[Federal Register: March 7, 1997 (Volume 62, Number 45)]
[Rules and Regulations]
[Page 10434-10441]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr97-11]

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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 5


Revised Procedures for Commission Review and Approval of
Applications for Contract Market Designation and of Exchange Rules
Relating to Contract Terms and Conditions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: On November 22, 1996, the Commodity Futures Trading Commission
(``Commission'') proposed rules amending its procedures relating to the
review and approval of applications for contract market designation and
proposed exchange rule amendments relating to contract terms and
conditions. Based upon its consideration of the comments received in
response to its Notice of Proposed Rulemaking, 61 FR 59386 (November
22, 1996), and upon its independent analysis, the Commission is
promulgating new rule 5.1.
    Rule 5.1 establishes fast-track procedures for Commission review of
exchange applications for contract market designation as an alternative
to the current review procedures. Under these alternative procedures,
applications for designation of cash-settled and other specified
futures and option contracts will be deemed to be approved ten days--
and all others, forty-five days--after receipt, unless the exchange is
notified otherwise. The final rules have been modified, in response to
public comment, by including within the ten-day category proposed
option contracts based upon futures contracts that are already
designated and by confirming explicitly within the rule that exchanges
may modify applications nonsubstantively under the fast-track review
procedures.
    The Commission also is amending rule 1.41, as proposed, to provide
an alternative fast-track review of proposed amendments to contract
terms or conditions. These procedures are similar to those for contract
market designations and include both ten-day and forty-five-day review
periods. These review periods can be extended for one thirty-day period
in appropriate instances. In a companion notice published separately in
the Federal Register, the Commission also is adopting fast-track
procedures relating to the review of proposed exchange rules which do
not relate to contract terms or conditions.

EFFECTIVE DATE: April 7, 1997.

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,
(202) 418-5260, or electronically, [[email protected]].

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Requirements for Commission Designation of
Proposed Contract Markets

    The requirement that boards of trade meet specified conditions in
order to be designated as contract markets has been a fundamental tool
of federal regulation of commodity futures exchanges for the past
seventy-five years.<SUP>1 Prior to the 1974 amendments to the Commodity
Exchange Act, 7 U.S.C. 1 et seq. (``Act''), however, the statutory
scheme did not require the Commodity Exchange Authority (``CEA''), the
Commission's predecessor agency, to approve in advance the trading of
all new futures contracts,<SUP>2 nor did it require agency approval of
exchange rules before they became effective. Rather, exchange rules
amending the terms and conditions of futures contracts were subject
only to disapproval after becoming effective. See, Pub. L. 90-258, sec.
23, 82 Stat. 33 (1968).
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    \1\ See, Futures Trading Act of 1921, Pub. L. 67-66, 42 Stat.
187 (1921). Designation as a contract market under the 1921 Act was
contingent upon a board of trade's meeting specified statutory
criteria, including providing for the prevention of manipulative
activity. Although the constitutionality of this Act was
successfully challenged as an improper use of the Congressional
taxing power in Hill v. Wallace, 259 U.S. 44 (1922), all subsequent
legislation regulating the futures industry followed this pattern.
    \2\ Prior to 1974, the Act defined ``commodity'' by specific
enumeration. Accordingly, new contracts that were not so enumerated
were unregulated. The definition of commodity periodically would be
updated to include additional commodities in which trading had
commenced on those exchanges which traded other regulated contracts.
For example, livestock and livestock products were added to the
Act's definition of ``commodity'' as part of the 1968 amendments to
the Act, after such contracts had already begun trading on the
Chicago Mercantile Exchange. Pub. L. 90-258 section 1(a), 49 Stat.
1491 (1968).
    Other futures exchanges, including the Commodity Exchange, Inc.
and the former Coffee and Sugar and Cocoa exchanges, operated wholly
outside of the regulatory scheme.
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    The 1974 amendments to the Act rejected that approach. Instead, as
part of Congress' overall intent to strengthen federal regulatory
oversight of the futures industry, the 1974 amendments provided for a
meaningful government review of all new futures contracts before
trading could begin and of proposed amendments to the terms or
conditions of existing contracts. See, H. Rep. No. 93-975, 93d Cong.,
2d Sess. at 78, 82 (1974).
    Subsequently, Congress reinforced this determination by enhancing
the opportunity for public participation in the Commission's review
procedures. As part of the 1978 amendments to the Act, Congress added
the provision requiring a public comment period for economically
significant proposed exchange rules. That amendment to section
5a(a)(12) of the Act was offered from the floor during debate in the
House of Representatives. In offering this amendment, Representative
AuCoin reasoned that

[m]any of the notifications [of changes to exchange rules] approved
by this Commission are technical and rather noncontroversial.
    However, there are a number of proposed rule changes that are
controversial because of their expected impact on the way a
particular commodity is traded or on the broader effects that a
change may bring about in the production and distribution of that
commodity.

124 Cong. Rec. H7312 (July 26, 1978).

    Over the years, the Commission has demonstrated flexibility in
implementing its regulatory mandate to review and approve new contracts
and amendments to existing contracts. Based upon its administrative
experience, the Commission periodically has revised and updated its
procedures to provide exchanges with more specific criteria for meeting
the contract market designation requirements; to reflect new
developments in futures trading--such as the introduction of financial
futures, futures on aggregates or indices of securities and cash
settlement as a substitute for physical delivery; and, where
appropriate, to lessen the burden on applicants by reducing the
information required and streamlining the form of application.
    In this regard, Guideline No. 1, 17 CFR part 5, appendix A, which
provides guidance on the information to be included in designation
applications and on the criteria for meeting the statutory designation
requirements, was last amended in January 1992. The 1992 amendment
substantially reduced and streamlined the guideline's

[[Page 10435]]

requirements. Indeed, much of the application for option contracts has
been reduced to the form of a checklist. Moreover, under the 1992
amendments, applications for designation of futures contracts need not
duplicate any of the analysis or justification of contract terms which
have been previously approved, reducing greatly the length of the
justification or analysis required in a typical application for
designation.
    Despite the progress already made in reducing the paperwork
requirements associated with designation applications, the Commission,
in proposing these fast-track review rules, gave notice of its
intention broadly to reexamine the form and content requirements of
Guideline No. 1. This would include consideration of the possible
applicability of an option-style checklist to applications for
designation of proposed futures contracts. 61 FR 5991.<SUP>3
Implementation of fast-track review and approval procedures, separately
and together with the planned revision of the format and content
requirements for designation applications, should result in
significantly streamlining the procedures and regulatory requirements
associated with the current contract designation process.<SUP>4
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    \3\ Several commenters questioned the Commission's commitment to
undertake this review expeditiously, citing the Commission's
determination to propose these fast-track review rules separately.
Rather than indicating a lack of commitment to its expressed
intention, this statement accurately assessed the relative
complexity of the undertaking and demonstrated an intention to put
improvements to its review and approval procedures in place as soon
as possible.
    \4\ The Commission has also modified many of its internal
procedures to expedite further the review and approval of new
contracts and proposed amendments to existing contracts. In 1992,
the Commission established a policy to notify the public of the
availability of proposed contract terms for comment by publication
in the Federal Register within one week of receipt of an
application. In addition, under these procedures, substantive issues
are identified and communicated informally to the exchange very
shortly after receipt, permitting a prompt resolution.
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II. The Proposed Rules

    The Commission proposed rules streamlining the procedures for the
review of applications for contract market designation and of proposed
exchange rule amendments relating to the terms and conditions of
existing contracts. The thirty-day comment period ended on December 23,
1996, but was extended at the request of several exchanges until
January 16, 1997, 61 FR 68175 (December 27, 1996).<SUP>5
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    \5\ By Petition dated December 17, 1996, the New York Mercantile
Exchange, joined by the Chicago Board of Trade and the Chicago
Mercantile Exchange, requested that the thirty-day comment period on
fast-track designation procedures be extended.
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    Although the Commission proposed rules whereby the overall time to
review and act on exchange submissions could be significantly
shortened, the proposed rules did not alter the underlying legal
requirement that these rules be subject to Commission review and prior
approval before becoming effective. The Commission reasoned that prior
Commission approval of proposed contracts remains in the public
interest because,

[i]n the absence of properly designed contract terms, damage to
hedgers or industry pricing may result before corrections to the
contract can be made. The impact of a market manipulation or other
disruption in a newly introduced futures contract potentially could
be far wider than the futures market itself, adversely affecting the
underlying cash market, as well. Correcting this type of problem
after trading has already begun may require extraordinary measures
such as emergency action. At a minimum, such an occurrence would
probably result in diminished credibility for futures trading in
that contract, and possibly for futures trading, generally.

61 FR 59386 (footnote deleted).

    Specifically, the Commission proposed a new rule 5.1 providing for
a ten-day review period, after which--absent any contrary action by the
Commission--the contracts would be automatically deemed to be approved.
The Commission proposed that this procedure be applicable to all cash-
settled futures and option contracts, except those for the domestic
agricultural commodities enumerated in section 1a(3) of the Act or
subject to the special procedures of the Johnson-Shad jurisdictional
accord, <SUP>6 and to all futures and option contracts on foreign
currency. This is the same time period as provided under the Commission
Part 36 exemptive rules. See, Commission rule 36.4, 17 CFR 36.4 (1996).
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    \6\ See, section 2(a)(1)(B) of the Act. Proposed contracts
subject to this provision of the Act are not eligible for fast-track
treatment generally, under either the ten-day review provision or
the forty-five day review period discussed below.
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    For all other contracts, the Commission proposed to reduce by half
the average time now required for contract market designation. These
applications for contract market designation would be deemed to be
approved by the Commission forty-five days after receipt. As proposed,
both the ten-day and forty-five-day review periods could be extended
for one thirty-day period, in appropriate instances. The fast-track
review periods would be available only for applications for designation
that are complete and not substantively amended after filing, except as
requested by the Commission. The Commission would continue to publish
for public comment notice of the availability of the terms of those
applications for designation subject to the forty-five-day review
period, but proposed to reduce the public comment period for such fast-
track applications from thirty days, as currently provided under
appendix D to part 5, to fifteen days.
    The Commission proposed to amend its procedures for reviewing
proposed exchange rule amendments to the terms and conditions of
existing contracts consistent with the proposed changes to its review
of applications for new designations. <SUP>7 Thus, in light of the
existing provisions for ten-day review of many categories of such
proposed exchange rule amendments, the Commission proposed to add to
Commission rule 1.41(b) a fast-track review procedure consistent with
the proposed forty-five-day fast-track review for designation
applications.
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    \7\ In general, only contract terms and conditions, with the
exception of rules setting margin, are required to be submitted for
Commission review and approval. See, section 5a(a)(12)(A) of the
Act. Changes to contract specifications, which can modify a contract
significantly, are given the same type of review they would receive
if submitted as part of an application for a new designation.
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    With regard to publication for public comment, the Commission
proposed to reduce the comment period to fifteen days for those rules
published as a matter of discretion based upon a finding that
``publication * * * is in the public interest and will assist the
Commission in considering the views of interested persons.'' Commission
rule 140.96(b), 17 CFR 140.96(b). The Commission determined to maintain
a thirty-day comment period for those rules that are published because
they are determined to be of major economic significance. See, section
5a(a)(12)(A) of the Act.

III. Comments Received and Final Rules

    The Commission received seven comment letters from eight
commenters. The commenters included four futures exchanges, a
securities exchange, an industry association, and two academics. All
but two of the commenters advanced the position that the proposed
rulemaking, although well-intentioned, did not go far enough to relieve
the exchanges from the perceived competitive burden which they argued
the approval process entails. These commenters argued that only through
amendment of the Act can the exchanges' competitiveness be restored.
Those comments are best

[[Page 10436]]

addressed by Congress. Nevertheless, it may be instructive to respond
to those comments here, particularly insofar as they are likely based
upon assumptions and premises common to those comments which respond to
the proposed rules.

a. Competitiveness as the Impetus for Fundamental Restructuring of the
Process for Contract and Rule Amendment Approval

    The Commission, from its inception, has always been careful to
consider the effect of its actions on competition in, and the
competitiveness of, the U.S. futures industry. It routinely strives to
impose the least restrictive regulatory approach necessary to
accomplish the goals and objectives of the Act. <SUP>8 After carefully
considering the comments, the Commission believes that streamlining the
current procedures, while maintaining the current prior approval
standards, offers the best balance between protection of the public and
cost reduction, as well as best conserving both Commission and exchange
staff resources.
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    \8\ See, section 15 of the Act.
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    In this regard, the Commission carefully and fully analyzed the
nature of global competition in the futures industry in a major 1994
study mandated by Congress as part of the 1992 amendments to the Act.
That study analyzed the growth of futures trading in non-U.S. markets
and the relative decline in the global market share of U.S. exchanges
and concluded that U.S. exchanges remain leaders in innovation and
generally have reached the global market first with new products.
    The Commission is supportive, in general, of initiatives of U.S.
exchanges to become more competitive. <SUP>9 However, fundamentally
restructuring the process for listing new products as advocated by many
of the commenters will not address the real factors which explain the
growth of foreign markets. Foreign exchanges, by and large, have
succeeded by developing products similar to those offered on U.S.
exchanges but tailored to their home markets. <SUP>10 A second strength
enjoyed by foreign competitors arises from time-zone advantages,
whereby foreign futures exchanges are open for trading at the same time
as important centers for trading in the underlying cash market.
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    \9\ The Commission has encouraged industry-wide innovation and
modernization in trading systems. In this regard, for example, the
Commission sponsored a round-table on October 16, 1996, to highlight
issues relating to electronic order routing and trading systems.
    \10\ For example, many foreign exchanges trade interest-rate
contracts based upon the sovereign debt of the nation in which they
are located.
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    The Commission found no evidence, however, that disparities in the
regulatory frameworks of various jurisdictions, and of the procedures
for listing new contracts in particular, were a major factor explaining
the success of various exchanges in the global market. Moreover, in
general, the trend among foreign authorities has been to strengthen
their regulatory regimes, rather than to weaken them. This is a process
supported and advanced by the Commission. <SUP>11 Thus, the
appropriateness of the Commission's proposed rules for fast-track
review should be analyzed solely on their own merit, and not measured
against a vague notion that restructuring the approval process will
address the competitive challenges faced by the exchanges.
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    \11\ The Commission has been a world-leader in promoting the
strengthening of regulatory oversight as futures trading becomes
more global in nature. This process has accelerated in light of
developments in connection with the Barings, Plc. and Sumitomo Corp.
situations. See, Windsor Declaration issued May 17, 1995, and London
Communique on Supervision of Commodity Futures Markets (November 26,
1996).
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b. The General Role of Self-Regulation in the Rule Approval Process

    In addition to their arguments based on competitiveness, several
exchanges also reject the fast-track approach on general philosophical
grounds concerning the appropriate scope of government oversight of
self-regulatory organizations (``SROs''). The Chicago Board of Trade
(``CBT''), for example, argues that the Act's current preapproval
framework is premised upon the erroneous presumption that ``exchanges
are either incapable of acting or cannot be trusted to act as
responsible SROs in compliance with (their) obligations under the
CEA.'' The CBT therefore advocates a fundamental legislative
restructuring of the Act's review provisions.
    The CBT maintains that Commission oversight can, and should, be
relaxed because market incentives, such as avoidance of damage to its
valuable reputation, will guide exchanges to take appropriate self-
regulatory actions. The CBT, in its view, already provides sufficient
opportunity for public input into its design of contracts and rule
changes as a matter of business self-interest; public participation at
a later stage of review under the aegis of government oversight is
unnecessary because ``business judgment tells * * * (the CBT) (to) be
careful and diligent in the exercise of (its) regulatory judgment * * *
. `` CBT Comment Letter dated January 16, 1997, at 9 (emphasis in
original).
    The Commission agrees that market incentives, enlightened business
judgment and the desire to protect reputation are strong motivations
which can lead to a high degree of self-regulation. Far from having a
presumption that exchanges are either incapable of acting responsibly
or not to be trusted, the Commission presumes that the exchanges will,
in fact, act responsibly. Nevertheless, experience demonstrates that
there have been instances when government oversight and action have
been required to address particular instances where business judgments
by the exchange membership did not appear to offer sufficient guidance
to inform fully an SRO's regulatory judgment. <SUP>12
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    \12\ Often, the Commission receives few or no public comments on
contract market designations or on exchange rule changes. This is to
be expected. It indicates that the exchange has indeed received and
considered input from interested outside sources in connection with
a proposal. However, there are more than a few designation
applications or proposed exchange rule changes every year that
elicit a significant number of comments, casting doubt upon the
exchange's theory that its business self-interest will reliably
inform all of its regulatory judgements. See e.g., Notification to
the CBT to Amend Delivery Specifications, 61 FR 68175 (December 12,
1995).
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    The exchanges also argue that replacing prior approval with post-
introduction intervention in troubled markets is a superior approach to
these issues. For example, although the CBT agrees that ``[n]o one
questions that contract design flaws could make a contract susceptible
to manipulation,'' it disagrees with the Commission's assessment that
review of contracts before they begin to trade is one of the most
effective market surveillance tools. The CBT states that, based on its
experience, the exchange's ``comprehensive market surveillance program
is the most effective way to protect our markets.''
    The Commission advocates careful preapproval review in order to
reduce the need to intervene in markets which are trading. The
Commission agrees that futures exchanges generally have adequate
programs of market surveillance, as is required by the current
provisions of the Act and Commission rules. Where contract terms are
appropriately set, however, market forces will respond to factors of
supply and demand, without the need for regulatory intervention--by
either the SRO or the government. Thus, the hand of regulation may be
heaviest where preapproval review is lessened in favor of the more
drastic forms of intervention necessary to address problems after

[[Page 10437]]

trading begins. Accordingly, the Commission remains convinced that the
current structure of the Act best serves the public interest.
    In addition to opposition to the rulemaking in favor of legislative
action, certain exchanges raised objections to specific provisions of
the proposed rules. For example, the New York Mercantile Exchange
(``NYMEX'') opined that the ten-day review provision should be applied
more broadly, stating that, ``if Commission staff can review (cash-
settled) contracts within ten days, the same time frame also should
apply to contracts involving physical delivery.'' As explained in the
Notice of Proposed Rulemaking, the Commission afforded ten-day
treatment to foreign currency and cash-settled contracts based on its
many years of administrative experience reviewing applications for
designation from all of the nation's futures exchanges. In the
Commission's experience, contracts for foreign currency and (with the
exception of those agricultural commodities which are enumerated in
section 1a(3) of the Act) contracts providing for cash-settlement for
the most part raise fewer issues requiring careful analysis than do
contracts for physical delivery. This is especially true where the
cash-settlement price is determined by a reputable third-party for
commercial purposes other than solely for settlement of the futures
contract.<SUP>13
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    \13\ Many of the exchange commenters complain, as does the CBT,
that cash-settled contracts raise issues which are not inherently
more or less complicated than those raised by contracts for physical
delivery. The Commission agrees that some cash-settled contracts do
raise issues which would require more than ten days to analyze. That
is why it proposed to maintain a degree of flexibility in the
process by permitting the Commission to extend the ten-day review
period for those cash-settled contracts that raise novel or complex
issues. In this way, the Commission has sought to balance the need
for speedy, yet meaningful contract review.
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    NYMEX also questions why the ten-day review period is available
only to options on those foreign currency and cash-settled futures
contracts eligible for ten-day review. Although options on physicals
may raise issues regarding delivery and deliverable supplies, options
on futures contracts generally raise few issues independent of the
underlying futures contracts. Accordingly, as NYMEX's question
suggests, options on futures typically could be included under the ten-
day review period.
    However, applications for designation of new futures contracts and
options on those futures contracts generally are submitted
together.<SUP>14 Because such an option is exercised into the futures
contract, the underlying futures contract must be approved for trading
as well. See, rule 33.41(a)(1)(ii). Accordingly, both the futures
contract and its associated option should be assigned the same review
period, notwithstanding the fact that an option on a futures contract
raises few independent issues. Nevertheless, there have been rare
instances where an option has been proposed to trade subsequent to
designation of its underlying futures contract. In those instances, a
ten-day review period is appropriate. The final rules reflect this
modification.
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    \14\ The fees associated with applications for contract market
designation recognize the efficiency of reviewing and designating an
option and its underlying futures contract together and are set at a
lower rate than are fees for a futures contract and a related option
contract that are submitted separately.
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    In addition, all of the exchanges question inclusion in the fast-
track procedures of any extension of time, even for novel or complex
contracts. The Chicago Mercantile Exchange (CME) complains that the
Commission could extend the time because a contract is novel or complex
without ``any necessary nexus between the nature of such issues and the
provisions of the Act and regulations.''
    This proposed provision was not intended by the Commission to be a
means of enlarging the time for review routinely or merely because a
contract is novel. The Commission has a laudable record of encouraging
innovation and of removing regulatory hurdles to novel contract
proposals. However, where more time is needed to determine whether an
application meets the requirements for designation because there are
questions remaining on complex or novel issues, it would be ill-advised
not to provide for a short extension.
    Of course, the Commission agrees that extensions of the review
period should not be frivolous or unwarranted. Accordingly, it proposed
to notify exchanges of such extensions, specifying the particular
``issues for which additional time for review is required.'' Such a
requirement is intended to assure against unnecessary extensions of
time for review. If after actual experience with this rule, however,
the exchanges believe that it has been abused, they can petition the
Commission to amend it. Such flexibility is a primary benefit of an
agency's establishing such procedures by rule, rather than through
congressional statutory amendment.
    Several exchanges also commented negatively on including as a
proposed ground for terminating fast-track review an application's
failure to comply with the applicable form or content requirements. The
CME argues that Guideline No. 1 asks for a great deal of information,
``much of which may not be relevant to the ultimate question of whether
the contract should be disapproved for violating a statutory or
regulatory condition of designation.'' The CBT argues that, ``given the
level and extent of detail required by Guideline No. 1, coupled with
the open-ended obligation Guideline No. 1 imposes * * * the
determination of whether an application is `complete upon submission'
is highly subjective and open to misuse.'' CBT Comment Letter at 11.
    The facts, however, do not justify such fears. The informational
requirements of Guideline No. 1 are in fact related to whether the
terms of a proposed contract violate a provision of the Act or
Commission rules. The vast majority of the information required to be
provided under Guideline No. 1 relates to consistency of the delivery
terms of the proposed contract to the underlying cash market, based
upon the statutory requirements that delivery terms be set so that
contracts are not readily susceptible to manipulation. Compare, Part 5,
Appendix A(a)(2)(i)-(v) and (3) to sections 5 and 5a of the Act.
Moreover, the number of times that proposed contracts are formally
deemed to be materially incomplete are relatively few.<SUP>15
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    \15\ The Commission rarely deems a contract application to be
incomplete on the basis that additional information is needed.
Rather, the typical practice is for staff to make targeted requests
to exchanges for additional information which is necessary to make
clear whether particular terms or conditions violate or may violate
a provision of the Act or Commission rules. Generally, applications
for designation are found to be ``materially incomplete'' only when
actual modifications to the specific terms that have been submitted
for review are required to bring the proposed contract into
compliance with the Act or Commission regulations.
    Similarly, few proposed amendments to contract terms are
remitted for failure to comply with the applicable form or content
requirements. No such rule amendments have been remitted in the
current fiscal year or in fiscal year 1996.
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    The CME concedes that it ``can sympathize with the CFTC's position
that it should not be required to give expedited review to an
application that contains material deficiencies.'' It suggests that
where such deficiencies exist, rather than the proposed contract's
becoming ineligible for fast-track review, the exchange

should be afforded an opportunity to correct the deficiency and then
resume the fast-track

[[Page 10438]]

review process. The statement in the CFTC proposal that an amendment
or supplement to an exchange's application renders the application
ineligible for fast-track review seems overly harsh. At worst, an
amendment or supplement to the application should cause the clock
for the fast-track process to be reset.

CME Comment Letter, dated January 16, 1997, at 7.

    A careful reading of the proposed rules reveals that the
Commission, under proposed rule 5.1(a)(ii)(6), did indeed leave open
the possibility that in appropriate circumstances the Commission could
request that exchanges substantively amend the terms of a proposed
contract under the fast-track procedures. The Commission anticipates
that such requests would be made to exchanges where a term or condition
of a proposed contract appears to violate a provision of the Act or
Commission rules, but could be cured readily within the time
remaining.<SUP>16
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    \16\ For example, where a contract for foreign currency called
for delivery in a manner contrary to the law of the issuing
sovereign, but the delivery provisions could be modified to make
delivery legal, the Commission could request that the modification
be made, provided that there were sufficient time in the ten-day
review period for the exchange to comply.
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    In this regard, the thirty-day extension available for certain
novel or complex applications should not be viewed by the exchanges as
an additional period within which to cure defects in otherwise
straightforward applications. Nor is the Commission modifying the
proposed rule to provide that in such instances the time for fast-track
review be reset. This would add an unnecessary level of complexity to
the fast-track review procedures, particularly in light of the
relatively prompt review and approval of submissions under current
procedures.<SUP>17 Where Commission staff identify serious defects in
the contract terms that cannot be cured within the time remaining for
fast-track review and which would result in a recommendation that the
Commission disapprove a proposal, the Commission will terminate fast-
track review. Because disapproving applications for designation or
proposed exchange amendments requires significant staff resources, this
termination provision is intended to offer exchanges the opportunity to
supplement an incomplete record or cure a defect in a proposed
application for contract designation or amendment of a contract term
without engaging in a disapproval proceeding.
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    \17\ Of course, where an exchange wishes to cure a defect in a
proposed contract after submission, it is free to withdraw the
original submission and submit a new, amended application for fast-
track review. This, in essence, is a mechanism within the contours
of the rules as proposed by which an exchange can ``reset'' the
review period simply, without adding undue complexity to these
rules.
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    Although the Commission would prefer to permit exchanges an
opportunity to supplement an incomplete record or to cure a potential
defect and then to move forward toward approval of the application,
rather than to initiate disapproval proceedings, the final
determination in such instances of whether disapproval proceedings
should be initiated will rest with the exchange. As the Commission
explained in the Notice of Proposed Rulemaking, an exchange may require
the Commission to decide either to approve or to initiate disapproval
of a contract or proposed exchange rule at the time that fast-track
review is terminated. It stated that,

[w]here a proposed contract originally filed for fast-track review
appears to violate a statutory or regulatory requirement, the
Commission presumes that the exchange would prefer to convert the
application to one for review under current procedures * * *.
However, when exchanges prefer that the Commission render a decision
whether to disapprove the application as filed, the Commission will
institute a formal disapproval proceeding upon notification that the
exchange views its application as complete and final as submitted.

61 FR 59389 (footnote omitted).

    Finally, several of the exchanges complained that not permitting
them substantively to revise their applications or rule submissions
penalized them for trying to improve the proposed contract or
rule.<SUP>18 This argument is somewhat at odds with the exchanges'
other arguments that, because they expend such great resources in
perfecting their proposed contracts, Commission review is unnecessary
and wasteful. The CME argues, somewhat more consistently, that
substantive revisions are made to proposed contracts during the review
period, but only because exchanges ``currently have an incentive to
rush new contract applications in as soon as possible to `start the
clock.' ''
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    \18\ Both NYMEX and the Coffee, Sugar and Cocoa Exchange noted
that, although the preamble stated that exchanges would be permitted
to make non-substantive amendments to their submissions, such as
correcting typographical errors, the proposed rule did not
explicitly include such a provision. The final rule has been
modified so to provide.
---------------------------------------------------------------------------

    The exchanges have maintained that, as a consequence of business
incentives, new contracts are thoroughly analyzed by the exchanges. If
so, one would expect new contract applications to be complete when
submitted. Moreover, to the extent that the time period for review at
the outset is known to be brief, the incentive to submit incomplete
applications for review prematurely should be diminished. In either
case, these fast-track procedures will realign the contract approval
process along the lines advocated by the exchanges. Complete, well-
thought-out proposed contracts, even novel or complex ones, should
speed through the review process, validating the quality of the
exchanges' proposals and conserving scarce Commission resources.
    One commenter, the Futures Industry Association (``FIA''),
supported the Commission's proposed fast-track rules as ``an essential
next step in the evolution of the Commission's rule review
procedures.'' The FIA ``estimates that its members effect more than
eighty percent of all customer transactions executed on United States
contract markets.'' It notes that ``although exchanges have the
obligation to act in the public interest and may be expected to do so,
the determination with respect to whether a particular contract or rule
is in the public interest is properly vested in the Commission.''
    Moreover, the FIA agrees with the Commission's concern that the
procedures applicable to contract market designation and approval of
rules retain a measure of flexibility, stating:

The vast majority of exchange rule submissions, whether in the form
of an initial application for designation as a contract market or a
subsequent amendment have been approved without controversy, and
such rules will benefit from the expedited review procedures.
However, * * * from time to time certain exchange rules relating to
the terms and conditions of contracts have raised significant
concerns for FIA members as well as other market participants.
Moreover, the impact of a particular rule has not always been
evident on its face, either to the Commission, industry participants
or, in some cases, the submitting exchange. It is essential,
therefore, that the Commission retain the flexibility inherent in
the proposed rules to assure the opportunity for thoughtful analysis
and comment in appropriate circumstances.

FIA Comment Letter, dated January 21, 1997 at 3.<SUP>19

    \19\ An additional commenter, the New York Stock Exchange, while
not commenting on the fast-track review procedures, noted its
interest in preserving the public's ability to comment on particular
rule amendments. The NYSE requested that the Commission publish all
proposals to amend circuit breakers. It is the Commission's current
policy, which it will continue, to publish for public comment all
proposed amendments affecting circuit breakers coordinated among
markets. See, e.g., 61 FR 68722 (December 30, 1996).

    In addition, the FIA notes that membership organizations, and the
exchanges themselves, will have difficulty in responding within the
time frames provided under these rules.

[[Page 10439]]

Indeed, several exchanges requested an extension of the comment period
in this very proposed rulemaking.<SUP>20 Accordingly, the FIA requests
that the Commission consider taking steps in addition to publication in
the Federal Register to disseminate more quickly information regarding
matters pending under these fast-track procedures. It suggests, in
particular, that the Commission use its internet web site to do so.
---------------------------------------------------------------------------

    \20\ As noted above, the thirty-day comment period on these
proposed rules was extended pursuant to a petition for extension by
NYMEX, joined by several of the exchanges.
---------------------------------------------------------------------------

    The Commission agrees with the FIA's assessment that all interested
parties--the Commission, the exchanges, industry member associations
and other interested membership organizations or individuals--will have
difficulty meeting the shortened time frames of these fast-track
procedures and will endeavor to find ways to ease this burden on
interested parties. The Commission intends to implement FIA's
suggestion and will post notice on the internet of the filing of all
proposed designation applications and amendments to contract terms,
including the dates when the review period terminates. The Commission
also encourages the use of electronic filing of comments and other
submissions in order to reduce the time burdens imposed by these rules.

IV. Implementation

    These rules constitute a necessary first step in a potentially
profound restructuring of the relationship between the Commission and
the exchanges with respect to the Commission's oversight and review and
approval of contract market applications and proposed rule amendments.
Applications for contract market designation that have been submitted
in advance of the effective date of these rules may not have been
prepared by the exchanges with this new relationship and timetable in
mind, with the expectation that adjustments to the pending submissions
would be made during the review process.
    The Commission, in implementing these rules will offer the
exchanges the maximum regulatory relief and flexibility possible.
Accordingly, when these rules become effective, the Commission will
treat all pending contracts and proposed rule amendments as having been
submitted under the fast-track procedures as of the rules' effective
date, unless instructed otherwise by the exchange. However, where
approval of pending contract applications or proposed rule amendments
would be accelerated by using existing procedures, the Commission will
continue to process those designation applications or proposed rule
amendments under those existing procedures.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
these rules on small entities. The Commission has previously determined
that contract markets are not ``small entities'' for purposes of the
RFA, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30, 1982). These
amendments establish alternative streamlined procedures for Commission
review and approval of applications by contract markets for additional
designations and of amendments to contract terms and conditions.
Accordingly, the Chairperson, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein
will not have a significant economic impact on a substantial number of
small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') of 1980 (Act), 44 U.S.C. 501
et. seq., imposes certain requirements on federal agencies (including
the Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. While this rulemaking
imposes no burden, the group of rules (3038-0022) of which these are a
part has the following burden:

    Average burden hours per response--3,546,26.
    Number of respondents--10,971.
    Frequency of response--on occasion.

    Copies of the OMB-approved information collection package
associated with this rule may be obtained from Gerald P. Smith,
Clearance Officer, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
Telephone: (202) 418-5160.

List of Subjects

17 CFR Part 1

    Commodity exchanges, Contract market rules, Rule review procedures.

17 CFR Part 5

    Contract markets, Designation application.
    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6c, 7, 7a, 8, and 12a, the
Commission hereby amends Chapter I of Title 17 of the Code of Federal
Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 9, 12, 12a, 12c, 13a-1, 13a-2,
16, 19, 21, 23 and 24.

    2. In Sec. 1.41(b), the introductory text, paragraphs (b)(1),
(b)(2), (b)(3), (b)(4), (b)(5) and the concluding text are redesignated
as (b)(1)(i), (b)(1)(i)(A), (b)(1)(i)(B), (b)(1)(i)(C), (b)(1)(i)(D),
(b)(1)(i)(E), and (b)(1)(ii), respectively; the first sentence of newly
redesignated paragraph (b)(1)(i) and newly redesignated paragraph
(b)(1)(ii) are revised; and paragraphs (b)(2) through (b)(4) are added,
to read as follows:


Sec. 1.41  Contract market rules; submission of rules to the
Commission; exemption of certain rules.

* * * * *
    (b) Rules that relate to terms and conditions. (1)(i) Except as
provided herein and in paragraph (f) of this section, all proposed
contract market rules that relate to terms and conditions must be
submitted to the Commission for approval pursuant to section
5a(a)(12)(A) of the Act prior to their proposed effective dates. * * *
    (ii) The Commission may remit to the contract market, with an
appropriate explanation where practicable, and not accept for review
any rule submission that does not comply with the form and content
requirements of paragraphs (b)(1)(i) (A) through (E) of this section.
    (2) All proposed contract market rules that relate to terms and
conditions submitted for review under paragraph (b)(1) shall be deemed
approved by the Commission under section 5a(a)(12)(A) of the Act,
forty-five days after receipt by the Commission, unless notified
otherwise within that period, if:
    (i) The contract market labels the submission as being submitted
pursuant to Commission rule 1.41(b)--Fast Track Review;
    (ii) The submission complies with the requirements of paragraphs
(b)(1)(i) (A) through (E), of this section or for dormant contracts,
the requirements of Sec. 5.2 of this chapter;
    (iii) The contract market does not amend the proposed rule or
supplement

[[Page 10440]]

the submission, except as requested by the Commission, during the
pendency of the review period; and
    (iv) The contract market has not instructed the Commission in
writing during the review period to review the proposed rule under the
usual procedures under section 5a(a)(12)(A) of the Act and paragraph
(b)(1) of this section.
    (3) The Commission, within forty-five days after receipt of a
submission filed pursuant to paragraph (b)(2) of this section, may
notify the contract market making the submission that the review period
has been extended for a period of thirty days where the proposed rule
raises novel or complex issues which require additional time for
review. This notification will briefly specify the nature of the
specific issues for which additional time for review is required. Upon
such notification, the period for fast-track review of paragraph (b)(2)
of this section shall be extended for a period of thirty days.
    (4) During the forty-five day period for fast-track review, or the
thirty-day extension when the period has been enlarged under paragraph
(b)(3) of this section, the Commission shall notify the contract market
that the Commission is terminating fast-track review procedures and
will review the proposed rule under the usual procedures of section
5a(a)(12)(A) of the Act and paragraph (b)(1) of this section, if it
appears that the proposed rule may violate a specific provision of the
Act, regulation, or form or content requirement of this section. This
termination notification will briefly specify the nature of the issues
raised and the specific provision of the Act, regulation, or form or
content requirement of this section that the proposed rule appears to
violate. Within ten days of receipt of this termination notification,
the contract market may request that the Commission render a decision
whether to approve the proposed rule or to institute a proceeding to
disapprove the proposed rule under the procedures specified in section
5a(a)(12)(A) of the Act by notifying the Commission that the contract
market views its submission as complete and final as submitted.
* * * * *
    3. Section 1.41b is amended by revising paragraph (b) to read as
follows:


Sec. 1.41b.  Delegation of authority to the Director of the Division of
Trading and Markets and Director of the Division of Economic Analysis.

* * * * *
    (b) The Commission hereby delegates, until the Commission orders
otherwise: (1) To the Director of the Division of Economic Analysis,
with the concurrence of the General Counsel or the General Counsel's
delegatee, to be exercised by such Director or by such other employee
or employees of the Commission under the supervision of such Director
as may be designated from time to time by the Director, the authority
to approve, pursuant to section 5a(a)(12)(A) of the Act and
Sec. 1.41(b), contract market proposals, submitted pursuant to
Sec. 5.2, to list additional trading months or expiration for, or to
otherwise recommence trading in, a contract that is dormant within the
meaning of Sec. 5.2; and
    (2) To the Director of the Division of Economic Analysis, and to
the Director of the Division of Trading and Markets, with the
concurrence of the General Counsel or the General Counsel's delegatee,
to be exercised by such Director or by such other employee or employees
of the Commission under the supervision of such Director as may be
designated from time to time by the Director, authority to request
under Sec. 1.41(b)(2)(iii) that the contract market amend the proposed
rule or supplement the submission, to notify a contract market under
Sec. 1.41(b)(3) that the time for review of a proposed contract term
submitted under that section for fast-track review has been extended,
and to notify the contract market under Sec. 1.41(b)(4) that fast-track
procedures are being terminated.

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT
MARKETS

    3. The authority citation for Part 5 is revised it to read as
follows:

    Authority: 7 U.S.C. 6(c), 6c, 7, 7a, 8 and 12a.

    4. Part 5 is amended by adding a new Sec. 5.1, and in Appendix D,
by revising the second sentence, to read as follows:


Sec. 5.1  Fast-track designation review.

    (a) Cash-settled contracts. Boards of trade seeking designation as
a contract market under sections 4c, 5, 5a, and 6 of the Act, and
regulations thereunder, shall be deemed to be designated as a contract
market under section 6 of the Act ten days after receipt by the
Commission of the application for designation, unless notified
otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted
pursuant to Commission rule 5.1--Fast Track Ten-Day Review;
    (2)(i) The application for designation is for a futures contract
providing for cash settlement or for delivery of a foreign currency for
which there is no legal impediment to delivery and for which there
exists a liquid cash market; or
    (ii) For an option contract that is itself cash-settled, is for
delivery of a foreign currency which meets the requirements of
paragraph (a)(2)(i) of this section or is to be exercised into a
futures contract which has already been designated as a contract
market;
    (3) The application for designation is for a commodity other than
those enumerated in section 1a(3) of the Act or subject to the
procedures of section 2(a)(1)(B) of the Act;
    (4) The board of trade currently is designated as a contract market
for at least one contract which is not dormant within the meaning of
this part;
    (5) The submission complies with the requirements of Appendix A of
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (6) The board of trade does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission or for correction of
typographical errors, renumbering or other such nonsubstantive
revisions, during that period; and
    (7) The board of trade has not instructed the Commission in writing
during the review period to review the application for designation
under the usual procedures under section 6 of the Act.
    (b) Contracts for physical delivery. Boards of trade seeking
designation as a contract market under sections 4c, 5, 5a, and 6 of the
Act, and regulations thereunder, shall be deemed to be designated as a
contract market under section 6 of the Act forty-five days after
receipt by the Commission of the application for designation, unless
notified otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted
pursuant to Commission rule 5.1--Fast Track Forty-Five Day Review;
    (2) The application for designation is for a commodity other than
those subject to the procedures of section 2(a)(1)(B) of the Act;
    (3) The board of trade currently is designated as a contract market
for at least one contract which is not dormant within the meaning of
this part;
    (4) The submission complies with the requirements of Appendix A of
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (5) The board of trade does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission or for correction of
typographical errors, renumbering or

[[Page 10441]]

other such nonsubstantive revisions, during that period; and
    (6) The board of trade has not instructed the Commission in writing
during the forty-five day review period to review the application for
designation under the usual procedures under section 6 of the Act.
    (c) Notification of extension of time. The Commission, within ten
days after receipt of a submission filed under paragraph (a) of this
section, or forty-five days after receipt of a submission filed under
paragraph (b) of this section, may notify the board of trade making the
submission that the review period has been extended for a period of
thirty days where the designation application raises novel or complex
issues which require additional time for review. This notification will
briefly specify the nature of the specific issues for which additional
time for review is required. Upon such notification, the period for
fast-track review of paragraphs (a) and (b) of this section shall be
extended for a period of thirty days.
    (d) Notification of termination of fast-track procedures. During
the fast-track review period provided under paragraphs (a) or (b) of
this section, or of the thirty-day extension when the period has been
enlarged under paragraph (c) of this section, the Commission shall
notify the board of trade that the Commission is terminating fast-track
review procedures and will review the proposed rule under the usual
procedures of section 6 of the Act, if it appears that the proposed
contract may violate a specific provision of the Act, regulation, or
form or content requirement of Appendix A of this part. This
termination notification will briefly specify the nature of the issues
raised and the specific provision of the Act, regulation, or form or
content requirement of Appendix A of this part that the proposed
contract appears to violate. Within ten days of receipt of this
termination notification, the board of trade may request that the
Commission render a decision whether to approve the designation or to
institute a proceeding to disapprove the proposed application for
designation under the procedures specified in section 6 of the Act by
notifying the Commission that the exchange views its application as
complete and final as submitted.
    (e) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Economic
Analysis or to the Director's delegatee, with the concurrence of the
General Counsel or the General Counsel's delegatee, authority to
request under paragraphs (a)(6) and (b)(5) of this section that the
contract market amend the proposed contract or supplement the
application, to notify a board of trade under paragraph (c) of this
section that the time for review of a proposed contract term submitted
for review under paragraphs (a) or (b) of this section has been
extended, and to notify the contract market under paragraph (d) of this
section that the fast-track procedures of this section are being
terminated.
    (2) The Director of the Division of Economic Analysis may submit to
the Commission for its consideration any matter which has been
delegated in paragraph (e)(1) of this section.
    (3) Nothing in the paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (e)(1)
of this section.

Appendix D--Internal Procedure Regarding Period for Public Comment

    * * * Generally, the Commission will provide for a public
comment period of thirty days on such applications for designation;
provided, however, that the public comment period will be fifteen
days for those applications submitted for review under the fast-
track procedures of Sec. 5.1(b) of this part.
* * * * *
    Issued in Washington, D.C., this 27th day of February, 1997, by
the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-5567 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P

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