act. Under Core Principle (2), the contract
market must monitor and enforce compliance with those rules.
Consistent with long-standing Commission interpretation, it is
reasonable for a contract market or a DTF to outsource these
functions, in whole or in part, to a technology contractor.
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In contrast to such contracting arrangements, a delegation confers
upon another the authority to act in the delegating entity's name. The
distinction between delegation of authority and contracting for
services is particularly well-illustrated in matters related to member
discipline and market surveillance. A market that delegates these
functions empowers the delegatee to take appropriate remedial actions,
including the sanctioning of members or market participants for rule
violations. In contrast, a market may contract with an entity to
conduct trading surveillance and to investigate the facts surrounding
alleged rule infractions. Unlike a delegatee, a contractor would not
have the authority to decide on behalf of the delegating entity whether
an infraction had occurred or to impose remedial sanctions. These
decisional functions can be exercised only by delegation of that
authority to registered entities or a registered futures association,
as Congress has provided.
Further, although section 5c(b)(2) of the Act provides that the
Commission would have oversight authority over a delegatee because it
is a registered entity, the contract market or DTF that delegates
responsibilities under the Act also "shall remain responsible for
carrying out the function." Therefore, regardless of whether a
registered entity has delegated functions or contracted for services,
the entity must assure itself that the delegated functions or
contracted services will enable it to remain in compliance with the
Act's requirements. Moreover, the registered entity must have a
sufficient degree of control over the persons under contract because it
remains the registered entity's "responsibility to ensure that its
obligations under the Act are met." Id.
3. Arbitration
Rule 166.5 governs the use of pre-dispute arbitration agreements.
Under subsection (g) of the proposed rule, an eligible contract
participant would have retained the right to bring a private right of
action under section 22 of the Act, but could have been required, in
accordance with an amendment to section 14(g) of the Act,\59\ to waive
the right to seek reparations.
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\59\ See CFMA, section 118.
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Several commenters questioned the need to retain the voluntariness
requirement with respect to section 22 of the Act. SIA reasoned that,
"(a)lthough the CFMA may not directly address the issue," the policy
behind the CFMA's provision permitting FCMs to require eligible
contract participant customers to waive their right to reparations,
"would seem equally applicable in the case of pre-dispute arbitration
agreements generally." CL 20-4. NFA also "encourage[d] the Commission
to provide more flexibility regarding pre-dispute arbitration
agreements[,]" and reasoned that any restrictions on such agreements
are unnecessary with respect to eligible contract participants because
"[t]hese customers are capable of negotiating favorable terms in their
agreements with intermediaries." CL 16-2. Others opined that limiting
the use of pre-dispute arbitration agreements for any customer
contravenes prevailing law and policy regarding dispute resolution
procedures. CL 11 at 2-6, CL 18 at 5-6.
SIA, FIA, and NYMEX, advocated increased harmonization of the
Commission's rules governing pre-dispute arbitration agreements with
those governing pre-dispute arbitration agreements in the securities
industry, particularly in light of the availability of security futures
products. CL 10 at 4-5, CL 11 at 5-6, CL 20 at 4; see also CL 2-9 and
CL 19-7. At a minimum, FIA suggested, the Commission should exclude
claims relating to security futures products from the rule's
applicability, particularly with respect to notice-registered FCMs. CL
11 at 5-6. FIA further suggested that the Commission's rules permit
FCMs to use the disclosure statement required on the
[[Page 42267]]
securities side of a dually registered broker-dealer/FCM.\60\
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\60\ FIA also specifically recommended that the Commission
decline to adopt proposed rule 166.5, while removing part 180. CL 11
at 6. NFA commented that the Commission should provide that
arbitration agreements bind both the customer and the intermediary
equally. CL 16 at 2.
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In the final rules, the Commission has decided to remove any
limitation on the FCM's use of account opening pre-dispute arbitration
agreements for eligible contract participants. As several commenters
noted, this is consistent with the CFMA, which permits FCMs to require
that eligible contract participant customers waive their right to
reparations as a condition of opening an account. It also should
facilitate the ability of an FCM that is also a broker-dealer to use a
single agreement with those customers.\61\ With regard to customers who
are not eligible contract participants, the Commission is retaining the
voluntariness requirement in its current form. However, it will further
consider the issue as part of its study on the regulation of
intermediaries and as part of its rules implementing the provisions of
the Act relating to security futures products.
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\61\ A number of the above comments relating to greater
harmonization of account opening disclosures to customers of dually
registered FCMs/broker-dealers are outside of the scope of this
rulemaking. Nevertheless, the Commission agrees that these issues
are important and should be addressed, including the feasibility of
using the disclosure currently mandated for securities customers for
commodity customers as well. See, e.g., Rule 3110(f) of the National
Association of Securities Dealers, Inc.;. see also 64 FR 66681 (Nov.
29, 1999) (Self-Regulatory Organizations; Notice of Filing of
Proposed Rule Change by the National Association of Securities
Dealers, Inc. Relating to Amendments to NASD Rule 3110(f) Governing
Use of Predispute Arbitration Agreements with Customers).
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4. Contract Approval Fees
Prior to the CFMA's amendments to the Act, boards of trade were
required to be designated as a contract market in each commodity that
they listed for trading. The CFMA amended the Act, in part, by
providing that the facility must be designated as a "contract market"
or registered as a DTF, that the contract market or DTF may list new
products for trading by certification, and that they may voluntarily
request Commission approval of those products. The Commission proposed
to amend current 17 CFR part 5, Appendix B, to clarify that
applications for voluntary product approval must be accompanied by a
service fee.\62\ No comments were received and the Commission is
adopting the provision as proposed. The Commission, in a separate
notice of final rulemaking published elsewhere in this edition of the
Federal Register, is revising the fees charged for this service.
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\62\ The Commission also proposed to redesignate the Appendix as
Appendix B to Part 40. Previously, in November 1999, the Commission
proposed to eliminate fees for contract market designation
applications in connection with its adoption of Rule 5.3 that
allowed exchanges to list new contracts by certification (64 FR
66432, Nov. 26, 1999). The Commission deferred action while it
considered additional regulatory reform.
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III. Section 4(c) Findings
Some of the rules contained in this Federal Register notice are
being adopted 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.
When it proposed these rules, the Commission made a preliminary
determination that the exemptions contained therein would be consistent
with the public interest because they provide registered entities with
greater procedural flexibility than is contained in the Act. For
instance, pursuant to rule 38.4, contract markets may request 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 rules contain a less
burdensome certification procedure than that provided for in the Act.
The Commission invited public comment on its preliminary determination
that this exercise of its exemptive authority would be consistent with
the public interest. As noted above, the commenters broadly supported
these exemptive rules. Accordingly, the Commission finds under section
4(c) of the Act that the exemptions are consistent with the public
interest.
IV. Cost-Benefit Analysis
Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission, before issuing a new regulation under the Act,
to consider the costs and benefits of its action. The Commission
understands that, by its terms, section 15 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. Rather, section 15 simply requires the Commission to "consider
the costs and benefits" of its action.
Section 15 further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
(1) Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. 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 Commission's proposal contained an analysis of its
consideration of these costs and benefits and solicited public comment
thereon. 66 FR at 14267. The Commission specifically invited commenters
to submit any data that they had quantifying the costs and benefits of
the proposed rules with their comment letters. Id. The Commission has
considered all the comment letters received, some of which contained
narrative discussion of the costs and benefits of specific provisions
of this rule package, but none of which set forth any data that
quantified such costs and benefits.
The Commission has considered the costs and benefits of this rule
package in light of the specific areas of concern identified in section
15. The Commission has endeavored in this rule package to impose the
minimum requirements necessary to enable the Commission to perform its
oversight functions, to carry out its mandate of assuring the continued
existence of competitive and efficient markets and to protect the
public interest in markets free of fraud and abuse. After considering
their costs and benefits, the Commission has decided to adopt these
rules as discussed above.
V. Implementation Issues; No-Action
In light of Congress's intent to implement the changes of the CFMA
without delay, the Commission determined when it proposed these rules
that it would not bring any enforcement action against any person who
complied with the proposed rules during the transition period between
the
[[Page 42268]]
effective date of the amendments to the Act (generally, December 21,
2000) and the adoption of final implementing regulations. 66 FR at
14268. At that time, the Commission also advised persons relying on
that no-action position that they would be required to bring their
conduct into compliance with the final rules to the extent that the
final rules differ from the proposed rules. Id.
The rules being adopted today will become effective October 9,
2001. The Commission will not bring any enforcement action against any
person who complies with the final rules during the period between
their adoption and effective date.
VI. 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.\63\ In its previous
determinations, the Commission has concluded that contract markets are
not small entities for the purpose of the RFA.\64\ The Commission
proposed 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. 66 FR at
14268. In its proposing release, the Commission also observed that the
rules authorize these trading facilities to operate in a less regulated
environment than may currently be the case and that, consequently, the
rules should not result in, or should result in only a de minimis,
increase in the regulatory requirements that apply to contract markets
and other trading facilities. The Commission invited the public to
comment on its proposed determination that the new categories of
trading facilities covered by these rules would not be small entities
for purposes of the RFA and on its finding of small entity impact. The
Commission received no comments on its proposed determination or on its
proposed finding.
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\63\ 47 FR 18618-21 (Apr. 30, 1982).
\64\ 47 FR 18618, 18619 (discussing contract markets).
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The Commission hereby determines that the new categories of trading
facilities covered by these rules (derivatives transaction execution
facilities, exempt boards of trade and exempt commercial markets) are
not small entities for purposes of the RFA. Furthermore, the Commission
does not believe that these rules, as adopted, will 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 rule amendments will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act of 1995
This rulemaking contains information collection requirements. As
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.), the Commission has submitted a copy of these rules to the Office
of Management and Budget for its review. See 44 U.S.C. 3507(d)(1). No
comments were received in response to the Commission's invitation in
the notice of proposed rulemaking to comment on any potential paperwork
burden associated with these regulations. See 44 U.S.C. 3507(d)(2).
The final rules contain several disclosure requirements. Exempt
commercial markets may not represent that they are regulated (rule
36(c)). In addition, DTFs and contract markets must disclose
information related to prices, bids and offers and certain trading
information (part 37, Appendix B, Core Principles 4 and 5; part 38,
Appendix B, Core Principles 7, 8 and 10.)
The final rules also contain several reporting requirements. Exempt
boards of trade and exempt commercial markets must notify the
Commission that they are engaging in business (rules 36.2(b) and
36.3(a)). Contract markets and DTFs must file applications for
designation and registration, respectively, and must certify that
certain rules are consistent with the Act (rules 37.5, 37.7, 38.3,
38.4, 40.2 and 40.7).
The final rules also require the collection of certain information
from exempt boards of trade, exempt commercial markets, contract
markets and DTFs. The Commission may not conduct or sponsor, and a
person is not required to respond to an information collection unless
it displays a currently valid OMB control number. The Commission has
requested a control number for these information collections from OMB.
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 amends Chapter I of Title 17 of the
Code of Federal Regulations as follows:
[[Page 42269]]
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 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. 106-554,
114 Stat. 2763 (2000).
2. Section 1.1 is 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 section shall be applicable to
accounts, agreements, contracts, or transactions described in section
2(c)(1) of the Act, to the extent that the Commission exercises
jurisdiction over such accounts, agreements, contracts and 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, contract 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 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 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, or the resulting transactions are
maintained in, accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to
the provisions of paragraph (a) of this section.
Secs. 1.41, 1.41b, 1.43, 1.45, 1.50, and 1.51 [Removed]
5. Sections 1.41, 1.41b, 1.43, 1.45, 1.50 and 1.51 are removed and
reserved.
PART 15--REPORTS--GENERAL PROVISIONS
6. The authority citation for Part 15 is revised to read as
follows:
Authority: 7 U.S.C. 2, 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).
7. Section 15.05 is 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 registered 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 registered derivatives transaction execution facility. Service or
delivery of any communication issued by or on behalf of the Commission
to a designated contract market or registered 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 registered 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
registered 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 registered 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 registered 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 registered 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
[[Page 42270]]
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 registered 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, NW., Washington, DC 20581. A foreign broker, any of its
customers or a foreign trader shall notify the Commission immediately
if the written agency agreement is terminated, revoked, or is otherwise
no longer in effect. If the designated contract market or registered
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 registered 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 registered 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 registered
derivatives transaction execution facility on which all transactions of
foreign brokers, their customers or foreign traders in futures or
option contracts, or other instruments subject to the Act pursuant to
section 5a(g) of the Act, 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.
8. Part 36 is 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 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:
(i) 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; or
(ii) Attach its initial trading protocols and any amendments
thereto in hard copy form to the notification required in paragraph (a)
of this section and 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.
[[Page 42271]]
(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 Secs. 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 represent in the notification provided under
paragraph (a) of this section that it requires, and require, that each
participant agree to comply with all applicable law 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.
9. Part 37 is 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), 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, 1.59(d),
1.63(c), 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.
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;
(2) Commodities that are a security futures product, and the
registered derivatives transaction execution facility is a national
securities exchange registered under the Securities Exchange Act of
1934;
(3) Commodities for which the Commission has determined, based on
the market characteristics and surveillance history, and the 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; 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.
(5) The commodities that meet the criteria of paragraph (a)(1) of
this section are the commodities defined in section 1a(13) of the Act
as "excluded commodities."
(6) The Commission may make the determination described in
paragraph (a)(3) of this section by rule, regulation or order, after
notice and an opportunity for a hearing through submission of written
data, views and arguments. A registered derivatives transaction
execution facility may request that the Commission make such an
individualized determination by filing with the Secretary of the
Commission at its Washington, DC headquarters a petition that includes:
(i) The terms and conditions of the product to be listed; and
(ii) 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:
(A) A high level of cash-market liquidity;
(B) Cash-market bid-ask spreads that are narrow relative to traded
values;
(C) Relatively frequent cash market transactions involving
participants that represent major segments of the industry;
(D) The absence of material impediments to participation in the
cash market by commercial entities;
(E) Transfer of ownership of the cash commodity that is easily and
readily accomplished at minimal cost;
(F) 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;
(G) A history of actual trading experience that the contract or
product's terms and conditions provide for a deliverable supply, or a
reliable and acceptable cash-settlement procedure, that is adequate to
minimize the threat of market abuses such as price manipulation and
distortions, congestion, and defaults; and
(H) Procedures to effectively oversee the market, including a large
trader
[[Page 42272]]
reporting system, as well as a history of active surveillance to
prevent or mitigate market problems.
(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 registered
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 Secretary of the Commission at its Washington, DC headquarters
a copy of the facility's rules (which may be trading protocols) or a
list of the designated contract market's rules that apply to operation
of the derivatives transaction execution facility, 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;
(5) The applicant identifies with particularity information in the
application that will be subject to a request for confidential
treatment and supports that request for confidential treatment with
reasonable justification; and
(6) The applicant has not instructed the Commission in writing at
the time of submission of the application or during the review period
to review the application pursuant to the time provisions of and
procedures under section 6 of the Act.
(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 sections
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 such other employee or employees
as the Directors may designate from time to time, 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
[[Page 42273]]
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 Secretary of the
Commission at its Washington, DC 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, as appropriate to the market, 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 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, derivatives 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 Secretary of 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 derivatives transaction execution
facilities need not certify rules or rule amendments under Sec. 40.6 of
this chapter, and must only notify the Commission prior to placing into
effect or amending such a rule, which includes trading protocols, by:
(1) Filing with the Secretary of 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.
[[Page 42274]]
(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) Notwithstanding the forty-five day review period for voluntary
approval under Sec. 40.3(b) of this chapter, the operating rules and
the terms and conditions of one product submitted for voluntary
Commission approval under Sec. 40.3 of this chapter, that has been
submitted with, and at the same time as, an application for
registration as a derivatives transaction execution facility, will be
deemed approved by the Commission thirty days after receipt by the
Commission, or at the conclusion of such extended period as provided
under Sec. 40.3(c) of this chapter.
(3) 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 derivatives 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 derivatives 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, or the resulting
transactions are maintained in accounts carried by, a registered
futures commission merchant or introduced by an introducing broker
subject to Sec. 1.37 of this chapter.
(e) Identify persons subject to fitness requirement. Upon request
by any representative of the Commission, a registered derivatives
transaction execution facility shall furnish to the Commission's
representative 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 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 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 sections 5a(c)
and 6 of the Act and Sec. 37.5, on meeting the criteria for
registration both initially and on an ongoing basis. The guidance
following each registration criterion is illustrative only of the
types of matters an applicant may address, as applicable, and is not
intended to be 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 Sec. 37.5(b).
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
[[Page 42275]]
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 to deter abuses by effective and
affirmative rule enforcement, including documentation of the
facility's authority to do so; such trading and participation rules
should be designed with adequate specificity. The submission should
include documentation on the ability of the facility either to
obtain necessary information or to provide market 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 on a best price/earliest time
basis should include a brief explanation of the alternative
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 adopted by the Commission on
November 21, 1990 (55 FR 48670), as supplemented in October 2000,
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 (but not necessarily a third-party
contractor).
(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 members and non-intermediated market participants,
appropriate margin forms, and appropriate default rules and
procedures. If cleared, agreements, contracts and transactions in
excluded or exempt commodities that are traded on a DTF may be
cleared through clearing organizations other than DCOs registered
with the Commission. 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 registered 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 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 appendix.
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 to detect and deter abuses by 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/or terminate activities or access of a member,
including members with trading privileges but having no, or only
nominal equity, in the facility and non-member market participants
or, in the case of a derivatives transaction execution facility
restricting its traders to
[[Page 42276]]
eligible commercial entities, the authority and ability to terminate
activities or access of such a member. In either case, any
termination should be carried out pursuant to clear and fair
standards that are available and transparent to the member or market
participant.
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 to detect and deter abuses
through 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 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.
The Commission considers that the public disclosure of
information required under the core principle refers to disclosure
to market participants, where the facility's user agreement requires
all market participants to keep such information confidential. 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, and financial integrity protections,
including whether eligible contract participants will have the right
to opt out of segregation of customer funds. Such information may be
made publicly available through the derivatives transaction
execution facility's website. The facility should also, as
appropriate to the market, 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 core
principle.
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. In addition, persons who have governing obligations or
responsibilities, or who exercise disciplinary authority, should not
have a significant history of serious disciplinary offenses, such as
those that would be disqualifying under Sec. 1.63 of this chapter.
Eligible contract participants or eligible commercial entities who
are members 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 ownership
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 greater than a ten percent ownership 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.
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
[[Page 42277]]
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.
10. 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, 1.12(e), 1.31, 1.38, 1.52, 1.59(d), 1.63(c), 1.67, 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;
(5) The applicant identifies with particularity information in the
application that will be subject to a request for confidential
treatment and supports that request for confidential treatment with
reasonable justification; and
(6) The applicant has not instructed the Commission in writing at
the time of submission of the application or 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, as appropriate to the market, 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 members with trading privileges but having no, or only nominal,
equity, in the facility and non-member market participants of the
contract market by expelling or by denying future access, either
directly or indirectly, 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 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 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 Secretary of the
Commission at its Washington, DC, headquarters such a request.
Withdrawal of an application for designation 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 such other employee or employees as the Directors may
designate from time to time, with the concurrence of the General
Counsel
[[Page 42278]]
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. (1) 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.
(2) Notwithstanding the forty-five day review period for voluntary
approval under Secs. 40.3(b) and 40.5(b) of this chapter, the operating
rules and the terms and conditions of products submitted for voluntary
Commission approval under Secs. 40.3 or 40.5 of this chapter that have
been submitted at the same time as, or while an application for
contract market designation is pending, will be deemed approved by the
Commission no earlier than the facility is deemed to be designated.
(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 sections 5(b) and 6 of the Act and
Sec. 38.3, on meeting the criteria for designation both initially
and on an ongoing basis. The guidance following each designation
criterion is illustrative only of the types of matters an applicant
may address, as applicable, and is not intended to be 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 appendix.
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 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) Establishing and enforcing trading rules to ensure fair and
equitable trading on a contract market, among other things, includes
providing to market participants, on
[[Page 42279]]
a fair, equitable and timely basis, information regarding, prices,
bids and offers, as applicable to the market.
(b) Such trading rules should be designed with adequate
specificity.
(c) 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"), and adopted by the Commission on November 21, 1990 (55
FR 48670), as supplemented in October, 2000, 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
(but not necessarily a third-party contractor).
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 members and non-intermediated market
participants, margining systems, appropriate margin forms and
appropriate default rules and procedures. Absent Commission action
pursuant to its exemptive authority under section 4(c) of the Act,
transactions executed on the contract market (other than stock
futures products), if cleared, must be cleared through a derivatives
clearing organization registered as such with the Commission. 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 the activities of a member or of a market
participant could be established in a contract market's rules, user
agreements or other means. An organized exchange or a trading
facility could satisfy this criterion for a member with trading
privileges but having no, or only nominal, equity, in the facility
and for a non-member market participant 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
appendix, 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 the
contract market's members and by non-intermediated market
participants. 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 paragraph (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 paragraph (b) following each core
principle. Boards of trade that follow the specific practices
outlined under paragraph (b) for any core principle in this appendix
will meet the applicable core principle. Paragraph (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
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
[[Page 42280]]
collect information and documents on both a routine and non-routine
basis including the examination of books and records kept by the
contract market's members and by non-intermediated market
participants. The arrangements and resources should facilitate the
direct supervision of the market and the analysis of data collected.
Trade practice surveillance programs could be carried out by the
contract market itself or through delegation to a third party. If
the contract market delegates the responsibility of carrying out a
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 the activities of a
member or market participant as well as the authority and ability to
terminate the activities of a member or market participant pursuant
to clear and fair standards. An organized exchange or a trading
facility could satisfy this criterion for members with trading
privileges but having no, or only nominal, equity, in the facility
and non-member market participants, by expelling or denying such
persons future access upon a determination 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 market
participant pursuant to clear and fair standards that are available
to market participants. 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 to the size and ownership of deliverable
supplies--the existing supply and the future or potential supply,
and to the pricing of the deliverable commodity relative to the
futures price and relative to similar, but nondeliverable, kinds of
the commodity. For cash-settled markets, it is more appropriate to
pay attention to the availability and pricing of the commodity
making up the index to which the market will be settled, as well as
monitoring the continued suitability of the methodology for deriving
the index.
(3) To assess traders' activity and potential power in a market,
at a minimum, every contract market should have routine access to
the positions and trading of its market participants and, if
applicable, should provide for such access through its agreements
with its third-party provider of clearing services. 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).
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, and to facilitate orderly
liquidation of expiring futures contracts, markets may need to set
limits on traders' positions for certain commodities. These position
limits specifically may exempt bona fide hedging, permit other
exemptions, or set limits differently by markets, by delivery
months, or by time periods. For purposes of evaluating a contract
market's 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) Provisions concerning speculative position limits are set
forth in part 150. In general, position limits are not necessary for
markets where the threat of excessive speculation or manipulation is
nonexistent or very low. Thus, contract markets do not need to adopt
speculative position limits for futures markets on major foreign
currencies, contracts based on certain financial instruments having
very liquid and deep underlying cash markets, and contracts
specifying cash settlement where the potential for distortion of
such price is negligible. Where speculative position limits are
necessary, acceptable speculative-limit levels typically should be
set in terms of a trader's combined position in the futures contract
plus its position in the related option contract (on a delta-
adjusted basis).
(3) 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.
(4) Spot-month limits should be adopted for markets based on
commodities having more limited deliverable supplies or where
otherwise necessary to minimize the susceptibility of the market to
manipulation or price distortions. The level of the spot limit 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.
(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.
[[Page 42281]]
(6) 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.
(7) Contract markets should establish a program for effective
enforcement of these limits Contract markets should use their LTRS
to monitor and enforce daily compliance with position limit rules.
The Commission notes that a contract market may allow traders to
periodically apply to the contract market for an exemption and, if
appropriate, be granted a position level higher than the applicable
speculative limit. The contract market should establish a program to
monitor approved exemptions from the limits. The position levels
granted under such hedge exemptions generally 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.
(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
should consider appropriate actions, regardless of whether the
violation is by a non-member or 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. The Commission will consider for approval all contract
market position limit rules.
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 avoid conflicts of interest while
carrying out such decision-making. A contract market should also
have the authority to intervene as necessary to maintain markets
with fair and orderly trading as well as procedures for carrying out
the intervention. Procedures and guidelines should also include
notifying the Commission of the exercise of a contract market's
regulatory emergency authority, minimizing 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 including non-
intermediated market participants of the contract market to another,
or alter the delivery terms or conditions, or, if applicable, should
provide for such actions through its agreements with its third-party
provider of clearing services.
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, market
participants 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,
market participants and the public. Provision of all such
information to market participants and the public could be by timely
placement of the information on a contract market's web site.
(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) A competitive, open and efficient
market and mechanism for executing transactions includes a board of
trade's methodology for entering orders and executing transactions.
(2) 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"), and adopted by the Commission on November 21, 1990 (55
FR 48670), as supplemented in October 2000, 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.
(3) 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 Information 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
[[Page 42282]]
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
or other disposition. The contract market must create and maintain
an electronic transaction history database that contains information
with respect to transactions executed on the designated contract
market.
(2) An acceptable audit trail 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 10.
(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) Tansaction 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) the categories of participants
for which such trades are executed, including whether the person
executing a trade was executing it for his/her own account or an
account for which he/she has discretion, his/her clearing member's
house account, the account of another member, including market
participants present on the floor, or the account of any other
customer; (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 other than transactions in security
futures products, should be provided through a Commission-registered
derivatives clearing organization. In addition, a designated
contract market should maintain the financial integrity of its
transactions by maintaining minimum financial standards for its
members and non-intermediated market participants and by 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 from its members. 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. The contract market should
audit its members that are intermediaries for compliance with the
foregoing rules as well as applicable Commission rules. These audits
should be conducted consistent with the guidance set forth in
Division of Trading and Markets Interpretations 4-1 and 4-2. A
contract market may delegate to a designated self-regulatory
organization responsibility for receiving financial reports and for
conducting compliance audits pursuant to the guidelines set forth in
Sec. 1.52 of this chapter.
(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 make them available on a voluntary basis, either
directly or through another self-regulatory organization, to
customers that are non-eligible contract participants.
(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:
(i) Provide the customer with an opportunity to have his or her
claim decided by an objective and impartial decision-maker,
(ii) Provide each party with the right to be represented by
counsel, at the party's own expense,
(iii) Provide each party with adequate notice of the 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) Authorize prompt, written, final settlement awards that are
not subject to appeal within the contract market, and
(v) Notify the parties of the fees and costs that may be
assessed.
(3) The use of such procedures should be voluntary for customers
who are not eligible contract participants, 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 core
principle).
(a) Application guidance. (1) A designated contract market
should have appropriate eligibility criteria for the categories of
[[Page 42283]]
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. In addition, persons who have
governing obligations or responsibilities, or who exercise
disciplinary authority, should not have a significant history of
serious disciplinary offenses, such as those that would be
disqualifying under Sec. 1.63 of this chapter. Members with trading
privileges but having no, or only nominal, equity, in the facility
and non-member market participants who are not intermediated and 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 "market
participant." Natural persons who directly or indirectly have
greater than a ten percent ownership 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 provides 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.
(a) Application guidance. 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 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.
(b) Acceptable practices. [Reserved]
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.
(a) Application guidance. The composition of a mutually-owned
contract market should fairly represent the diversity of interests
of the contract market's market participants.
(b) Acceptable practices. [Reserved]
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]
11. Chapter I of 17 CFR is 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 [Reserved]
Appendix B to Part 40--Schedule of fees.
Appendix C to Part 40 [Reserved]
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as
amended by the Commodity Futures Modernization Act of 2000, Appendix
E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).
Sec. 40.1 Definitions.
As used in this part:
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 sixty 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;
[[Page 42284]]
(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 registered derivatives
transaction execution facility), a registered entity must file with the
Secretary of 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, or the rules establishing the terms and conditions of
products that make them acceptable for clearing, and a certification by
the registered entity that the trading product or other instrument, or
the clearing of the trading product or other instrument including any
rules establishing the terms and conditions of products that make them
acceptable for clearing), complies with the Act and rules thereunder.
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 paragraph (a)
of this section; and
(2) The submitting entity does not amend the terms or conditions of
the product or supplement the request for approval, except as requested
by the Commission or for correction of typographical errors,
renumbering or other such nonsubstantive revisions, during that period.
Any voluntary, substantive amendment by the submitting entity 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 product 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 product
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 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 product shall be
presumptive evidence that the entity may not truthfully certify under
Sec. 40.2 that the same, or substantially the same, product does not
violate the Act or rules thereunder.
Sec. 40.4 Amendments to terms or conditions of enumerated agricultural
contracts.
(a) Designated contract markets must submit for Commission approval
under the procedures of Sec. 40.5, prior to its implementation, any
rule or rule amendment that, for a delivery month having open interest,
would materially change a term or condition as defined in Sec. 40.1(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.
(b) The following rules or rule amendments are not material
changes:
(1) Changes in trading hours;
(2) Changes in lists of approved delivery facilities pursuant to
previously set standards or criteria;
(3) Changes to terms and conditions of options on futures other
than those relating to last trading day, expiration date, option strike
price delistings, and speculative position limits;
(4) Reductions in the minimum price fluctuation (or "tick");
(5) Changes required to comply with a binding order of a court of
competent jurisdiction, or of a rule, regulation or order of the
Commission or of another Federal regulatory authority; and
(6) Any other rule, the text of which has been submitted to the
Secretary of the Commission at least ten days prior to its
implementation at its Washington, D.C. headquarters and that has been
labeled "Non-material Agricultural Rule Change," and with respect to
which the Commission has not notified the contract market during that
period that the rule appears to require or does require prior approval
under this section.
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 Secretary of
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. One copy of each
submission shall be transmitted by the registered entity to the
regional office of
[[Page 42285]]
the Commission having local jurisdiction over the registered entity.
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
or interpretation of the Commission's regulation.
(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) 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 thirty 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 (other than a rule or rule amendment approved or
deemed approved by the Commission under Sec. 40.5) only if:
(1) The rule or rule amendment is not a rule or rule amendment of a
designated contract market that materially changes a term or condition
of a contract for future delivery of an agricultural commodity
enumerated in section 1a(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 with the Commission at its Washington, D.C. headquarters and
at the regional office having local jurisdiction, and the Commission
has received the submission at its headquarters by close of business on
the business day preceding implementation of the rule; provided,
however, rules or rule amendments implemented under procedures of the
governing board to respond to an emergency as defined in Sec. 40.1(d),
shall, if practicable, be filed with the Commission prior to the
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation but in no event more
than 24 hours after implementation; and
(3) The rule submission includes:
(i) 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.
[[Page 42286]]
(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 NW.,
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 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
[[Page 42287]]
(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 A to Part 40 [Reserved]
Appendix B to Part 40--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, NW., 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.
Appendix C to Part 40 [Reserved]
Appendix A to Part 5 [Redesignated as] Appendix A to Part 40
Appendix E to Part 5 [Redesignated as] Appendix C to Part 40
PART 5--[REMOVED AND RESERVED]
12. 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 amended by adding new Part 41 as
follows:
PART 41--SECURITY FUTURES
41.1 [Reserved]
PART 166--CUSTOMER PROTECTION RULES
14. The authority citation for Part 166 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,
12a, 21, and 23, as amended by the Commodity Futures Modernization
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
15. Section 166.5 is 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,
(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,
effects a transaction on such contract market, except another member of
or participant in such designated contract market. Provided, however, a
person who is an "eligible contract participant" as defined in
section 1a(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 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:
[[Page 42288]]
(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 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. 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 provided for in the agreement.
PART 170--REGISTERED FUTURES ASSOCIATIONS
16. The authority citation for Part 170 is 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 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 removed.
Issued in Washington, DC, this 30th day of July, 2001, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
Dissent of Commissioner Thomas J. Erickson Rules Implementing the
Commodity Futures Modernization Act (CFMA) With Respect to Transaction
Execution Facilities
I dissent from the publication of these final rules because they
fall well short of the minimum standards necessary to maintain
integrity of markets and protect customers from trade practice
abuses. Today, the Commission promulgates final rules intended to
implement the Commodity Futures Modernization Act of 2000.\1\ While
the Commission's rules reflect the thrust of the CFMA, they fail to
recognize the discretion afforded the agency to ensure that the
[[Page 42289]]
markets it oversees remain open, fair and transparent.
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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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I am confident that the new regulatory regime will foster the
competitiveness of U.S. derivatives marketplaces, and that is good.
I am less confident that the regulations implementing this new
regime will foster open and competitive bids and offers for
transactions in markets, which for customers and commercial
participants is bad. Thus, I have repeatedly requested comment on
those issues that would enable this agency to be confident that its
regulatory framework retains tools necessary to detect and deter
manipulation, detect and deter abusive trade practices, and
vigorously enforce our fraud authority.\2\ Where this Commission has
a regulatory interest, it should be demanding the maximum
transparency allowed by law.\3\ Today's rules, I fear, leave
enormous gaps in our regulatory oversight regime.
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\2\ Throughout the process of developing and implementing a new
regulatory framework for the oversight of derivatives markets, the
Commission, in my estimation, has not adequately taken into account
the public interest by failing to request comment on issues salient
to our ability to carry out our primary regulatory obligations. I
have taken exception with the Commission's process in this regard.
The resulting public record, in this case, lacks serious
consideration of the public interest and has resulted in rules that
require little and expect even less.
\3\ Certainly, for example, the Commission has the discretion to
require large trader reporting in DTF markets. In fact, the U.S.
Department of the Treasury requested as much in comments submitted
to the Commission on April 9, 2001. Treasury recommended "that
there be large trader reporting requirements for any exempt security
futures that trade on a DTF as well as on a regulated contract
market." Even with such a direct request from a fellow regulator,
the Commission has failed to exercise its discretion to insist upon
greater transparency.
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The longstanding tradition of public, open markets in the United
States seems to have given way to the notion that private, closed
markets are superior in every respect. Perhaps private, closed
markets are more expedient for their participants. But it will be
incumbent on industry participants to see to it that the public
interest in open, fair and transparent markets is not compromised.
In the end, public confidence in our markets will depend upon
how the industry adapts to and carries out its new responsibilities
under the law and these regulations. I sincerely hope that the
derivatives markets will find self-interest to be a powerful
motivator and that market participants will reward those markets
adhering to the highest standards of market integrity.
/S/--------------------------------------------------------------------
Commissioner Thomas J. Erickson
Date: 7/26/01
[FR Doc. 01-19496 Filed 8-9-01; 8:45 am]
BILLING CODE 6351-01-P