[Federal Register Volume 75, Number 245 (Wednesday, December 22, 2010)]
[Proposed Rules]
[Pages 80572-80636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-31458]



[[Page 80571]]

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Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 16, and 38



Core Principles and Other Requirements for Designated Contract Markets; 
Proposed Rule

Federal Register / Vol. 75 , No. 245 / Wednesday, December 22, 2010 / 
Proposed Rules

[[Page 80572]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 16, and 38

RIN 3038-AD09


Core Principles and Other Requirements for Designated Contract 
Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing new rules and amended guidance and acceptable 
practices to implement the new statutory provisions enacted by Title 
VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''). The proposed rules, guidance and acceptable 
practices, which apply to the designation and operation of contract 
markets, implement the Dodd-Frank Act's new statutory framework that, 
among other things, amends Section 5 of the Commodity Exchange Act 
(``CEA'') concerning designation and operation of contract markets, and 
adds a new CEA Section 2(h)(8) to include the listing, trading and 
execution of swaps on designated contract markets. The Commission 
requests comment on all aspects of the proposed rules, guidance and 
acceptable practices.

DATES: Comments must be received on or before February 22, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD09, 
by any of the following methods:
    <bullet> Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
    <bullet> Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as mail above.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations, 17 CFR 
145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.

FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Assistant Deputy 
Director, 202-418-5453, <a href="/cdn-cgi/l/email-protection#640a0905160f0b130d101e24070210074a030b12"><span class="__cf_email__" data-cfemail="deb0b3bfacb5b1a9b7aaa49ebdb8aabdf0b9b1a8">[email protected]</span></a>, or Nadia Zakir, Attorney-
Advisor, 202-418-5720, <a href="/cdn-cgi/l/email-protection#dfb1a5beb4b6ad9fbcb9abbcf1b8b0a9"><span class="__cf_email__" data-cfemail="d7b9adb6bcbea597b4b1a3b4f9b0b8a1">[email protected]</span></a>, Division of Market Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Overview
    B. The Current Statutory Framework
    C. The Dodd-Frank Act Amendments
II. The Proposed Rules
    A. Proposed Repeal of Appendix A to Part 38
    B. Adoption of New Regulations and Revised Guidance and 
Acceptable Practices
    C. Proposed Amendments to General Regulations Under Part 38 (New 
Subpart A)
    1. Proposed Sec.  38.1--Scope
    2. Proposed Sec.  38.2--Applicable Provisions
    3. Proposed Sec.  38.3--Procedures for Designation
    4. Proposed Sec.  38.4--Procedures for Listing Products and 
Implementing Designated Contract Market Rules
    5. Proposed Sec.  38.5--Information Relating to Contract Market 
Compliance
    6. Proposed Sec.  38.7--Prohibited Use of Data Collected for 
Regulatory Purposes
    7. Proposed Sec.  38.8--Listing of Swaps on a Designated 
Contract Market
    8. Proposed Sec.  38.9--Designated Contract Markets Operating as 
Swap Execution Facilities
    9. Proposed Sec.  38.10--Reporting of Swaps Traded on a 
Designated Contract Market
    D. Proposed New Regulations and Revised Guidance and Acceptable 
Practices for Compliance With Core Principles
    1. Subpart B--Designation as Contract Market
    2. Subpart C--Compliance With Rules
    i. Proposed Sec.  38.151--Access Requirements
    ii. Proposed Sec.  38.152--Abusive Trading Practices Prohibited
    iii. Proposed Sec.  38.153--Capacity To Detect and Investigate 
Rule Violations
    iv. Proposed Sec.  38.154--Regulatory Services Provided by a 
Third Party
    v. Proposed Sec.  38.155--Compliance Staff and Resources
    vi. Proposed Sec.  38.156--Automated Trade Surveillance System
    vii. Proposed Sec.  38.157--Real-Time Market Monitoring
    viii. Proposed Sec.  38.158--Investigations and Investigation 
Reports
    ix. Proposed Sec.  38.159--Ability To Obtain Information
    x. Proposed Sec.  38.160--Additional Rules Required
    3. Subpart D-Contracts Not Readily Susceptible to Manipulation
    4. Subpart E-Prevention of Market Disruption
    i. Proposed Sec.  38.251--General Requirements
    ii. Proposed Sec.  38.252--Additional Requirements for Physical 
Delivery Contracts
    iii. Proposed Sec.  38.253--Additional Requirements for Cash-
Settled Contracts
    iv. Proposed Sec.  38.254--Ability to Obtain Information
    v. Proposed Sec.  38.255--Risk Controls for Trading
    vi. Proposed Sec.  38.256--Trade Reconstruction
    vii. Proposed Sec.  38.257--Regulatory Service Provider
    viii. Proposed Sec.  38.258--Additonal Rules Required
    5. Subpart F--Position Limitations or Accountability
    6. Subpart G--Emergency Authority
    7. Subpart H--Availability of General Information
    i. Proposed Sec.  38.401(a)--General
    ii. Proposed Sec.  38.401(b)--Accuracy Requirement
    iii. Proposed Sec.  38.401(c)--Notice of Regulatory Submissions
    iv. Proposed Sec.  38.401(d)--Rulebook
    8. Subpart I--Daily Publication of Trading Information
    9. Subpart J--Execution of Transactions
    i. Proposed Sec.  38.501--General Requirements
    ii. Proposed Sec.  38.502--Minimum Centralized Market Trading 
Requirement
    a. Minimum Centralized Market Trading Percentage Requirement
    b. Centralized Market Trading Percentage Calculation
    c. Mandatory Delisting
    d. Treatment of Contracts Listed as of the Effective Date of 
this Section
    e. Exemptions
    iii. Proposed Sec.  38.501--Block Trades on Futures Contracts
    iv. Proposed Sec.  38.504--Block Trades on Swap Contracts
    v. Proposed Sec.  38.505--Exchange of Derivatives For Related 
Positions
    vi. Proposed Sec.  38.506--Office Trades and Transfer Trades
    10. Subpart K--Trade Information

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    i. Proposed Sec.  38.551--Audit Trail Required
    ii. Proposed Sec.  38.552--Elements of an Acceptable Audit Trail 
Program
    iii. Proposed Sec.  38.553--Enforcement of Audit Trail 
Requirements
    11. Subpart L--Financial Integrity of Transactions
    12. Subpart M--Protection of Market Participants
    13. Subpart N--Disciplinary Procedures
    i. Proposed Sec.  38.701--Enforcement Staff
    ii. Proposed Sec.  38.702--Disciplinary Panels
    iii. Proposed Sec.  38.703--Review of Investigation Report
    iv. Proposed Sec.  38.704--Notice of Charges
    v. Proposed Sec.  38.705--Right to Representation
    vi. Proposed Sec.  38.706--Answer to Charges
    vii. Proposed Sec.  38.707--Admission or Failure to Deny Charges
    viii. Proposed Sec.  38.708--Denial of Charges and Right to 
Hearing
    ix. Proposed Sec.  38.709--Settlement Offers
    x. Proposed Sec.  38.710--Hearings
    xi. Proposed Sec.  38.711--Decisions
    xii. Proposed Sec.  38.712--Right to Appeal
    xiii. Proposed Sec.  38.13--Final Decisions
    xiv. Proposed Sec.  38.714--Disciplinary Sanctions
    xv. Proposed Sec.  38.715--Summary of Fines for Violations of 
Rules Regarding Timely Submission of Records, Decorum or Other 
Similar Activities
    xvi. Proposed Sec.  38.716--Emergency Disciplinary Actions
    14. Subpart O--Dispute Resolution
    15. Subpart P--Governance Fitness Standards
    16. Subpart Q--Conflicts of Interest
    17. Subpart R--Composition of Governing Boards of Contract 
Markets
    18. Subpart S--Recordkeeping
    19. Subpart T--Antitrust Considerations
    20. Subpart U--System Safeguards
    21. Subpart V--Financial Resources
    i. Proposed Sec.  38.1101(a)--General Requirements
    ii. Proposed Sec.  38.1101(b)--Types of Financial Resources
    iii. Proposed Sec.  38.1101(c)--Computation of Financial 
Resource Requirement
    iv. Proposed Sec.  38.1101(d)--Valuation of Financial Resources
    v. Proposed Sec.  38.1101(e)--Liquidity of Financial Resources
    vi. Proposed Sec.  38.1101(f)--Reporting Requirements
    22. Subpart W--Diversity of Boards of Directors
    23. Subpart X--Securities and Exchange Commission
III. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    1. Additional Information Provided by Designated Contract 
Markets
    2. Information Collection Comments
    C. Cost Benefit Analysis
IV. Text of Proposed Rules

I. Background

A. Overview

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \1\ Title VII of the Dodd-Frank Act 
\2\ amended the CEA \3\ to establish a comprehensive, new regulatory 
framework for swaps and security-based swaps. The legislation was 
enacted to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to, among others, all registered entities and intermediaries 
subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act''). 
The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq. (amended 2010).
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    Section 735 of the Dodd-Frank Act amended Section 5 of the CEA 
pertaining to the designation and operation of contract markets, by: 
(i) Eliminating the stand-alone designation criteria contained in 
former Section 5(b) of the CEA; (ii) revising the existing core 
principles, including incorporating therein most of the substantive 
elements of the former designation criteria; and (iii) adding five new 
core principles, thereby requiring applicants and designated contract 
markets (``DCMs'') to comply with a total of 23 core principles as a 
condition of obtaining and maintaining designation as a contract 
market.
    In addition, Section 723(a)(3) of the Dodd-Frank Act added Section 
2(h)(8) of the CEA to require, among other things, that execution of 
swaps subject to the clearing requirement of Section 2(h)(1) of the CEA 
must occur either on a DCM or on a new type of regulated facility 
called a Swap Execution Facility (``SEF'').\4\ Also, Section 733 of the 
Dodd-Frank Act added Section 5h(a)(1), requiring that no person may 
operate a facility for the trading or processing of swaps unless the 
facility is registered as a SEF or as a DCM. Accordingly, the rules 
proposed in this release also implement provisions related to the 
processing, trading and execution of swaps on DCMs.
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    \4\ The Commission will be proposing rules governing the 
registration and operation of SEFs in a separate, forthcoming 
rulemaking. See CFTC Web site for additional information on the 
``SEF Registration Requirements and Core Principle Rulemaking, 
Interpretation & Guidance'' rulemaking, at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_13_SEFRules/index.htm 
(last visited Dec. 14, 2010).
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    In enacting the Dodd-Frank Act, Congress directed that rules and 
regulations required by the provisions of Title VII take effect the 
later of 360 days after enactment of the bill or to the extent that a 
rulemaking is required by the Dodd-Frank Act, not less than 60 days 
after the publication of that final rule.\5\ Consistent with Congress' 
directive, this release proposes amendments to parts 38, 16 and 1 of 
the Commission's regulations to implement Section 5 of the CEA, as well 
as the requirements of Sections 2(h)(8) and 5h(a)(1) of the CEA, as 
amended by the Dodd-Frank Act, as applicable to DCMs.
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    \5\ See Section 754 of the Dodd-Frank Act.
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B. The Current Statutory Framework

    Section 5 of the CEA governs the designation and operation of 
DCMs.\6\ DCMs were first established under the Commodity Futures 
Modernization Act of 2000 (``CFMA'') \7\ as one of two forms of 
Commission-regulated markets for the trading of contracts for sale of a 
commodity for future delivery or commodity options.\8\
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    \6\ 7 U.S.C. 7; see also, Section 5 of the CEA, as amended by 
the Dodd-Frank Act.
    \7\ Commodity Futures Modernization Act of 2000, Public Law 106-
554, 114 Stat. 2763 (2000) (``CFMA'').
    \8\ The CFMA established two tiers of regulated markets--
designated contract markets and registered derivatives transaction 
execution facilities (``DTEFs''). In addition, the CFMA provided for 
two markets exempt from regulation, exempt boards of trade 
(``EBOTs'') and exempt commercial markets (``ECMs''). A description 
of the categories, requirements and functions of each of these 
markets as first established under the CFMA is provided in the 
Commission's notice of proposed rulemaking and final rulemaking 
implementing the CFMA. See A New Regulatory Framework for Trading 
Facilities, Intermediaries and Clearing Organizations, Notice of 
Proposed Rulemaking, 66 FR 14,262, March 9, 2001; Final Rulemaking, 
66 FR 42,256, Aug. 10, 2001. In addition, a new type of regulated 
market was created under the CFTC Reauthorization Act of 2008 
(``Farm Bill''), Incorporated as Title XIII of the Food, 
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 
1651 (June 18, 2008). Under the Farm Bill, the Commission was 
required to determine and make public its determination whether a 
particular agreement, contract or transaction executed or traded on 
an ECM serves a significant price discovery function (``SPDC''). 
Once a contract was identified as a SPDC, the ECM on which the 
contract was traded was required to demonstrate to the Commission 
that the ECM had a regulatory system in place that satisfied the 
requirements of the core principles under current Section 2(h)(7) of 
the current CEA and the applicable provisions of Sec.  36.3 of the 
Commission's regulations. Section 723 of the Dodd-Frank Act repealed 
the ECM SPDC provisions.
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    The CEA, as amended by the CFMA, requires a DCM applicant to 
demonstrate that it satisfies each of

[[Page 80574]]

eight designation criteria as a condition of obtaining designation as a 
contract market.\9\ In addition, each applicant is required to 
demonstrate its ability to comply with 18 core principles at the time 
of application, and on an ongoing basis after designation.\10\
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    \9\ The eight designation criteria under current Section 5(b) of 
the CEA are titled the following: (1) In General; (2) Prevention of 
Market Manipulation; (3) Fair and Equitable Trading; (4) Trade 
Execution Facility; (5) Financial Integrity of Transactions; (6) 
Disciplinary Procedures; (7) Public Access; and (8) Ability to 
Obtain Information.
    \10\ 7 U.S.C. 7(d). The Commission also undertakes due diligence 
reviews of each contract market's compliance with the core 
principles during rule and product certification reviews and 
periodic examinations of DCMs' compliance with the core principles 
under Rule Enforcement Reviews (``RERs'').
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C. The Dodd-Frank Act Amendments Applicable to Designated Contract 
Markets

    Section 735 of the Dodd-Frank Act amends Section 5 of the CEA by: 
(i) Eliminating the eight criteria for designation as a contract 
market; (ii) amending many of the core principles, including 
incorporating most of the substantive requirements of the current 
designation criteria, and requiring that all DCMs demonstrate 
compliance with each of the core principles as a condition of obtaining 
and maintaining designation as a contract market; and (iii) adding five 
new core principles, specifically Core Principle 13 (Disciplinary 
Procedures), Core Principle 20 (System Safeguards), Core Principle 21 
(Financial Resources), Core Principle 22 (Diversity of Boards of 
Directors), and Core Principle 23 (Securities and Exchange 
Commission).\11\
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    \11\ New Core Principle 13 is verbatim of current Designation 
Criterion 6.
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    As noted above, the Dodd-Frank Act also specifically requires under 
Section 2(h)(8) of the CEA, as amended,\12\ that execution of swaps 
that are required to be cleared must occur on either a DCM or a SEF, 
except where no DCM or SEF makes the swap available for trading.\13\ 
Accordingly, unless otherwise specified in this release, each of the 23 
core principles and the proposed regulations, guidance and acceptable 
practices, apply to all ``contracts'' listed on a DCM, which will 
include swaps, futures and options contracts.
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    \12\ See Section 723 of the Dodd-Frank Act.
    \13\ Section 5h(a)(1) of the CEA, as amended by Dodd-Frank Act, 
also prohibits any person from operating a facility for the trading 
and processing of swaps unless the facility is registered as a SEF 
or DCM.
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    In sum, the new and revised regulations, guidance and acceptable 
practices proposed in this release will implement the regulatory 
obligations that each DCM must meet in order to comply with Section 5 
of the CEA, as amended by the Dodd-Frank Act, initially upon 
designation and thereafter on an ongoing basis. The Commission requests 
comments on all aspects of the proposed rules, guidance and acceptable 
practices.

II. The Proposed Rules

A. Proposed Repeal of Appendix A to Part 38

    Section 735 of the Dodd-Frank Act eliminates the criteria for 
designation as a contract market in current CEA Section 5(b), creates a 
new core principle from one of the criterion, and incorporates most of 
the substance of the remaining designation criteria into the core 
principles. Because the designation criteria are eliminated under the 
Dodd-Frank Act, the Commission proposes to eliminate the guidance on 
compliance with the designation criteria for DCMs contained in Appendix 
A to part 38. As noted below, this release further proposes to 
redesignate Appendix A as the application form for contract market 
designation.

B. Adoption of New Regulations and Revised Guidance and Acceptable 
Practices

    In implementing the provisions of the CFMA, the Commission adopted 
a regulatory framework for part 38 of its regulations that consisted 
largely of general application guidance and acceptable practices 
consistent with the CFMA's principles-based regime.\14\ The Dodd-Frank 
Act amends Section 5(d)(1)(B) of the CEA generally to provide that the 
Commission, in its discretion, may determine by rule or regulation the 
manner in which boards of trade comply with the core principles.\15\ 
Accordingly, the Commission undertook a comprehensive evaluation of its 
existing regulations, guidance and acceptable practices associated with 
each of the core principles in order to update those provisions and to 
determine which core principles would benefit from new or revised 
regulations and new or revised guidance or acceptable practices. Based 
on that review, the Commission is proposing both new and revised 
regulations and revised guidance and acceptable practices for some core 
principles, as set forth in this release.
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    \14\ Guidance provides DCMs and DCM applicants with contextual 
information regarding the core principles, including important 
concerns which the Commission believes must be taken into account in 
complying with specific core principles. In contrast, the acceptable 
practices are more specific than guidance and provide examples of 
how DCMs may satisfy particular requirements of the core principles; 
they do not, however, establish mandatory means of compliance. 
Acceptable practices are intended to assist DCMs by establishing 
non-exclusive safe harbors. The safe harbors apply only to 
compliance with specific aspects of the core principle, and do not 
protect the contract market with respect to charges of violations of 
other sections of the CEA or other aspects of the core principle.
    \15\ Current Core Principle 1 states, among other things, that 
boards of trade ``shall have reasonable discretion in establishing 
the manner in which they comply with the core principles.'' This 
``reasonable discretion'' provision underpins the Commission's use 
of core principle guidance and acceptable practices. Section 735 of 
the Dodd-Frank Act amends this provision to include the proviso that 
``[u]nless otherwise determined by the Commission by rule or 
regulation * * *,'' boards of trade shall have reasonable discretion 
in establishing the manner in which they comply with the core 
principles. See Section 735(b) of the Dodd-Frank Act, amending 
Section 5(d)(1)(B) of the CEA.
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    The proposed new regulations codify certain requirements and 
practices that are commonly accepted in the industry and have been 
found, based on the Commission's administrative experience in 
overseeing the futures markets since passage of the CFMA, to represent 
the best practice means of complying with the core principles.\16\ 
Indeed, some of these requirements are the off-shoot of the Rule 
Enforcement Reviews (``RERs'') periodically carried out by Commission 
staff.
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    \16\ The Commission's oversight of DCMs' compliance with the 
core principles includes the evaluation of applications for contract 
market designation, periodic RERs of DCMs' compliance with various 
statutory requirements, and the review of rule and product 
certifications implicating all aspects of the core principles.
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    The RERs are the cornerstone of the Commission's oversight program, 
serving as a key tool for monitoring a DCM's compliance with the core 
principles, and also as a primary means for identifying industry trends 
and DCM best practices for self-regulation. Essentially, RER findings 
and recommendations communicate to the industry what Commission staff 
believes are best practices for compliance and such recommendations 
typically are then adopted industry-wide as the standard form of 
compliance.
    The RERs, which are conducted periodically at all DCMs, typically 
examine DCMs' compliance with specific core principles relating to 
audit trail, trade practice surveillance, market surveillance, 
disciplinary programs, and dispute resolution.\17\ Commission staff's

[[Page 80575]]

findings and any recommendations for improvement are included in a 
report that is presented to the Commission, and the Commission votes on 
whether to accept the report. The RER report is publicly released and 
published on the Commission's Web site and also sent to the DCM. 
Although a DCM may not fully agree with the Commission staff's 
findings, responses from DCMs, which are required within 30 days, 
almost always explain how the DCM intends to implement staff's 
recommendations, if any. Because RER reports are public, 
recommendations for one DCM invariably lead to all DCMs that suffer 
from the same identified shortfall taking timely corrective action. 
Such corrective action usually includes modifying compliance procedures 
and/or adopting or modifying existing rules.
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    \17\ Staff typically review a one-year target period and, 
depending on the core principles covered, thoroughly examine a DCM's 
audit trail reviews, trade practice and market surveillance 
investigations, investigation logs, hedge exemptions, surveillance 
systems, compliance manuals, summary fine schedules, disciplinary 
files, settlement agreements, and arbitration files. Staff also 
conducts on-the-record interviews with DCM compliance officials.
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    The Commission believes that the promulgation of clear-cut and 
definite requirements or practices in those instances where a standard 
industry practice has developed would provide greater legal certainty 
to the industry in demonstrating compliance with the CEA. Accordingly, 
in certain circumstances, the Commission is proposing to replace the 
general application guidance and acceptable practices in part 38 with 
regulations that codify the relevant practices and requirements for 
those core principles. For some of the new core principles, the 
Commission also is proposing regulations that represent the best 
practice for complying with the core principle. For several core 
principles, the Commission is proposing to maintain the guidance and 
acceptable practices, albeit with proposed revisions that reflect 
developments in the industry since the passage of the CFMA, and the 
Commission's considerable experience since the passage of the CFMA with 
matters involving compliance with the core principles by a broad range 
of DCMs.

C. Proposed Amendments to General Regulations Under Part 38 (New 
Subpart A)

    The Commission is proposing to reorganize part 38 to include new 
subparts A through X. Proposed subpart A would include the general 
regulation Sec. Sec.  38.1 through 38.10,\18\ applicable both to DCM 
applicants and to existing DCMs. Subparts B through X would each 
include relevant regulations applicable to each core principle.\19\
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    \18\ This release does not propose any revisions to Sec.  38.6 
of the Commission's regulations.
    \19\ Each of these subparts begins with a regulation containing 
the language of the core principle.
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1. Proposed Sec.  38.1--Scope
    The proposed revisions to Sec.  38.1 are non-substantive as they 
simply eliminate cross-references to other sections of the Commission's 
regulations that are no longer applicable, and add references to 
sections, most of them new, that are now applicable.
2. Proposed Sec.  38.2--Applicable Provisions
    Section 38.2 sets forth the Commission regulations that DCMs must 
comply with in addition to those in part 38. The proposed revisions to 
Sec.  38.2 include a change to the title of the section to more 
accurately describe the regulation, and further updates the list of 
Commission regulations that are applicable to DCMs based on the new 
provisions under the Dodd-Frank Act, including the proposed provisions 
relating to real time reporting of swaps and the determination of 
appropriate block size for swaps which will be proposed under part 43, 
requirements for data element, recordkeeping and reporting of swap 
information to swap data repositories which will be proposed under part 
45, business continuity and disaster recovery which will be proposed 
under part 46, designation requirements for swap data repositories 
which will be proposed under part 49, and position limits which will be 
proposed under part 151.\20\
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    \20\ The Commission notes that because some of the proposed 
rulemakings are either ongoing or forthcoming, this proposed list of 
reserved sections under Sec.  38.2 may be subject to further 
revisions pending the final rules for each respective rulemaking.
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3. Proposed Sec.  38.3--Procedures for Designation
    Current Sec.  38.3 sets forth the application and approval 
procedures for new DCM applications.\21\ The Commission is proposing in 
Sec.  38.3 that all DCM applications, reinstatements, requests for 
transfer of designations, requests for withdrawal of application for 
designation, and vacation of designations be filed with the Secretary 
of the Commission in an electronic format, via the Internet, e-mail, or 
other means of direct electronic submission as approved by the 
Commission.\22\
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    \21\ In addition to these substantive revisions, many of the 
proposed revisions to Sec.  38.3 are non-substantive and are 
intended to clarify the rule.
    \22\ This amendment also would ensure consistency with the 
electronic process used for filing rule and product submissions 
under parts 39 and 40 of the Commission's regulations. See 17 CFR 
parts 39 and 40.
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    The Commission also is proposing to eliminate the expedited 
approval procedures for DCM applications, such that the timing of such 
reviews will be governed only by the 180-day statutory review period 
and procedures specified in Section 6(a) of the CEA.\23\ Based upon its 
experience since 2001, the Commission has determined that the 90-day 
accelerated review process is inefficient and impracticable. 
Specifically, the Commission has found that applicants seeking 
expedited review often file incomplete or draft applications, without 
adequate supporting materials, in the interest of meeting the expedited 
approval timeline. This, in turn, has required Commission staff to 
expend significant amounts of time reviewing incomplete or draft 
applications, necessitating numerous follow-up conversations with 
applicants, usually resulting in removal of applications from the 
expedited review timeline. The Commission believes that by requiring 
all applications to be reviewed within the 180-day review period, 
applicants will have sufficient time to submit complete applications 
for review, and to respond to Commission staff requests for additional 
information, resulting in a more efficient review process.\24\
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    \23\ 7 U.S.C. 8(a); see also, Section 6(a) of the CEA, as 
amended by the Dodd-Frank Act.
    \24\ This proposal also is consistent with the Commission's 
proposal to eliminate the 90-day expedited review procedures for 
derivatives clearing organization applications under part 39 in a 
separate rulemaking.
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    To provide an applicant with more certainty of the types of 
information that are required to support its DCM application, the 
Commission proposes to redesignate Appendix A to part 38 \25\ to 
include a new application form with comprehensive instructions to guide 
DCM applicants and a specified lists of documents and information that 
must be provided as exhibits.\26\ Other than the specific requirements 
necessitated by the revised and newly added core principles, the 
majority of information required under the form application consists of 
information that historically has been required by the Commission staff 
in its reviews of DCM applications under the Commission's regulations. 
Accordingly, proposed Sec.  38.3(a)(1) requires that, at a minimum, all 
applicants must complete the application form and provide the necessary 
information and documentation, in accordance with the associated 
instructions, in order to

[[Page 80576]]

initiate the 180-day designation review process.
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    \25\ Appendix A currently contains the stand alone designation 
criteria now eliminated under the Dodd-Frank Act.
    \26\ The Commission also is requiring tailored application forms 
for the registration of Designated Clearing Organizations, Swap 
Execution Facilities and Swap Data Repositories.
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    The Commission is proposing new Sec.  38.3(d) to formalize the 
procedures that a DCM must follow when requesting the transfer of its 
DCM designation and positions comprising open interest, in anticipation 
of a corporate event (e.g., a merger, corporate reorganization, or 
change in corporate domicile) which results in the transfer of all or 
substantially all of the DCM's assets to another legal entity. Under 
proposed Sec.  38.3(d)(2), the DCM would submit to the Commission a 
request for transfer no later than three months prior to the 
anticipated corporate change, with a limited exception.\27\ The request 
shall include: (1) The underlying agreement that governs the corporate 
change; (2) a narrative description of the corporate change, including 
the reason for the change and its impact on the DCM, including its 
governance and operations, and its impact on the rights and obligations 
of market participants holding the open positions; (3) a discussion of 
the transferee's ability to comply with the CEA, including the core 
principles applicable to DCMs, and the Commission's regulations 
thereunder; (4) the governing documents of the transferee, including 
but not limited to, articles of incorporation, bylaws, operating 
agreements and/or partnership agreements, as applicable; (5) the 
transferee's rules marked to show changes from the current rules of the 
DCM; and (6) a list of contracts, agreements, transactions or swaps for 
which the DCM requests transfer of open interest.
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    \27\ The proposed rule would require that where a DCM does not 
know or could not have reasonably known three months prior to the 
anticipated change, it shall be required to file the request as soon 
as it knows of the change.
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    Proposed Sec.  38.3(d) also would require, as a condition of 
approval, that the DCM submit a representation that it is in compliance 
with the CEA, including the DCM core principles, and the Commission's 
regulations. In addition, the DCM would have to submit various 
representations by the transferee, including but not limited to: (1) 
That the transferee will assume responsibility for complying with all 
applicable provisions of the CEA and the Commission's regulations 
promulgated thereunder, including part 38 and Appendices thereto; (2) 
that the transferee will assume, maintain and enforce all rules 
implementing and complying with these core principles, including the 
adoption of the transferor's rulebook; (3) upon the transfer, all open 
interest in all contracts listed on the transferor will be transferred 
to and represent equivalent open interest in all such contracts listed 
on the transferee, (4) that none of the proposed rule changes will 
affect the rights and obligations of any participant with open 
positions transferred to it; and (5) it will notify market participants 
of any changes to the rulebook and of the transfer.
    Proposed Sec.  38.3(d) also provides that the Commission will 
review any requests for transfer of designation and open interest as 
soon as practicable, and such request will be approved or denied 
pursuant to a Commission order.
    Proposed Sec.  38.3(g) \28\ is a new rule that is intended to 
ensure that all DCMs designated before the effective date of the rules 
proposed in this part 38 are in compliance with both the five new core 
principles and the revised core principles. As noted above, the Dodd-
Frank Act significantly changes some of the compliance obligations of 
DCMs under current Section 5 of the CEA by amending the majority of the 
existing core principles and adding five new core principles.\29\ All 
DCMs, including existing DCMs, must comply with the requirements of 
Section 5 of the CEA, as amended, as well as the applicable 
requirements under the Commission's regulations, including this 
release, upon their effective date. Accordingly, in proposed Sec.  
38.3(g), the Commission would require that each existing DCM provide 
the Commission with a signed certification of its compliance with each 
of the 23 core principles and the Commission's regulations under part 
38 as amended in this release, within 60 days of the effective date of 
the publication of the final rules proposed in this release. The 
failure of any existing DCM to provide such certification shall be 
grounds for revocation of the DCM's designation status. While the 
Commission believes that 60 days is a sufficient period of time for 
DCMs to have rules and procedures in place to ensure compliance with 
the core principles and the rules proposed in this release, the 
Commission requests comments on whether the 60 day period is 
sufficient, and if not, what period of time may be more appropriate and 
why.
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    \28\ In addition, proposed Sec. Sec.  38.3(e) and 38.3(f) 
restate existing requirements with certain non-substantive, 
clarifying changes.
    \29\ Compare 7 U.S.C. 7(d) with section 5(d) of the CEA, as 
amended by the Dodd-Frank Act.
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4. Proposed Sec.  38.4--Procedures for Listing Products and 
Implementing Designated Contract Market Rules
    The proposed amendments to Sec.  38.4 are largely intended to 
conform this rule to the proposed changes to existing Sec. Sec.  40.3 
(Voluntary submission of new products for Commission review and 
approval) and 40.5(b) (Voluntary submission of rules for Commission 
review and approval).\30\ The proposed amendments to those rules are 
made in the separate release pertaining to ``Provisions Common to 
Registered Entities.'' \31\
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    \30\ Proposed Sec.  40.3 is amended to require additional 
information to be provided by registered entities submitting new 
products for the Commission's review and approval. Proposed Sec.  
40.5(b) codifies a new standard for the review of new rules or rule 
amendments as established under the Dodd-Frank Act.
    \31\ 75 FR 67482, Nov. 2, 2010.
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5. Proposed Sec.  38.5--Information Relating to Contract Market 
Compliance
    On occasion, DCMs enter into equity interest transfers that result 
in a change in ownership. In those situations, Commission staff must 
determine whether the change in ownership will impact adversely the 
operations of the DCM or the DCM's ability to comply with the core 
principles and the Commission's regulations. The Commission is 
proposing to amend Sec.  38.5 to ensure that DCMs remain mindful of 
their self-regulatory responsibilities when negotiating the terms of 
significant equity interest transfers, and to improve the Commission 
staff's ability to undertake a timely and effective due diligence 
review of the impact, if any, of such transfers.
    In this regard, proposed Sec.  38.5(c) would require DCMs to file 
with the Commission a notice of the equity interest transfer of ten 
percent or more, no later than the business day, as defined in Sec.  
40.1, following the date on which the DCM enters into a firm obligation 
to transfer the equity interest.\32\ The notification must include and 
be accompanied by: (i) Any relevant agreement(s), including preliminary 
agreements; (ii) any associated changes to relevant corporate 
documents; (iii) a chart outlining any new ownership or corporate or 
organizational structure;

[[Page 80577]]

(iv) a brief description of the purpose and any impact of the equity 
interest transfer; and (v) a representation from the DCM that it meets 
all of the requirements of Section 5(d) of the Act and Commission 
regulations adopted thereunder. The proposed rule requires that the DCM 
keep the Commission apprised of the projected date that the transaction 
resulting in the equity interest transfer will be consummated, and must 
provide to the Commission any new agreements or modifications to the 
original agreement(s) filed pursuant to Sec.  38.5(c). The DCM must 
notify the Commission of the consummation of the transaction on the day 
in which it occurs. The proposed rule will enable staff to consider 
whether any conditions contained in an equity transfer agreement(s) are 
inconsistent with the self-regulatory responsibilities of a DCM or with 
any of the core principles.\33\
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    \32\ The Commission is proposing a 10 percent threshold because 
it believes that a change in ownership of such magnitude may have an 
impact on the operations of the DCM. The Commission believes that 
such impact may be present even if the change in ownership does not 
constitute a change in control. For example, if one entity holds a 
minority 10 percent equity share in the DCM, it may have a more 
significant voice in the operation of the DCM than five entities 
each with a minority 2 percent equity share. Given the potential 
impact that a change in ownership might have on the operations of a 
DCM, the Commission believes that it is appropriate to require such 
DCM to certify after such change that it continues to comply with 
all obligations under the CEA and Commission regulations.
    \33\ The Commission also maintains the existing provisions of 
Sec.  38.5 that allow the Commission at any time to request a DCM to 
file a written demonstration with the Commission that it is in 
compliance with one or more of the core principles.
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    Section 38.5(d) currently requires that upon a change in ownership, 
an acquirer of an existing DCM must certify that the exchange meets all 
of the requirements of the current Sections 5(b) and 5(d) of the Act, 
and the provisions of part 38 of the Commission's regulations. The 
Commission believes when there is a 10% or greater change in ownership, 
the DCM itself is the more appropriate entity to provide a 
certification of its continued compliance with all regulatory 
obligations. Accordingly, proposed Sec.  38.5(c)(3) \34\ would require 
that if there is a change in ownership \35\ the DCM must certify, no 
later than two business days following the date on which the change in 
ownership occurs, that the DCM meets all of the requirements of Section 
5(d) of the CEA, as amended by the Dodd-Frank Act, and the provisions 
of part 38 of the Commission's regulations. The proposed rule also 
requires that the DCM include as part of its certification whether any 
aspects of the DCM's operations will change as a result of the change 
in ownership, and if so, the DCM must provide a description of the 
changes. Finally, proposed Sec.  38.5(c) provides that the 
certification may rely on, and be supported by, prior materials and 
information submitted as part of an application for designation or a 
required product or rule filing or new filings if necessary to update 
its previous filings.
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    \34\ The Commission is proposing to redesignate Sec.  38.5(d) as 
Sec.  38.5(c).
    \35\ The Commission's regulations consistently identify a 
financial or ownership interest of ten percent or more as material 
and indicative of the ability to influence the activities of an 
entity or trading in an account. See, e.g., Core Principle 5, 
Acceptable Practices, and Core Principle 14, Application Guidance, 
in appendix B to part 38 of the Commission's regulations. 17 CFR 
part 38, appendix B.
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6. Proposed Sec.  38.7 \36\--Prohibited Use of Data Collected for 
Regulatory Purposes
---------------------------------------------------------------------------

    \36\ Current Sec.  38.6 (Enforceability) remains unchanged.
---------------------------------------------------------------------------

    To fulfill their regulatory and compliance obligations, DCMs often 
require market participants to provide proprietary data or personal 
information. Proposed Sec.  38.7 would prohibit DCMs from using such 
information for business or marketing purposes.\37\ The Commission 
notes that nothing in this provision should be viewed as prohibiting a 
DCM from sharing such information with another DCM or SEF for 
regulatory purposes, where necessary.
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    \37\ The Commission notes that in the recent notice of proposed 
rulemaking for Business Affiliate Marketing and Disposal of Consumer 
Information Rules, 75 FR 66018-01, Oct. 27, 2010 (to be codified at 
17 CFR part 163) rules are proposed prohibiting FCMs (and other 
intermediaries) from using certain consumer information received 
from an affiliate to make a solicitation for marketing purposes. In 
addition, rules were proposed requiring FCMs to develop a written 
disposal program to the extent that such FCMs possess consumer 
information. The underlying policy for these rules is to protect the 
privacy of customer information. Similarly, this proposed rule is 
intended to protect market participant's information provided to a 
DCM for regulatory purposes from its use to advance the commercial 
interests of the DCM.
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7. Proposed Sec.  38.8--Listing of Swaps on a Designated Contract 
Market
    The Dodd-Frank Act permits existing DCMs to list, trade and execute 
swaps, provided that the DCMs do so in a manner that complies with the 
provisions of the CEA, as amended by the Dodd-Frank Act, and part 38, 
as amended. Proposed Sec.  38.8(a) requires a DCM to notify the 
Commission, prior to or upon listing its first swap contract, of the 
manner in which it will fulfill each of the requirements under amended 
CEA and part 38 with respect to the listing, trading, execution and 
reporting of swap transactions.
    Proposed Sec.  38.8(b) requires a DCM to request and obtain from 
the Commission a unique, extensible, alphanumeric code for the purpose 
of identifying the DCM before it lists swaps. A DCM will do so pursuant 
to the swap recordkeeping and reporting requirements under proposed 
part 45 of the Commission's regulations. This requirement stems from 
the Commission's authority, under Section 728 of the Dodd-Frank Act, to 
establish standards and requirements related to reporting and 
recordkeeping for swaps.\38\ In particular, the Commission is required 
to adopt consistent data element standards for ``registered entities,'' 
which includes DCMs. part 45, which is being proposed in the separate 
Commission release ``Data Recordkeeping and Reporting Requirements,'' 
will set forth the recordkeeping and reporting requirements for DCMs 
with respect to swaps.\39\ Proposed Sec.  38.8(b) codifies the 
obligations of DCMs to comply with the provisions of proposed part 45.
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    \38\ See Section 21 of the CEA, as amended by the Dodd-Frank 
Act.
    \39\ See ``Swap Data Recordkeeping and Reporting Requirements,'' 
Proposed Rule, 75 FR 76574 (Dec. 8, 2010).
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8. Proposed Sec.  38.9--Boards of Trade Operating Both a Designated 
Contract Market and a Swap Execution Facility
    As noted above, the Dodd-Frank Act created a new regulated entity, 
the SEF, for the listing, trading and processing of swaps. The 
registration and compliance requirements for SEFs will be proposed in 
redesignated part 37, in a forthcoming release.\40\ Under the Dodd-
Frank Act, a DCM may list and trade swaps pursuant to its designation 
as a contract market. In addition, a board of trade that operates a DCM 
also may operate a SEF, provided that the board of trade separately 
registers as a SEF and complies with the applicable SEF core principles 
and any Commission regulations thereunder. Proposed Sec.  38.9 codifies 
the requirement that a board of trade that operates a DCM and that 
intends to operate a SEF must separately register pursuant to the SEF 
registration requirements and, on an ongoing basis, must separately 
comply with the SEF rules and core principles under Section 5h of the 
CEA, as amended by the Dodd-Frank Act, and part 37 of the Commission's 
regulations.
---------------------------------------------------------------------------

    \40\ See CFTC Web site for additional information on the ``SEF 
Registration Requirements and Core Principle Rulemaking, 
Interpretation & Guidance,'' at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_13_SEFRules/index.htm (last visited 
Dec. 14, 2010).
---------------------------------------------------------------------------

    Moreover, section 5h(c) of the CEA, as amended by the Dodd-Frank 
Act, provides that any board of trade that is a DCM and intends to 
operate as an independent SEF may use the same electronic trade 
execution system for listing and executing swaps, provided that the 
board of trade makes it clear to market participants whether the 
electronic trading of such swaps is taking place on or through the DCM 
or the SEF.\41\ Proposed Sec.  38.9(b) codifies this statutory 
requirement.
---------------------------------------------------------------------------

    \41\ Section 5h(c) of the CEA, as amended by the Dodd-Frank Act, 
provides:
    IDENTIFICATION OF FACILITY USED TO TRADE SWAPS BY CONTRACT 
MARKETS.--A board of trade that operates a contract market shall, to 
the extent that the board of trade also operates a swap execution 
facility and uses the same electronic trade execution system for 
listing and executing trades of swaps on or through the contract 
market and the swap execution facility, identify whether the 
electronic trading of such swaps is taking place on or through the 
contract market or the swap execution facility.

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[[Page 80578]]

9. Proposed Sec.  38.10--Reporting of Swaps Traded on a Designated 
Contract Market
    Section 727 of the Dodd-Frank Act directs the Commission to adopt 
rules providing for the public availability of swap transaction and 
pricing data in real-time.\42\ To the extent that they make swaps 
available for trading and execution either on a SEF or a DCM, DCMs will 
have real-time public reporting obligations pursuant to the Dodd-Frank 
Act and, therefore, must comply with the applicable provisions 
governing real time reporting. The Commission is proposing regulations 
applicable to the real time swap reporting obligations of certain 
entities under a separate release.\43\ The real time reporting 
regulations are proposed to be codified under part 43 of the 
Commission's regulations. In addition to the real time reporting 
obligations, the proposed rule also requires DCMs to comply with the 
swap reporting and recordkeeping requirements that are being proposed 
by the Commission in a separate release, and are proposed to be 
codified under part 45 of the Commission's regulations. Accordingly, 
proposed Sec.  38.10 would codify the compliance obligations of DCMs 
with respect to real time reporting of swap transactions and swap data 
recordkeeping and reporting obligations, as may be required under 
proposed parts 43 and 45 of the Commission's regulations, respectively.
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    \42\ See Sections 2(a)(13)-(14) of the CEA, as amended by the 
Dodd-Frank Act.
    \43\ See ``Real Time Public Reporting of Swap Transaction 
Data,'' Proposed Rule, 75 FR 76140 (Dec. 7, 2010).
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D. Proposed New Regulations and Revised Guidance and Acceptable 
Practices For Compliance With the Core Principles

    As noted above, this release proposes to reorganize part 38 to 
include subparts A through X. As proposed, each of subparts B through X 
will include relevant regulations applicable to the 23 core principles. 
In addition to the proposed new regulations, the Commission proposes to 
codify within each subpart the statutory language of the respective 
core principle.\44\
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    \44\ In two instances, the language of the core principle, as 
codified, was slightly revised to add references to the CEA where 
the statutory language simply cited to the CEA section without 
citing to the statute. These non-substantive edits were made to 
Sec. Sec.  38.100 and 38.1200.
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1. Subpart B--Designation as Contract Market
    The Dodd-Frank Act amends Core Principle 1 to make clear that 
compliance with the core principles, and any other rule or regulation 
that the Commission may impose under Section 8a(5) of the CEA, is a 
necessary condition to obtain and maintain designation as a contract 
market.\45\ Amended Core Principle 1 provides that unless otherwise 
determined by the Commission by rule or regulation, DCMs will continue 
to have reasonable discretion in establishing the manner in which they 
comply with the core principles. The Commission proposes to codify the 
statutory text of Core Principle 1 in proposed Sec.  38.100.
---------------------------------------------------------------------------

    \45\ 7 U.S.C. 7; see also Section 5(d)(1) of the CEA, as amended 
by the Dodd-Frank Act.
---------------------------------------------------------------------------

2. Subpart C--Compliance With Rules
    Core Principle 2, as amended by the Dodd-Frank Act, requires that a 
DCM establish, monitor, and enforce its rules, including rules relating 
to access requirements, rules regarding the terms and conditions of any 
contract to be traded on the contract market, and rules prohibiting 
abusive trading practices. A DCM also must have the capacity to detect 
and investigate potential rule violations, and to sanction any person 
that violates its rules.\46\ In addition, a DCM's rules must provide it 
with the ability and authority to perform the obligations and 
responsibilities required under Core Principle 2, including the 
capacity to carry-out such international information sharing agreements 
that the Commission may require. Proposed Sec.  38.150 implements these 
requirements.
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    \46\ As noted above, Section 735 of the Dodd-Frank Act amends 
Section 5 of the CEA to eliminate DCM designation criteria and 
amends several core principles, including Core Principle 2. Core 
Principle 2 was amended to include language formerly found in 
Designation Criterion 8--Ability to Obtain Information, and to 
specifically require that a DCM have the ability to detect, 
investigate, and sanction rule violations.
---------------------------------------------------------------------------

    For the most part, the Commission is codifying: (1) Language found 
in the guidance and acceptable practices for Core Principle 2 and 
former designation criterion 8; (2) existing DCM compliance practices 
that the Commission believes constitute best practices; and (3) 
recommendations made over the past several years by the Commission in 
rule enforcement reviews.\47\ In addition, the Commission is proposing 
some practices and requirements that are new for DCMs. The Commission 
also looked to and incorporated into the proposed rules for Core 
Principle 2 certain concepts that are currently contained in part 8 of 
its regulations-- Exchange Procedures for Disciplinary, Summary, and 
Membership Denial Actions. In this regard, the Commission notes that 
most DCMs' compliance and enforcement practices relating to Core 
Principle 2 obligations historically have been consistent with the 
rules contained in part 8.\48\ Each of the proposed rules under subpart 
C is discussed below.
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    \47\ Commission staff conducts periodic RERs of all DCMs. RERs 
examine DCM compliance with specific core principles over a one-year 
target period. Commission staff's analyses, conclusions and 
recommendations regarding any identified deficiencies are included 
in a publicly available written report.
    \48\ Section 38.2 of the Commission's regulations exempts DCMs 
from all Commission rules not specifically reserved. The part 8 
rules were not reserved.
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i. Proposed Sec.  38.151--Access Requirements
    Proposed Sec.  38.151 is an example of a rule in which the 
Commission proposes a new requirement for DCMs.\49\ Proposed Sec.  
38.151(a) requires that prior to granting a member or market 
participant access to its markets, the DCM must require the member or 
market participant to consent to its jurisdiction. The growth of 
electronic trading in the futures industry and the transformation of 
futures exchanges from traditional membership organizations to 
demutualized for-profit entities has changed how individuals and firms 
access the markets and execute trades. When open outcry dominated 
trading, orders were typically called in to a desk on the trading floor 
and members on the floor executed trades. Today, on most DCMs, one does 
not need to be a ``member'' to enter an order on an electronic trading 
system. Rather, clearing members can provide their customers with 
access to a DCM's electronic trading system and customers can enter 
their own orders. Depending on the type of access granted by the 
clearing member, the customer's order either will go through the 
clearing member's system for risk management before hitting the DCM's 
electronic trading system or directly go into the DCM's trading system.
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    \49\ Generally, Sec.  38.151 is being proposed pursuant to the 
Commission's general rulemaking authority under Section 8a(5) of the 
CEA (providing the authority to ``promulgate such rules * * * 
reasonably necessary * * * to accomplish any of the purposes of'' 
the CEA), and Section 3 of the CEA (providing that the purposes of 
the Act include the promotion of ``fair competition among boards of 
trade, other markets and market participants''). 7 U.S.C. 5, 12a(5).
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    DCMs generally require through rule and/or clearing firm connection

[[Page 80579]]

agreements that prior to a clearing member granting a customer access 
to the DCM's electronic trading system, the clearing member secure its 
customer's agreement to abide by, and be subject to, the DCM's rules. 
Nevertheless, DCMs do not view themselves as having the jurisdiction 
needed to compel these market participants to participate in the 
investigation and disciplinary process. Although DCMs have the option 
of requiring a clearing firm to bar a customer from accessing the DCM 
if the DCM believes that the customer committed a rule violation, most 
DCMs will first request that the customer submit to its jurisdiction 
and participate in the investigation and disciplinary process before 
exercising this option.
    Trading on a DCM is a privilege that is subject to conditions and 
entails certain responsibilities. The Commission believes that if a 
participant is granted the privilege of trading on a DCM, the 
participant should not only be required to abide by the DCM's rules, 
but the participant also must consent to the DCM's jurisdiction and 
participate in both the investigatory and disciplinary process. The 
Commission recognizes that this requirement will require clearing firms 
to amend their existing customer agreements to secure customers' 
agreements to submit to a DCM's jurisdiction. Accordingly, although 
DCMs would be required to implement proposed Sec.  38.151(a) either by 
rule and/or modification of connection agreements by the effective date 
of the final rule, the proposed rule permits DCMs to allow their 
clearing firms up to 180 days to secure the necessary modifications to 
existing customer agreements.
    Proposed Sec.  38.151(b) requires that a DCM provide its members, 
market participants and ISVs with impartial access to its markets and 
services. This includes: 1) access criteria that are impartial, 
transparent, and applied in a non-discriminatory manner, and 2) 
comparable fee structures for members, market participants and 
independent software vendors (``ISV''),\50\ receiving equal access to, 
or services from the DCM. The purpose of the proposed impartial access 
requirements is to prevent DCMs from using discriminatory access 
requirements as a competitive tool against certain participants. Access 
to a DCM should be based on the financial and operational soundness of 
a participant, rather than discriminatory or other improper 
motives.\51\ Any participant should be able to demonstrate financial 
soundness either by showing that it is a clearing member of a DCO that 
clears products traded on that DCM or by showing that it has clearing 
arrangements in place with such a clearing member. Furthermore, 
granting impartial access to participants that satisfy a DCM's access 
requirements may enhance the DCM's liquidity and the overall 
transparency of the swaps and futures markets.
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    \50\ The Commission notes that examples of independent software 
vendors include: smart order routers, trading software companies 
that develop front-end trading applications, and aggregators of 
transaction data. Smart order routing generally involves scanning of 
the market for the best-displayed price and then routing orders to 
that market for execution. Software that serves as a front-end 
trading application is typically used by traders to input orders, 
monitor quotations and view a record of the transactions completed 
during a trading session. Aggregators of transaction data provide 
access to news, analytics and execution services. The Commission 
believes that transparency and trading efficiency would be enhanced 
as a result of innovations in this field for market services. For 
instance, certain providers of market services with access to 
multiple trading systems or platforms could provide consolidated 
transaction data from such trading systems or platforms to market 
participants.
    \51\ The Commission believes that the requirement to provide 
impartial access requires DCMs to avoid the creation of exclusive 
membership standards that focus on high net worth. Therefore, any 
participant should be able to demonstrate financial soundness either 
by showing that it is a clearing member of a DCO that clears 
products traded on that DCM or by showing that it has clearing 
arrangements in place with such a clearing member.
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    A DCM can satisfy the requirement that membership and participation 
criteria are impartial, transparent, and non-discriminatory by 
establishing clear and impartial guidelines and procedures for granting 
access to its facilities and publishing such guidelines and procedures 
on its Web site. Such requirements may establish different categories 
of market participants, but may not discriminate within a particular 
category. Fee structures may differ among categories if such fee 
structures are reasonably related to the cost of providing access or 
services to a particular category. For example, if a certain category 
requires greater information technology or administrative expenses on 
the part of the DCM, then a DCM may recoup those costs in establishing 
fees for that category of member or market participant.
    Proposed Sec.  38.151(c) (Limitations on Access) requires a DCM to 
establish and impartially enforce rules governing any decision by the 
DCM to deny, suspend, or permanently bar a member's or market 
participant's access to the contract market. While paragraph (b) of 
proposed Sec.  38.151 requires impartiality in a DCM's decision to 
grant access, paragraph (c) addresses the converse situation where a 
DCM wishes to deny access, or to revoke the access of members or market 
participants who already possess it. Proposed Sec.  38.151(c) gives 
specific examples of when such situations might arise, including DCM 
disciplinary proceedings or emergency actions. As with decisions to 
grant access, any decision by a DCM to deny, suspend, or permanently 
bar a member's or market participant's access to the DCM must be 
impartial and applied in a non-discriminatory manner.
ii. Proposed Sec.  38.152--Abusive Trading Practices Prohibited
    Proposed Sec.  38.152 requires that a DCM prohibit enumerated 
abusive trading practices. The listed practices are a compilation of 
abusive trading practices that DCMs already prohibit. A DCM permitting 
intermediation must prohibit specific trading practices, including 
trading ahead of customer orders, trading against customer orders, 
accommodation trading, and improper cross-trading. Specific trading 
practices that must be prohibited by all DCMs include front-running, 
wash trading, pre-arranged trading, fraudulent trading, money passes 
and any other trading practices that the DCM deems to be abusive. In 
addition, a DCM also must prohibit any other manipulative or disruptive 
trading practices prohibited by the CEA or by the Commission pursuant 
to Commission regulation.\52\
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    \52\ Section 747 of the Dodd-Frank Act amends Section 4c(a) of 
the CEA by adding three disruptive practices which make it: unlawful 
for any person to engage in any trading, practice, or conduct on or 
subject to the rules of a registered entity that-
    (A) Violates bids or offers;
    (B) Demonstrates intentional or reckless disregard for the 
orderly execution of transactions during the closing period; or
    (C) Is, is of the character of, or is commonly known to the 
trade as, `spoofing' (bidding or offering with the intent to cancel 
the bid or offer before execution).
---------------------------------------------------------------------------

iii. Proposed Sec.  38.153--Capacity To Detect and Investigate Rule 
Violations
    Proposed Sec.  38.153 is based on the current application guidance 
for Core Principle 2.\53\ The proposed rule requires that a DCM have 
arrangements and resources for effective rule enforcement. This 
includes the authority to collect information and examine books and 
records of members and market participants.\54\ By its terms, Core 
Principle 2 requires a DCM to have, in addition to appropriate 
resources for trade practice surveillance

[[Page 80580]]

programs, appropriate resources to enforce all of its rules.
---------------------------------------------------------------------------

    \53\ 17 CFR part 38, App. B, Core Principle 2, Application 
Guidance at ] 1.
    \54\ The language in the current application guidance requires 
that a DCM ``have arrangements and resources for effective trade 
practice surveillance programs[.]'' Id.
---------------------------------------------------------------------------

    The proposed rule also requires a DCM to have the authority to 
examine books and records for all market participants rather than 
limiting that authority to ``non-intermediated market participants'' as 
such authority was limited in the former application guidance. A DCM 
can best administer its compliance and rule enforcement obligations if 
it has the ability to reach the books and records of all market 
participants, rather than a subset of market participants.
iv. Proposed Sec.  38.154--Regulatory Services Provided by a Third 
Party
    The CEA provides that a DCM may comply with applicable core 
principles by delegating relevant functions to a registered futures 
association or another registered entity.\55\ The Commission also has 
described acceptable ``contracting'' arrangements for the performance 
of core principle functions by third-parties.\56\ In this context, the 
term ``contracting'' implies a lesser transference of authority to the 
third-party than does ``delegating.'' In all cases, however, the 
Commission has specified, as required under the CEA,\57\ that DCMs 
remain responsible for carrying out any function delegated or 
contracted to a third party and that DCMs must ensure that the services 
received will enable them to remain in compliance with the CEA's 
requirements.
---------------------------------------------------------------------------

    \55\ 7 U.S.C. 7a-2(b); see also, section 5c(b)(1) of the CEA, as 
amended by the Dodd-Frank Act.
    \56\ See 66 FR 42256, 42266, Aug. 10, 2001.
    \57\ See 7 U.S.C. 7a-2(b)(2); see also, Section 5c(b)(2) of the 
CEA, as amended by the Dodd-Frank Act.
---------------------------------------------------------------------------

    In recent years, the Commission has gained much experience in 
administering the delegation and contracting regime for regulatory 
services. Many DCMs, especially those that were designated after 
passage of the CFMA, employ third-party regulatory service providers to 
meet one or more core principle obligations. In administering this 
regime, the Commission has found that DCM applicants have questions as 
to the manner and degree to which their staffs must remain involved in 
regulatory decisions when they utilize third-party providers. 
Accordingly, the Commission is proposing new Sec.  38.154 to supplement 
its previous guidance on delegation and contracting arrangements to 
clarify its expectations in this regard. The proposed rule is equally 
applicable to delegations and contracting, and to arrangements DCMs 
have with regulatory service providers that are registered futures 
associations or other registered entities. For purposes of proposed 
Sec.  38.154, the applicable self-regulatory functions include: trade 
practice surveillance; market surveillance; real-time market 
monitoring; investigations of possible rule violations; and 
disciplinary actions.
    The proposed rule requires that DCMs utilizing third-party 
regulatory service providers must ensure that their providers have 
sufficient capacity and resources to render timely and effective 
regulatory services. The DCM also must oversee the quality of the 
contracted regulatory services and must retain exclusive authority with 
respect to certain regulatory decisions. These regulatory decisions 
include cancellation of trades, the issuance of disciplinary charges 
against members or market participants, and denials of access to the 
trading platform for disciplinary reasons. Conversely, the proposed 
rule also specifies that a decision to open an investigation of a 
possible rule violation must be made solely by a regulatory service 
provider, and all instances where a DCM's actions differ from those 
recommended by its regulatory provider must be documented and explained 
in writing.
v. Proposed Sec.  38.155--Compliance Staff and Resources
    As noted above, Core Principle 2 requires that a DCM enforce 
compliance with its rules and have the capacity to detect, investigate, 
and sanction violations. Having adequate staff to perform a DCM's 
compliance and enforcement responsibilities is essential to the 
effectiveness of its self-regulatory programs, including market 
surveillance, audit trail, trade practice surveillance, and 
disciplinary programs.
    A DCM's ability to enforce speculative limits, monitor for 
manipulation, complete timely investigations, conduct annual open 
outcry and electronic audit trail reviews, as well as perform other 
regulatory duties, is compromised if a DCM does not have sufficient 
staff. Thus, examining the size and experience of a DCM's compliance 
staff is a critical component of RERs carried out by Commission staff. 
In several RERs, staff has recommended, and the Commission has 
accepted, findings that DCMs: (1) increase their compliance staff 
levels, and (2) monitor the size of their staffs and increase the 
number of staff appropriately as trading volume increases, new 
responsibilities are assigned to compliance staff, or internal reviews 
demonstrate that work is not completed in an effective or timely 
manner.\58\
---------------------------------------------------------------------------

    \58\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (Aug. 27, 2009); Rule Enforcement Review of ICE Futures 
U.S. (Feb. 2, 2010); and Rule Enforcement Review of the Chicago 
Board of Trade and the Chicago Mercantile Exchange (Sep. 13, 2010).
---------------------------------------------------------------------------

    Those recommendations have formed the basis for proposed Sec.  
38.155. The proposed rule requires that a DCM maintain sufficient 
compliance resources to conduct effective audit trail reviews, trade 
practice surveillance, market surveillance, and real-time monitoring. 
It also requires that a DCM monitor its staff size annually to ensure 
that it is appropriate to effectively perform those functions. Staff 
size also must be sufficient to address market or trading events and to 
complete investigations in a timely manner.
    The Commission is not proposing that staff size be determined based 
on a specific formula. Rather, the Commission proposes to leave to the 
discretion of each individual DCM to determine the size of the staff it 
needs to effectively perform its self-regulatory responsibilities. In 
making this determination, the proposed rule requires that a DCM take 
into account specific facts and circumstances (e.g., volume, the number 
of new contracts, etc.), as well as any other factors suggesting the 
need for increased resources. Factors that may suggest the need for 
increased compliance resources are a prolonged surge in trading volume 
or a prolonged period of price volatility. A DCM must have sufficient 
staff to address unusual or unanticipated events while continuing to 
effectively conduct its routine self-regulatory duties.
vi. Proposed Sec.  38.156--Automated Trade Surveillance System
    All currently active DCMs, or their third-party service providers, 
maintain automated surveillance systems to conduct trade practice 
surveillance. These systems vary in degree of sophistication, but 
typically generate alerts on a trade date plus one day (T+1) basis to 
help staff focus on potential violations and anomalies found in trade 
data.\59\ They also provide a DCM's compliance staff the ability to 
sort and query voluminous amounts of data. In performing their 
surveillance responsibilities, DCMs engage in various analyses to 
profile trading activity and conduct investigations to detect and 
prosecute possible trading abuses. These functions all require the 
collection of order and trade data and the ability to

[[Page 80581]]

process that data in various ways for analysis.
---------------------------------------------------------------------------

    \59\ These systems typically differ from those systems used for 
real-time market monitoring. The requirements for real-time market 
monitoring can be found in proposed Sec.  38.157.
---------------------------------------------------------------------------

    Proposed Sec.  38.156 reflects the substantial growth in U.S. 
futures trading volume since the CFMA was adopted in 2000. The 
approximate trading volume for U.S. futures exchanges (including 
futures and options on futures) was 596 million contracts in 2000, 2 
billion contracts in 2005, and 3.2 billion contracts in 2010. In view 
of this growth in volume, combined with new participants in the 
markets, such as high frequency traders, it is critical that DCMs have 
automated tools that, at a minimum, have the capability to generate 
alerts, profile trading activity, and sort and query data to conduct 
trade practice surveillance. The Commission has found, in performing 
its oversight responsibility of monitoring the markets to ensure market 
integrity and customer protection, that effectively monitoring this 
large amount of volume requires automated tools.\60\ A DCM's automated 
surveillance system must have specific characteristics for it to be 
able to detect and prosecute the abusive trading practices enumerated 
in proposed Sec.  38.152. A DCM's automated surveillance system must 
maintain all trade and order data, including order modifications and 
cancellations. The system must process this data on a T+1 basis. In 
addition, a DCM's automated trade surveillance system must provide 
users with the ability to compute, retain and compare trading 
statistics; compute profit and loss; and reconstruct the sequence of 
trading activity.
---------------------------------------------------------------------------

    \60\ In this regard, the Commission is in the midst of modifying 
its own automated surveillance systems for both trade practice 
surveillance and market surveillance.
---------------------------------------------------------------------------

vii. Proposed Sec.  38.157--Real-time Market Monitoring
    Proposed Sec.  38.157 codifies existing practices at DCMs for real-
time monitoring of electronic trading. The practices codified in 
proposed Sec.  38.157 reflect the growth of electronic trading in the 
U.S. futures markets, as well as the Commission's experience in 
designating new contract markets since passage of the CFMA. All DCMs 
that were designated post-CFMA trade exclusively on electronic trading 
platforms.
    The purpose of real-time monitoring of electronic trading is to 
ensure orderly trading and to identify and correct any market or system 
anomalies promptly. The proposed rule requires that any DCM price 
adjustment or trade cancellation process be clear and transparent to 
the market and subject to clear, fair and publicly-available standards.
viii. Proposed Sec.  38.158--Investigations and Investigation Reports
    Proposed Sec.  38.158 is largely a compilation of requirements 
found in Sec. Sec.  8.06 and 8.07 of the Commission's regulations, with 
some modifications. Paragraph (a) of the proposed rule requires that a 
DCM have procedures to conduct investigations of possible rule 
violations. Paragraph (b) requires that an investigation be completed 
within a timely manner. A timely manner is defined to be 12 months 
after an investigation is opened, absent mitigating circumstances. This 
differs from Sec.  8.06(b) of the Commission's regulations, which 
provides that an investigation be ``completed within four months, 
unless significant reasons exist to extend it beyond such period.'' In 
its experience in conducting RERs, the Commission has found that while 
simple, straight-forward investigations typically are completed in less 
than four months, many DCM investigations involve fact patterns 
requiring more in-depth and sophisticated analysis. Depending on the 
complexity of a matter, an investigation frequently may take between 
four and 12 months to complete.
    While it is not typical for an investigation to take longer than 
one year to complete, certain circumstances may justify an 
investigation taking longer than one year. These include the complexity 
of the investigation, the number of firms or individuals involved, the 
number of potential violations, the amount of trade data requiring 
analysis and, in some instances, the amount of video recordings to be 
reviewed and analyzed.\61\
---------------------------------------------------------------------------

    \61\ See Rule Enforcement Review of ICE Futures U.S. (Feb. 2, 
2010), and Rule Enforcement Review of the Chicago Board of Trade and 
the Chicago Mercantile Exchange (Sep. 13, 2010). Some exchanges, 
such as CBOT and CME, have video cameras on their open outcry 
trading floors.
---------------------------------------------------------------------------

    Paragraphs (c) and (d) of proposed Sec.  38.158 set forth the 
elements and information that must be included in an investigation 
report when there is or there is not a reasonable basis for finding a 
rule violation. While the proposed language is similar to Sec. Sec.  
8.07(a) and (b) of the Commission's regulations, there are two notable 
differences.
    First, proposed Sec.  38.158(c) requires that when DCM compliance 
staff believes there is a reasonable basis for finding a violation, the 
investigation report must include the potential wrongdoer's 
disciplinary history. Second, proposed Sec.  38.158(d) requires that if 
a DCM's compliance staff recommends that a warning letter be issued, 
the investigation report must also include the potential wrongdoer's 
disciplinary history.\62\ Requiring disclosure of a member's or market 
participant's prior disciplinary history in the above-described 
circumstances is consistent with recommendations made in RERs.\63\ The 
Commission believes that prior disciplinary history is critical 
information that a disciplinary committee should consider when either 
issuing a warning letter or assessing an appropriate penalty as part of 
any settlement decision or hearing.\64\ In practice, when a DCM's 
compliance department believes there is a reasonable basis to find a 
violation, the investigation report is forwarded to a disciplinary 
committee for action. Therefore, the Commission believes that the 
investigation report is the most logical place to include disciplinary 
history.
---------------------------------------------------------------------------

    \62\ In some instances, even though there is not sufficient 
evidence to recommend disciplinary action, a DCM's compliance staff 
may believe that a rule violation occurred.
    \63\ See 2000 Rule Enforcement Review of the New York Mercantile 
Exchange.
    \64\ As noted below in the discussion of proposed Sec.  
38.158(c), a DCM's disciplinary committee should review a member's 
complete disciplinary history when determining appropriate sanctions 
and impose meaningful sanctions on members who repeatedly violate 
the same or similar rules to discourage recidivist activity.
---------------------------------------------------------------------------

    Proposed Sec.  38.158(e) provides that a DCM may authorize its 
compliance staff to issue a warning letter or to recommend that a 
disciplinary committee issue a warning letter. The proposed rule is 
substantively identical to Commission Sec.  8.07(c), except that it 
prohibits a DCM from issuing more than one warning letter for the same 
violation during a rolling 12-month period. Currently, many DCMs use 
summary fine programs to enforce their audit trail rules. Typically, 
such programs allow compliance staff to issue summary fines for trade 
timing, order ticket and trading card violations. Such summary fine 
schemes generally start with a warning letter for the first offense. 
While a warning letter may be appropriate for a first-time violation, 
the Commission does not believe that more than one warning letter in a 
rolling 12-month period for the same or similar violation is ever 
appropriate. A policy of issuing repeated warning letters, rather than 
issuing meaningful sanctions, to members and market participants who 
repeatedly violate the same or similar rules denigrates the 
effectiveness of a

[[Page 80582]]

DCM's rule enforcement program.\65\ The proposed rule is consistent 
with what Commission staff has advised DCM applicants and 
recommendations made in RERs.\66\
---------------------------------------------------------------------------

    \65\ For purposes of this rule, the Commission does not consider 
a ``reminder letter'' or such other similar letter to be any 
different than a warning letter.
    \66\ See 1998 Rule Enforcement Review of Kansas City Board of 
Trade; and, Rule Enforcement Review of the Minneapolis Grain 
Exchange (Aug. 27, 2009).
---------------------------------------------------------------------------

ix. Proposed Sec.  38.159--Ability To Obtain Information
    Proposed Sec.  38.159 expands on the Core Principle 2 requirement 
that a DCM have the ability and authority to obtain necessary 
information to perform its rule enforcement obligations, including the 
capacity to carry out any international information sharing agreements 
required by the Commission. The proposed rule provides that information 
sharing agreements can be established with other DCMs or SEFs, or that 
the Commission can act in conjunction with a DCM to carry out such 
information sharing. This language is virtually identical to the 
language found in the guidance for former Designation Criterion 8.\67\
---------------------------------------------------------------------------

    \67\ 17 CFR Part 38, App. A, Designation Criterion 8, Guidance.
---------------------------------------------------------------------------

x. Proposed Sec.  38.160--Additional Rules Required
    Proposed Sec.  38.160 requires a DCM to adopt and enforce any 
additional rules that it believes are necessary to comply with the 
requirements of this subpart C.
3. Subpart D--Contracts Not Readily Subject to Manipulation
    The Dodd-Frank Act did not make any amendments to current Core 
Principle 3--Contracts Not Readily Subject to Manipulation. 
Historically, DCMs complied with the requirements of Core Principle 3 
by using as guidance the provisions of Guideline No. 1, contained in 
Appendix A to part 40. The Commission proposes certain revisions to the 
former Guideline No. 1, including: (1) Amending the provision to 
include swap transactions, (2) re-titling the guidance as 
``Demonstration of compliance that a contract is not readily 
susceptible to manipulation,'' and (3) redesignating the provision as 
Appendix C of part 38. Proposed Sec.  38.201 refers applicants and DCMs 
to the guidance in Appendix C to part 38 for purposes of demonstrating 
to the Commission their compliance with the requirements of Sec.  
38.200. Proposed guidance under Appendix C to part 38 would replace 
Guideline No. 1 under Appendix A to part 40.
    The amended guidance provides greater detail to DCMs regarding the 
relevant considerations in demonstrating compliance with Core Principle 
3 when designing a contract and submitting supporting documentation and 
data to the Commission at the time the DCM submits: (1) The terms and 
conditions of a new contract under Sec. Sec.  40.2 or 40.3, or (2) 
amendments to terms and conditions under Sec. Sec.  40.5 or 40.6.
    In general, the guidance provides that the settlement or delivery 
procedures adopted by a DCM for a futures contract should reflect the 
underlying cash market. The objective is to ensure that a given futures 
contract is not readily susceptible to manipulation and that it will 
provide a reliable pricing basis and promote cash/futures price 
convergence. Accordingly, the terms and conditions should conform to 
prevailing commercial practices and provide for adequate deliverable 
supply.
    For cash-settled contracts, the cash-settlement procedure should be 
based on a reliable price reference series that accurately reflects the 
underlying market value, is not readily susceptible to manipulation, 
and is commonly used by industry/market participants as a price 
reference. Therefore, the calculation methodology of the price 
reference series, if applicable, must be submitted as supporting 
documentation. In that regard, for a price reference series that is 
based on an index or survey of prices or rates, this would include the 
index or survey methodology used to determine the level of the index 
used as the price reference. Furthermore, the views and opinions of 
prospective market users of the contracts should be given considerable 
weight in the contract design process. The more accurately a listed 
contract's terms and conditions reflect the underlying cash market in 
that commodity, the more likely the contract will perform the intended 
risk management and/or price discovery functions. Finally, a DCM should 
ensure that the terms and conditions of listed contracts remain 
consistent with the guidance set forth herein. These concepts are set 
forth in the guidance in Appendix C to part 38.
    The guidance in Appendix C to part 38 is comprised of best 
practices that were developed over the past three decades by the 
Commission and other market regulators in their review of product 
submissions. The Commission first adopted a Guideline for product 
submissions on November 3, 1982 \68\ and since then has modified it 
from time to time. Furthermore, the Commission's Guideline served as 
the basis for ``Guidance on Standards of Best Practice for the Design 
and/or Review of Commodity Contracts,'' endorsed by the International 
Organization of Securities Commissioners (``IOSCO'') in its Tokyo 
Communiqu[eacute] (October 1997).\69\ The Guidance recognizes that the 
proper design of the terms and conditions of contracts reduces the 
susceptibility of such contracts to market abuses, including 
manipulation, and enhances the economic utility of such contracts to 
commercial users. Accordingly, the Guidance for designing futures 
contracts focuses on such issues as a contract's economic utility 
(i.e., a contract should meet risk management needs of potential users 
and/or promote price discovery of the underlying commodity), the 
contract's correlation with the cash market (i.e., the contract terms 
and conditions generally should reflect the operation of the underlying 
cash market and avoid impediments to delivery), a contract's settlement 
and delivery reliability (i.e., the settlement and delivery procedures 
should reflect the underlying cash market and promote price 
convergence), the contract's responsiveness to the views of potential 
market users, and the contract's transparency (i.e., the contract's 
terms and conditions, as well as relevant information concerning 
delivery and pricing, should be readily available to market authorities 
and to market users).
---------------------------------------------------------------------------

    \68\ See 47 FR 49832, 49838, Nov. 3, 1982.
    \69\ See Tokyo Commodity Futures Markets Regulators' Conference 
(October, 1997), http://www.cftc.gov/ucm/groups/public/@internationalaffairs/documents/file/oia_tokyorpt.pdf (last visited 
Oct. 25, 2010).
---------------------------------------------------------------------------

    Appendix C to part 38 is intended to act as a source for new and 
existing DCMs to reference for best practices when developing new 
products to list for trading. Specifically, Appendix C to part 38 
provides guidance regarding: (1) The forms of supporting information a 
new contract submission should include; (2) how to estimate deliverable 
supplies; (3) the contract terms and conditions that should be 
specified for physically delivered contracts; (4) how to demonstrate 
that a cash-settled contract is reflective of the underlying cash 
market, is not readily subject to manipulation or distortion, and is 
based on a cash price series that is reliable, acceptable, publicly 
available and timely; (5) the contract terms and conditions that should 
be specified for cash-settled contracts; (6) the requirements for 
options on futures contracts; (7) the terms and conditions for non-
price based futures contracts; and (8) the terms and conditions for

[[Page 80583]]

swap contracts. Currently, DCMs generally conduct market research in a 
manner discussed in Appendix C.
4. Subpart E--Prevention of Market Disruption
    The Dodd-Frank Act amended current Core Principle 4 by: (i) 
Changing the title of the core principle from ``Monitoring of Trading'' 
to ``Prevention of Market Disruptions;'' and (ii) specifying the 
methods and procedures DCMs must employ in discharging their 
obligations under Core Principle 4. The amendments to Core Principle 4 
emphasize that DCMs must take an active role, not only in monitoring 
trading activities within their markets, but in preventing market 
disruptions. Accordingly, the proposed rules under subpart E of part 38 
codify the relevant provisions of the current Application Guidance and 
Acceptable Practices for Core Principle 4 in current Appendix B to part 
38, and include new requirements that clarify and strengthen a DCM's 
responsibilities under the amended core principle.
i. Proposed Sec.  38.251--General Requirements
    As noted above, the Dodd-Frank Act amended Section 5(d)(4) of the 
CEA by adding new language to Core Principle 4 to require DCMs to 
conduct real-time monitoring of trading and to have the ability to 
comprehensively and accurately reconstruct trading.\70\ Accordingly, 
proposed Sec.  38.251 (General Requirements) would require that the DCM 
have the ability to conduct real-time monitoring of trading and 
comprehensive and accurate trade reconstructions. Intra-day trade 
monitoring must include the capacity to detect abnormal price 
movements, unusual trading volumes, impairments to market liquidity, 
and position-limit violations.
---------------------------------------------------------------------------

    \70\ See Section 735 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    As noted above in its discussion of the need for automated tools in 
connection with Core Principle 2 requirements, the Commission believes 
that it would be difficult, if not impossible, to monitor for market 
disruptions in contract markets with high transaction volume and a 
large number of trades unless the DCM has installed automated trading 
alerts to detect many types of potential violations of exchange or 
Commission rules. Accordingly, the Commission proposes in Sec.  38.251 
to require that, where the DCM cannot reasonably demonstrate that its 
manual processes are effective in detecting and preventing abuses, the 
DCM must implement automated trading alerts to detect potential 
problems.
    We invite comment on whether in any rule the Commission may adopt 
in this matter DCMs should be required to monitor the extent of high 
frequency trading, and whether automated trading systems should include 
the ability to detect and flag high frequency trading anomalies.
ii. Proposed Sec.  38.252--Additional Requirements for Physical 
Delivery Contracts
    The Commission has observed a number of physically-delivered 
futures contracts where the convergence of the futures price and the 
cash market price of the underlying commodity have been 
problematic.\71\ Price convergence refers to the process whereby the 
price of a physically-delivered futures contract converges to the spot 
price of the underlying commodity, as the futures contract nears 
expiration (a cash-settled contract, by definition, converges to the 
underlying price series at expiration). The hedging effectiveness of a 
physically-delivered futures contract depends in part upon the extent 
to which the futures price reliably converges to the comparable cash 
market price, or to a predictable differential to the comparable cash 
market price. The delivery mechanism for physically-delivered futures 
contracts is the critical link that drives price convergence. To the 
extent that delivery of a commodity at futures expiration occurs and 
the delivered commodity is merchandised in the physical marketing 
channel, arbitrage should ensure that the price of the futures contract 
converges to the price of the commodity in the physical marketing 
channel. Impediments to futures delivery, or the delivery of an 
instrument that permits a long futures position holder to defer moving 
the physical commodity into normal marketing channels, may weaken the 
crucial link between cash markets and the futures market, resulting in 
a lack of reliable price convergence.\72\
---------------------------------------------------------------------------

    \71\ The Commission notes that the lack of convergence and its 
adverse impact on the ability to effectively hedge in some 
agricultural futures markets has been the subject of several 
meetings of the Commission's Agricultural Advisory Committee. Where 
there is a lack of convergence, this has resulted in extremely weak 
bases, i.e., cash prices well below equivalent futures prices, 
disadvantaging short hedgers and resulting in abnormally large 
quantities of futures deliveries that diverted grain from normal 
commercial channels and tied up warehouse space. The lack of 
convergence likely sends the wrong price discovery signals to the 
market. See, Materials from Meeting of the CFTC's Agricultural 
Advisory Committee (AAC) (October 29, 2009), http://www.cftc.gov/About/CFTCCommittees/AgriculturalAdvisory/aac_102909agenda.html; 
see also, the AAC Subcommittee on Convergence in Agricultural 
Commodity Markets Report and Recommendations (October 29, 2009), 
http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/reportofthesubcommitteeonconve.pdf.
    \72\ For example, specifying a shipping certificate with an 
indefinite life as the futures delivery instrument that permits a 
long futures position holder to avoid taking delivery in the 
physical marketing channel, which, in certain circumstances, may 
result in weak or erratic convergence between the futures price and 
the cash price.
---------------------------------------------------------------------------

    Therefore, for physical delivery contracts, proposed Sec.  38.252 
specifically requires that, among other things, DCMs must monitor each 
contract's terms and conditions as to whether there is convergence of 
the futures price to the cash price of the underlying commodity and 
take meaningful corrective action, including to address conditions that 
interfere with convergence, or if appropriate, change contract terms 
and conditions, when lack of convergence impacts the ability to use the 
markets for making hedging decisions and for price discovery.
    The Commission requests comments on what other factors, in addition 
to the delivery mechanism, a DCM should be required to consider in 
determining whether convergence is occurring.
iii. Proposed Sec.  38.253--Additional Requirements for Cash-Settled 
Contracts
    Over the past several years, there has been a growth in markets 
that are linked, for example, where the settlement price of one market 
is linked to the prices established in another market. As a result, 
traders may have incentives to disrupt or manipulate prices in the 
reference market in order to influence the prices in the linked market. 
Accordingly, proposed Sec.  38.253 would require that, where a DCM 
contract is settled by reference to the price of a contract or 
instrument traded in another venue, including a price or index derived 
from prices on another exchange, the DCM must have rules that require 
the traders on the DCM's market to provide the DCM with their positions 
in the reference market as the traders' contracts approach settlement. 
In the alternative, Sec.  38.253 provides that the DCM may have an 
information sharing agreement with the other venue or designated 
contract market.
iv. Proposed Sec.  38.254--Ability To Obtain Information
    The current acceptable practice for Core Principle 4 provides that 
DCMs, at a minimum, should have routine access to the positions and 
trading of their market participants. To ensure that the DCM has the 
ability to properly assess

[[Page 80584]]

the potential for price manipulation, price distortions, and the 
disruption of the delivery or cash-settlement process, proposed Sec.  
38.254 provides that each DCM require that traders in their market keep 
records, including records of their activity in the underlying 
commodity and related derivative markets and contracts, and make such 
records available, upon request, to the designated contract market. The 
Commission's own market surveillance staff, which has similar authority 
to obtain information from large traders (under Sec.  18.05 for futures 
and options and proposed Sec.  20.6 for swaps), has found that access 
to such information is vital to an effective surveillance program.
v. Proposed Sec.  38.255--Risk Controls for Trading
    Proposed Sec.  38.255 requires that a DCM have effective risk 
controls to reduce the potential risk of market disruptions and ensure 
orderly market conditions. In the current futures markets, DCMs have 
implemented a variety of risk controls to avoid market disruptions 
through restrictions on order entry, including daily price limits, 
price/quantity bands, and trading pauses. Most commonly used by DCMs 
for futures contracts in physical commodities (outside of the spot 
month) and futures contracts in broad-based equity indexes (in 
coordination with circuit breakers on national security exchanges) are 
daily price limits, which restrict the total price movement allowed on 
any given trading day, calculated as a limit above and below the prior 
day's futures settlement price.\73\ Under daily price limits, futures 
can continue to trade within the limit up/down prices, but no trading 
can take place above or below the daily price limit. Some DCMs also 
have rules for the automatic expansion of the daily price limit after 
consecutive days of limit bid/offer prices. Some electronic trading 
platforms also have ``reasonability tests'' and/or ``price bands'' for 
order entry, which do not allow an order to enter the trade matching 
system if it is outside a predetermined price range or is of a 
particularly large size.\74\ Finally, some trading platforms use 
trading pauses to halt trading for a short period of time during 
certain market conditions. Trading pauses are used,\75\ most commonly, 
for trading in equity index products.
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    \73\ Option contracts on futures may have different daily price 
limits than the underlying futures.
    \74\ For example, the GLOBEX electronic trading system for the 
NYMEX crude oil futures contract generally will not accept an order 
75 points above or below the last traded price nor will it accept an 
order for a quantity larger than 999 contracts.
    \75\ The NYMEX Henry Hub Natural Gas (NG) futures has a 5 minute 
pause in trading when a daily price limit--up or down--is hit, then 
trading resumes at a higher limit. However, this provision does not 
apply during the last 60 minutes of regular trading hours. See NYMEX 
rule 220.08.
---------------------------------------------------------------------------

    The CME's GLOBEX system also has a risk control, commonly referred 
to as ``stop logic functionality,'' that implements a pause of a few 
seconds in the order matching system to protect against cascading stop 
orders--the domino effect of one stop order triggering others. The stop 
logic functionality pauses trading when the last transaction price 
would have triggered a series of stop loss orders that, if executed, 
would cause the market to trade outside of predefined values, which 
typically consist of values that are the same as the ``no bust'' range 
\76\ established for a market.
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    \76\ Under most exchanges' trade cancellation rules, trades 
considered to have been executed in error may be cancelled. Where 
the trade is within the ``no bust range'' for the specified futures 
contract, which range is determined by the exchange under its rules, 
the exchange will allow the trade to stand.
---------------------------------------------------------------------------

    In order to prevent market disruptions due to sudden volatile price 
movements, proposed Sec.  38.255 requires DCMs to have in place 
effective risk controls, including but not limited to pauses and/or 
halts to trading in the event of extraordinary price movements that may 
result in distorted prices or trigger market disruptions. Risk controls 
such as trading pauses and halts can, among other things, allow time 
for participants to analyze the market impact of new information that 
may have caused a sudden market move, allow new orders to come into a 
market that has moved dramatically, and allow traders to assess and 
secure their capital needs in the face of potential margin calls. 
Moreover, where a contract market can be a proxy or substitute for 
similar markets on the DCM or on other trading venues, including where 
a contract is based on the price of an equity security or the level of 
an equity index, risk controls should be coordinated with those on the 
similar markets or trading venues, to the extent possible. The 
desirability of coordination of various risk controls, for example, 
``circuit breakers'' in equities and their various derivatives 
including futures and options, recently has been the subject of 
discussions by regulators and the industry.
    The Commission believes that pauses and halts are effective risk 
management tools and must be implemented by DCMs to facilitate orderly 
markets. These basic risk controls also have proven to be effective and 
necessary in preventing market disruptions. The Commission requests 
comments on what types of pauses and halts are necessary and 
appropriate for particular market conditions. The Commission recognizes 
that pauses and halts are only one category of risk controls and that 
additional controls may be necessary to further reduce the potential 
for market disruptions. Such controls may include price collars or 
bands,\77\ maximum order size limits,\78\ stop loss order 
protections,\79\ kill button,\80\ and others. The Commission is 
considering mandating in this rulemaking risk controls that are 
appropriate and/or necessary. Accordingly, the Commission invites 
comments on the appropriateness of these and other controls that could 
supplement trading halts or pauses. The Commission also invites 
comments on the following additional questions:
---------------------------------------------------------------------------

    \77\ Price bands would prevent clearly erroneous orders from 
entering the trading system, including ``fat finger'' errors, by 
automatically rejecting orders priced outside of a range of 
reasonability.
    \78\ Maximum order size limitations prevent entry into the 
trading system of an order that exceeds a maximum quantity 
established by the DCM.
    \79\ Stop loss orders would be triggered if the market declines 
to a level pre-selected by the person entering the order. This 
mechanism would provide that when the market declines to the 
trader's pre-selected stop level for such an order, the order would 
become a limit order executable only down to a price within the 
range of reasonability permitted by the system, instead of becoming 
a market order.
    \80\ The kill button gives clearinghouses associated with the 
DCM the ability to delete open orders and quotes and reject entry of 
new orders or quotes in instances where a trader breaches its 
obligations with the clearinghouse. FIA Market Access Risk 
Management Recommendations, p. 10 (April 2010).
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    <bullet> What other DCM risk controls are appropriate or necessary 
to reduce the risk of market disruptions?
    <bullet> Which risk controls should be mandated and how?
vi. Proposed Sec.  38.256--Trade Reconstruction
    The Dodd-Frank Act added language to Core Principle 4 that 
designated contract markets must have the ability to comprehensively 
and accurately reconstruct all trading on its trading facility. These 
audit-trail data and reconstructions must also be made available to the 
Commission in a form, manner, and time as determined by the Commission. 
Proposed Sec.  38.256 codifies these requirements.
vii. Proposed Sec.  38.257--Regulatory Service Provider
    Proposed Sec.  38.257 provides that a designated contract market 
must comply with the regulations in this section

[[Page 80585]]

through a dedicated regulatory department, or by delegation of that 
function to a regulatory service provider, over which the designated 
market has supervisory authority.
viii. Proposed Sec.  38.258--Additional Rules Required
    Proposed Sec.  38.258 requires a DCM to adopt and enforce any 
additional rules that it believes are necessary to comply with the 
requirements of subpart E.
5. Subpart F--Position Limitations or Accountability
    Core Principle 5 under Section 5(d)(5) requires that DCMs adopt for 
each contract, as is necessary and appropriate, position limitations or 
position accountability. The Dodd-Frank Act amended Core Principle 5 by 
adding that for any contract that is subject to a position limitation 
established by the Commission pursuant to Section 4a(a) of the CEA, the 
DCM shall set the position limitation of the board of trade at a level 
not higher than the position limitation established by the Commission. 
The Federal position limits established by the Commission currently are 
codified in part 150. In a separate release, as required by the Dodd-
Frank Act, the Commission will consider replacing part 150 (Limits on 
Positions) with new part 151 (Limits on Positions) to establish Federal 
position limits for certain exempt and agricultural commodities that 
currently are not subject to Federal position limits.\81\ In that 
release, the Commission will propose to require that exchanges adopt 
their own position limits for all commodities (whether such commodities 
are subject to Federal limits or not), with an alternative of adopting 
position accountability rules in lieu of position limits for contracts 
in major currencies and certain excluded commodities. Proposed Sec.  
38.301 requires that each DCM must comply with the requirements of part 
151 that the Commission adopts in order to be in compliance with Core 
Principle 5.
---------------------------------------------------------------------------

    \81\ See CFTC Web site for additional information on the 
Position Limits rulemaking, at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm (last visited 
Dec. 14, 2010).
---------------------------------------------------------------------------

6. Subpart G--Emergency Authority
    The Dodd-Frank Act made minor, non-substantive changes to Core 
Principle 6 under Section 5(d)(6) of the CEA. Based upon its 
experience, and in recognition of the fact that DCMs may have different 
procedures and guidelines for taking emergency action, the Commission 
believes that it is appropriate to maintain an expanded version of the 
existing guidance and add an acceptable practice under its regulations 
for purposes of complying with this core principle. As a result, the 
Commission proposes to retain most of the former Application Guidance 
found in Appendix B to part 38 of the Commission's regulations, with 
some revisions and additions. Proposed Sec.  38.351 refers applicants 
and DCMs to the guidance and acceptable practices in Appendix B to part 
38 for purposes of demonstrating to the Commission their compliance 
with the requirements of subpart G. Specifically, a DCM is required to 
have rules providing it with the authority to intervene as necessary to 
maintain fair and orderly trading and to prevent or address 
manipulation or disruptive trading practices, whether the need for 
intervention arises exclusively from the DCM's own market or as part of 
a coordinated, cross-market intervention. The increased tendency for 
similar, if not identical, contracts to be traded on more than one 
venue, that in the future may include a SEF, demonstrates the 
importance of coordinated interventions. Accordingly, the Commission 
believes that there should be an increased emphasis on cross-market 
coordination of emergency actions. The guidance also provides that the 
DCM rules should include procedures and guidelines to avoid conflicts 
of interest in accordance with new provisions proposed in Sec.  40.9 
and to include alternate lines of communication and approval procedures 
in order to be able to address, in real time, emergencies that may 
arise. This latter provision is a result of the expansion of electronic 
markets and the speed of order execution. As a result of fast-paced 
trading systems, there is a need for DCMs to be able to react quickly 
to market events and intervene without delay. Thus, the proposed 
guidance acknowledges this trend with this provision. The proposed 
guidance also clarifies that the DCM must also have rules that allow it 
to take such market actions as may be directed by the Commission.
    The Commission's experience and industry practice have demonstrated 
that there are some specific best practices that should be followed, 
and these best practices are incorporated in an acceptable practice. 
Specifically, the DCM should have procedures and guidelines for 
decision-making and implementation of emergency intervention in the 
market. The DCM should have the authority to liquidate or transfer open 
positions in the market,\82\ suspend or curtail trading in any 
contract, require market participants in any contract to meet special 
margin requirements and allow it to take such market actions as the 
Commission may direct.
---------------------------------------------------------------------------

    \82\ In situations where a swap is traded on more than one 
platform, emergency action to liquidate or transfer open interest 
must be directed, or agreed to, by the Commission or Commission 
staff.
---------------------------------------------------------------------------

7. Subpart H--Availability of General Information
    Core Principle 7 requires that DCMs make available to the public 
accurate information concerning the contract market's rules and 
regulations, contracts and operations. The Dodd-Frank Act amended Core 
Principle 7 by adding a provision requiring the board of trade to make 
public the rules and specifications describing the operation of the 
DCM's electronic matching platform or trade execution facility.\83\ 
Since passage of the CFMA, the types of information and the various 
practices for providing information have become standardized across the 
industry as DCMs have adopted practices that comply with the current 
guidance and acceptable practices for Core Principle 7. Accordingly, 
proposed Sec.  38.401 in subpart H codifies these practices. In 
addition, the Commission proposes several additional provisions to 
ensure that pertinent information is available to the Commission, 
market participants and the public, as described below.
---------------------------------------------------------------------------

    \83\ This requirement, while new to the text of Core Principle 
7, was previously required as part of former Designation Criteria 4.
---------------------------------------------------------------------------

i. Proposed Sec.  38.401(a)--General
    Proposed Sec.  38.401(a) requires DCMs to have in place procedures, 
arrangements and resources for disclosing to market authorities, market 
participants and the public accurate and relevant information 
pertaining to: (i) Contract terms and conditions, (ii) rules and 
regulations applicable to the trading mechanism, and (iii) rules and 
specifications pertaining to the operation of the electronic matching 
platform or trade execution facility. Among other types of information, 
DCMs must ensure that market authorities, market participants and the 
public have available all material information pertaining to new 
product listings, new or amended governance, trading and product rules, 
or other changes to information previously disclosed by the DCM, within 
the time period prescribed in proposed Sec.  38.401. As described in 
Sec.  38.401(a) of the regulation, DCMs must provide the required 
information to market

[[Page 80586]]

participants and the public by posting such information on their Web 
site, as set forth in proposed Sec.  38.401(c).
ii. Proposed Sec.  38.401(b)--Accuracy Requirement
    Proposed Sec.  38.401(b) requires that each DCM have procedures in 
place to ensure that any information or communication with the 
Commission is accurate and complete, and further that no false or 
misleading information is submitted and that no material information is 
omitted. Similarly, each DCM must have procedures in place to ensure 
the accuracy and completeness of any information made available to 
market participants and the public, including information that is made 
available on its Web site.
iii. Proposed Sec.  38.401(c)--Notice of Regulatory Submissions
    The Commission historically has required DCMs to update their 
rulebooks upon the effectiveness of a rule amendment, product listing 
or rule certification that has been filed with the Commission. While 
proposed Sec.  38.401(c) maintains the general requirement for posting 
rules in the DCM rulebook upon their effectiveness, the Commission 
believes that market participants and the public would benefit from 
notifications of proposed rule amendments, product listing (or de-
listings) and rule certifications in advance of their taking 
effect.\84\ Accordingly, proposed Sec.  38.401(c) requires each DCM to 
post on its Web site all rule filings and submissions that it makes to 
the Secretary of the Commission. This information should be posted on 
the DCM's Web site on the same day that such information is transmitted 
to the Commission. Where applicable, the DCM Web site should make clear 
that the posted submissions are pending before the Commission. For 
example, a DCM's Web site may contain a separate Web page for 
``regulatory filings'' or ``rule certifications'' for posting 
submissions or certifications pertaining to new product listings, new 
rules, rule amendments or changes to previously-disclosed information. 
This requirement will provide market participants with advance notice 
of rule amendments and certifications, consistent with the goal of Core 
Principle 7 to make pertinent information available to market 
participants and the public. This posting requirement is in addition to 
the obligation of DCMs to update their Rulebooks upon the effectiveness 
of a rule submission or certification.
---------------------------------------------------------------------------

    \84\ This is especially relevant when the Commission determines 
to stay the certification of a DCM submission, as provided by the 
Dodd-Frank Act, for a 90-day review period, thereby triggering a 
public comment period.
---------------------------------------------------------------------------

    To the extent that a DCM requests confidential treatment of certain 
information filed or submitted to the Commission, the proposed rule 
requires the DCM to post the public portions of the filing or 
submission.
iv. Proposed Sec.  38.401(d)--Rulebook
    As noted above, consistent with the current acceptable practices 
for Core Principle 7, all DCMs must post and routinely update their 
rulebooks, which appear on their Web sites. Currently, each DCM updates 
its rulebook the day that a new product is listed or a new or amended 
rule takes effect. The vast majority of DCM Web sites also are readily 
accessible to the public and the information is available by visitors 
to the Web site without requiring registration, log-in, or user name or 
password. Proposed Sec.  38.401(d) merely codifies these existing 
practices.\85\
---------------------------------------------------------------------------

    \85\ As noted above, the requirement to maintain an accurate and 
updated rulebook does not relieve DCMs of their obligations under 
paragraph (c) to post on their Web sites all rule filings and 
submissions submitted to the Commission.
---------------------------------------------------------------------------

8. Subpart I--Daily Publication of Trading Information
    Core Principle 8 requires that DCMs make available to the public 
accurate information on settlement prices, volume, open interest, and 
opening and closing ranges for actively traded contracts on the 
contract market. The Dodd-Frank Act did not amend Core Principle 8. 
Accordingly, in proposed Sec.  38.451, the Commission reiterates the 
current acceptable practice that requires mandatory compliance with 
Sec.  16.01, ``Trading volume, open contracts, prices and critical 
dates.''
    However, in order to conform to the Dodd-Frank Act, certain changes 
were made to Sec.  16.01 regarding the information a reporting market 
will record and publish on futures and options contracts, and on swap 
and swaption contracts.
    Specifically, the Commission proposes to amend Sec.  16.01(d) to 
require reporting markets to report information in paragraphs (a)(1) 
through (6) of Sec.  16.01. Prior to the enactment of the Dodd-Frank 
Act, reporting markets were required only to report separately the 
following information enumerated in paragraphs (a)(1) through (5) of 
current Sec.  16.01 for futures and options: The option delta, where 
delta system is used, total gross open contracts, excluding from 
futures those contracts against which notices have been stopped; for 
futures, open contracts against which delivery notices have been 
stopped on that business day; the total volume of trading, excluding 
transfer trades or office trades; and the total volume of futures 
exchanged for commodities or for derivatives positions that are 
included in the total volume of trading.
    The Commission proposes to require reporting markets to also report 
to the Commission the information found in paragraph (a)(6) that is 
``the total volume of block trades that are included in the total 
volume of trading.'' Previously such information was only required to 
be reported to the public but not separately to the Commission. The 
Commission believes that having block trade volumes reported separately 
to it would be useful, particularly in analyzing whether a contract 
market is in compliance with Core Principle 9 (Execution of 
Transactions). Because reporting markets currently are required to make 
block trade volumes available to the public, it should not be an 
unreasonable burden for the reporting market to submit that information 
separately to the Commission.
    Under the Dodd-Frank Act, DCMs are able to list and trade swaps. 
Accordingly, amendments to part 16 specify the type of information that 
DCMs or SEFs must publish daily regarding the swaps contracts traded. 
Specifically, DCMs and SEFs would be required to publish for their 
swaps contracts all the information included in proposed Sec.  16.01 
(a) (1) through (6) for each trading day for each swap, class of swaps, 
swaption or class of swaptions as appropriate. For swap contracts that 
are standard-sized contracts (i.e., contracts that have a set contract 
size for all contracts), volume and open interest for swaps and 
swaptions shall be reported in terms of number of contracts traded, 
just as futures contracts currently are reported. For swap contracts 
that are non-standard-sized contracts (i.e., contracts whose contract 
size can vary for each transaction) the volume and open interest should 
be reported in terms of total notional value traded for that trading 
day. In addition, Sec.  16.01(b) is amended to require each DCM or SEF 
to publish for each trading day, by commodity and contract month or by 
tenor of the swap, the opening price, high price, low price and 
settlement price of the swap or swaption contract. The Commission is 
seeking comments on end-of-day price reporting for swaps. Specifically, 
the Commission seeks comments on the following issues:
    <bullet> For interest rate swaps, because the tenor on an interest 
rate swap can be one of thousands of possible periods, what would be an 
appropriate manner

[[Page 80587]]

to display end-of-day prices for each interest rate swap?
    <bullet> Would certain end-of-day swap price reporting be more 
meaningful than others? If so, which methods of price reporting would 
be more meaningful and why?
    <bullet> Would certain end-of-day swap price reporting be 
misleading? If so, which methods of price reporting would be misleading 
and why?
9. Subpart J--Execution of Transactions
    The Dodd-Frank Act amended Core Principle 9 to require, among other 
things, that a board of trade must provide a competitive, open and 
efficient market and mechanism for executing transactions ``that 
protects the price discovery process of trading in the centralized 
market of the board of trade.\86\ The amended core principle also 
provides that off exchange transactions are permitted for bona fide 
business purposes if authorized by the board of trade's rules.\87\
---------------------------------------------------------------------------

    \86\ 7 U.S.C. 7; see also Section 5(d)(9) of the CEA, as amended 
by the Dodd-Frank Act.
    \87\ This language was taken from former Designation Criterion 
3.
---------------------------------------------------------------------------

    In assessing a DCM's initial and ongoing compliance with Core 
Principle 9, the Commission currently considers several criteria, 
including, among others, the methodology and mechanisms of the DCM's 
trading system to ensure fair and orderly trading and the rules the DCM 
may have for permissible transactions executed off the centralized 
market. In so doing, the Commission has looked at Sec.  1.38 of the 
Commission's regulations, which sets forth a requirement that all 
purchases and sales of a commodity for future delivery or a commodity 
option on or subject to the rules of a DCM should be executed by open 
and competitive methods. There is an exception to this ``open and 
competitive'' requirement if the transaction is in compliance with the 
rules of the DCM that specifically provide for the non-competitive 
execution of such transactions.\88\ In addition, the current guidance 
for Core Principle 9 provides that a competitive, open and efficient 
market and mechanism for execution of transactions includes: (1) The 
DCM's methodology for entering orders and executing transactions; (2) 
that appropriate objective testing and review of automated systems 
should occur initially and periodically to ensure proper system 
functioning, adequate capacity and security; and (3) that a DCM that 
determines to allow block trades should ensure that such trades do not 
operate in a manner that compromises the integrity of prices or price 
discovery in the relevant market.\89\
---------------------------------------------------------------------------

    \88\ The Commission notes that the CFMA, which was enacted after 
promulgation of Sec.  1.38, modified Section 3 of the current CEA to 
require that transactions subject to the CEA provide ``a means for 
managing and assuming price risks, discovering prices, or 
disseminating pricing information through trading in liquid, fair 
and financially secure trading facilities.'' The CFMA also 
specifically listed some of the types of transactions that could be 
executed off the centralized market, including exchange of futures 
for swaps, and allowing 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 a contract market or derivatives clearing organization. 
7 U.S.C. 7(b)(3).
    \89\ The current acceptable practice for Core Principle 9 
identifies an example of the type of party that would be an 
acceptable party to carry out the testing and review of an 
electronic trading system. The Commission notes that under its 
proposed rulemaking, all rules relating to the type of testing and 
review required for trading systems would be set forth under new 
Core Principle 20, System Safeguards, discussed infra at Section 
II.D.20.
---------------------------------------------------------------------------

    In light of the Dodd-Frank Act amendments to Core Principle 9 and 
the Commission's experience in implementing Core Principle 9 since 
enactment of the CFMA, the Commission proposes to adopt certain 
regulations in subpart J of the Commission's regulations to establish 
requirements that a DCM must meet in order to comply with amended Core 
Principle 9. Specifically, new regulations are proposed to clarify the 
amended core principle's mandate requiring the protection of the price 
discovery function of trading on a DCM's centralized market. Other 
regulations codify practices that have become standard and adopted over 
the years by the industry. In addition, the Commission re-proposes 
certain guidance and acceptable practices that were published by the 
Commission in the September 2008 Notice of Proposed Rulemaking 
pertaining to ``Execution of Transactions: Regulation 1.38 and Guidance 
on Core Principle 9'' \90\ (hereafter ``2008 Core Principle 9 Proposed 
Rulemaking'') for purposes of informing DCMs of how they may comply 
with certain other aspects of amended Core Principle 9.\91\
---------------------------------------------------------------------------

    \90\ 73 FR 54097, Sep. 18, 2008. That proposed rulemaking was a 
re-proposal of some rules, guidance and acceptable practices 
pertaining to Regulation 1.38 and Core Principle 9, initially 
proposed on July 1, 2004. See 69 FR 39880, July 1, 2004. There were 
no final rulemakings to either of these proposals.
    \91\ In 2009, before those proposed rules were finalized, 
Congress initiated the legislative process that culminated in the 
Dodd-Frank Act. Accordingly, a number of the proposed rules 
contained in this release consist of regulations that were initially 
proposed in the 2008 Core Principle 9 Proposed Rulemaking, with 
relevant updates.
---------------------------------------------------------------------------

    In short, the Commission proposes to adopt the following 
regulations, guidance and acceptable practices for Core Principle 9, as 
amended by the Dodd-Frank Act:
    <bullet> New Sec.  38.501 proposes to codify in part 38 the 
requirements that are currently contained in Sec.  1.38 of the 
Commission's regulations, with amendments that were initially proposed 
in the 2008 Core Principle 9 Proposed Rulemaking along with relevant 
updates. Section 1.38 of the Commission's regulations would be 
eliminated.
    <bullet> New Sec.  38.502 addresses the specific requirements 
associated with protecting the price discovery function of trading on a 
DCM's centralized market as now specifically imposed by the Dodd-Frank 
Act. The proposed rule imposes: (i) Minimum requirements for trading on 
the centralized market for contracts listed on DCMs, (ii) mandatory 
delisting of contracts if the requirements of trading are not met, 
(iii) specified procedures for treatment of contracts existing prior to 
the effective date of this section, and (iv) limited exemptions for 
certain contracts that the Commission, upon a petition of the DCM, 
permits to remain listed under specified circumstances.
    <bullet> New Sec. Sec.  38.503 and 38.504 propose to codify certain 
requirements for block trades for futures and swaps and Sec.  38.505 
addresses other off-exchange transactions. These provisions codify 
practices that Commission staff has previously required and that have 
become industry practices. In particular, these proposed rules set 
forth block trade requirements for futures contracts and options, 
including who may enter into block trade transactions, conditions for 
block trades between affiliated parties, aggregation, recordkeeping and 
reporting procedures. In addition, in proposed Sec.  38.505, the 
Commission proposes to adopt rules for off-exchange transactions that 
involve exchange of derivatives for related position, specifically 
describing what constitutes a bona fide trade and reporting 
requirements for such trades. Proposed Sec.  38.504 addresses certain 
block trading requirements specifically for swaps traded on the DCM, 
and proposed Sec.  38.506 addresses transfer and office trades.
    <bullet> A new acceptable practice would provide a safe harbor 
methodology for DCMs to follow in determining the minimum size of block 
transactions for individual contracts. The acceptable practice also 
would provide a safe harbor relating to the manner of pricing block 
trades. By proposing this acceptable practice the Commission

[[Page 80588]]

recognizes the need for flexibility as the appropriate minimum size and 
pricing of block trades vary among contracts and across DCMs.
i. Proposed Sec.  38.501--General Requirements
    Current Sec.  1.38 of the Commission's regulations requires, 
subject to certain exceptions, ``that all purchases and sales of a 
commodity for future delivery, and of any commodity option, on or 
subject to the rules of a DCM shall be executed openly and 
competitively by open outcry or posting of bids and offers or by other 
equally open and competitive methods * * * provided, however, that this 
requirement shall not apply to transactions that are executed 
noncompetitively in accordance with written rules of the contract 
market * * *'' \92\ The 2008 Core Principle 9 Proposed Rulemaking 
proposed certain revisions to Sec.  1.38. Specifically, in addition to 
simplifying the language, the 2008 Core Principle 9 Proposed Rulemaking 
proposed to update the language of Sec.  1.38 to more accurately 
identify the types of transactions that may be executed off a contract 
market's centralized market under the rules of a DCM.\93\ The 2008 Core 
Principle 9 Proposed Rulemaking also would make it clear that under 
Sec.  1.38, DCMs may self-certify (not just seek approval for) rules or 
rule amendments related to transactions off the centralized 
marketplace. Both of these changes were proposed to the language of 
regulation Sec.  1.38 to incorporate updates made to the CEA in 2000 by 
the CFMA.
---------------------------------------------------------------------------

    \92\ 17 CFR 1.38 (2009).
    \93\ The proposed language for Sec.  1.38(b)(1) identified 
``transfer trades, office trades, block trades, inter-exchange 
spread transactions, or trades involving the exchange of futures for 
commodities or for derivatives positions, if transacted in 
accordance with written rules of a contract market that provide for 
execution away from the centralized market and that have been 
certified to or approved by the Commission.'' This release proposes 
updates to this list.
---------------------------------------------------------------------------

    As noted above, the existing provisions of current Sec.  1.38 will 
be incorporated in proposed Sec.  38.501, including previously proposed 
amendments, with some updates. These updates include language that adds 
to the types of transactions that may be executed off of a DCM's 
centralized market. In addition, the proposed rule replaces the term 
``exchange of futures for commodities or for derivatives positions'' 
with the term ``exchange of derivatives for a related position.'' This 
term is more descriptive of the panoply of off-exchange transactions 
currently offered by DCMs, including exchange for physicals, exchange 
for swaps, exchange for risk or exchange of futures for futures. This 
term also will encompass other types of off-exchange transactions, not 
limited to futures. Finally, because swaps may now be traded on DCMs, 
the proposed rule will reference swaps.
ii. Proposed Sec.  38.502--Minimum Centralized Market Trading 
Requirement
    As noted, the Dodd-Frank Act amended Core Principle 9 to 
specifically require that in the execution of transactions, ``the price 
discovery function of trading in the centralized market'' must be 
protected.\94\ The amended core principle recognizes that trading in 
the centralized market provides a price discovery function, and 
specifically requires that the execution of transactions be in a manner 
that protects that price discovery process.
---------------------------------------------------------------------------

    \94\ 7 U.S.C. 7; see also section 5(d)(9) of the CEA, as amended 
by the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission notes that, under the current regulatory landscape, 
some DCMs have listed contracts for the purpose of providing a clearing 
solution for privately negotiated bi-lateral swap trades or trades made 
on exempt commercial markets. The DCMs accept these trades as futures 
contracts by converting them, through their block trade or exchange-
for-swaps (or other exchange of derivatives for a related position) 
rules, to economically equivalent futures contracts in order for them 
to be cleared by their derivatives clearing organization. The vast 
majority of those contracts are not executed openly or competitively on 
the centralized market, but rather are effected away from the DCM's 
centralized market.\95\ Despite the lack of trading on the centralized 
market these contracts still manage to achieve open interest over 
sustained periods of time.
---------------------------------------------------------------------------

    \95\ Under current CEA section 4d(a)(2), funds supporting 
customer trades executed on a designated contract market must be 
segregated from other funds, including proprietary funds, of a 
future commission merchant (``FCM'') or clearinghouse. Customers 
often desire to comingle funds in this segregated account primarily 
to take advantage of lower margins due to off-setting positions. 
Current CEA section 4d(a)(2) provides a venue for achieving this by 
allowing the Commission to issue orders exempting an FCM or 
clearinghouse from the segregation requirement in appropriate 
situations. The DCM must go through the process of petitioning the 
Commission for an exemption, and providing the necessary information 
and data for the Commission to make a decision. The Commission's 
process for issuing Section 4d orders necessarily entails careful 
and measured review, and accordingly, can be time-intensive. The 
Commission believes that rather than seeking 4d orders for off-
exchange products, certain DCMs have resorted to listing those 
products as futures despite their unlikely prospects for central 
marketplace trading, to achieve the same results as the Section 4d 
process to the possible detriment of the centralized market. See 
also, section 4d(a)(2) of the CEA, as amended by the Dodd-Frank Act.
---------------------------------------------------------------------------

    A DCM that trades contracts that have a disproportionate percentage 
of their trading volume attributable to off-exchange activity and 
little or no open and competitive, centralized market trading would not 
appear to be in compliance with amended Core Principle 9. Specifically, 
where all or most transactions in a DCM contract are executed off the 
centralized market, there is no price discovery taking place on the DCM 
such that the protection of the price discovery process of trading in 
the centralized market is not satisfied.
    The Commission notes that, while amended Core Principle 9 
recognizes the primacy of trading on the centralized market for price 
discovery, it does not bar off exchange transactions. Congress 
reaffirmed that the rules of the DCM may authorize bona fide off-
exchange transactions. Thus, in implementing the provisions of the 
Dodd-Frank Act, the Commission seeks to protect the price discovery 
process of trading on the DCM's centralized market while permitting 
DCMs to authorize off-exchange transactions where necessary and 
appropriate for bona fide business purposes. Accordingly, the 
Commission's proposal provides for permissible off-exchange 
transactions, but only to the extent that such transactions do not 
compromise the price discovery process of trading in the centralized 
market. If off-exchange transactions become the exclusive or 
predominant method of establishing or offsetting positions in a 
particular market, the price discovery process in the centralized 
market will be jeopardized.
a. Minimum Centralized Market Trading Percentage Requirement
    The Commission believes that a significant amount of trading in any 
contract listed on a DCM must occur on the centralized market in order 
to meet the requirements of Core Principle 9. The Commission believes 
that setting a minimum percentage of trading that must take place on 
the centralized market is an appropriate method of implementing this 
provision in order to provide clarity and legal certainty to DCMs. 
Accordingly, the Commission is proposing to establish a minimum on-
exchange trading threshold of 85 percent.
    In considering the minimum threshold of trading on the centralized 
market, the Commission reviewed data regarding the amount of off-
exchange transactions in 570 listed DCM

[[Page 80589]]

contracts.\96\ Those contracts represented actively traded futures 
products on eight DCMs and included a wide cross-section of products 
with open interest. The data illustrated that the trading volume in the 
570 contracts could be grouped into two main categories.\97\ In one 
category, involving 410 of the contracts, mostly involving energy, 
forex and weather contracts, almost all or all of the trading over a 
three month period occurred off-exchange. As noted above, the 
Commission believes that the price discovery process in the centralized 
market is jeopardized where off-exchange transactions become the 
exclusive or predominant method of establishing or offsetting positions 
in a particular market. Since there was no centralized market trading 
in those contracts, the Commission did not consider these 410 contracts 
in its analysis of the appropriate minimum centralized market trading 
requirement. In the second largest category, involving 128 contracts 
from all asset classes which included contracts with large and small 
open interest, the average amount of off-exchange trading over the 
three-month period ranged from 0% to 15%. The Commission believes that 
this second category of contracts, where there was actual centralized 
market trading to observe, provides a reasonable basis for establishing 
a minimum centralized market trading requirement. Accordingly, from 
this second category the Commission took the upper range of the maximum 
average amount of off-exchange trading, and proposes that a maximum of 
15% of total trading volume of a contract would be an allowable amount 
of off-exchange trading in order to protect the price discovery process 
of trading on the centralized market.
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    \96\ Commission staff collected data on the amount of off-
exchange trading that took place over the three month period from 
May 2010 through July 2010, for 570 contracts listed on eight 
designated contract markets (CME, CBOT, NYMEX, COMEX, ICEUS, One 
Chicago, Kansas City Board of Trade and the Minneapolis Grain 
Exchange) and covering 10 asset classes (agricultural, alternative 
markets (i.e., environmental products), currency, energy, financial, 
index, interest rates, metal, real estate and weather). In 
collecting data, Commission staff attempted to sample a cross-
section of trading data from the eight DCMs. The data collected 
represents samples of: (i) Active contracts in the main asset 
classes (financials, energy, agricultural, index, currency, weather, 
real estate, and metals); (ii) particular contracts that 
historically have not traded on the centralized market (i.e., 
certain energy contracts, currency); (iii) commodities that as a 
group trade differently from other commodities (i.e., cocoa, 
coffee); (iv) commodities that are prominent on certain exchanges 
(i.e., wheat on the Kansas City Board of Trade and the Minneapolis 
Grain Exchange), (v) ``softs'' and (vi) other products on ICE 
Futures U.S. Commission staff began collecting data in early August 
2010 for the period May 2010 through July 2010. This time period was 
chosen because it represented the most current and straightforward 
data available at the time Commission staff began collecting data.
    \97\ A third category, consisting of a small number of contracts 
with trading volume between 15-60%, is discussed further below.
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    The Commission believes that requiring at least 85% of a contract's 
volume to be traded on the centralized market will balance the goal of 
protecting the price discovery process of trading in the centralized 
market, with the goal of allowing off-exchange transactions for bona 
fide business purposes. The Commission invites comments on the minimum 
centralized market trading percentage requirement proposed herein. In 
particular, the Commission requests that commenters providing 
alternative percentage requirements or alternative approaches also 
provide data that supports any alternative percentage or other 
approach.
b. Centralized Market Trading Percentage Calculation
    In order to determine the percentage of on and off exchange trading 
in a contract, DCMs must measure the average percentage of trading in 
each contract over a sufficient period of time. Indeed, the data 
collected by the Commission indicates that for those contracts that 
have significant trading on the centralized market, the amount of off-
exchange trading varies from day to day. The Commission proposes that a 
reasonable time period over which to measure and determine a contract's 
on-exchange trading volume is 12 months.
    Thus, for new contracts listed after the effective date of the 
minimum centralized market trading percentage requirement in 38.502(a), 
the Commission proposes that DCMs determine the amount of on-exchange 
trading in each contract at the conclusion of the 12 month period 
following the contract's initial listing on the exchange, and again on 
every 12 month anniversary going forward. The designated contract 
market must calculate the centralized market trading percentage for 
each listed contract within thirty days following the conclusion of the 
12 month anniversary of each contract's listing. The Commission notes 
that in order to be in compliance with Core Principle 9, the DCM has 
the burden of reviewing the on and off-exchange trading for each of its 
contracts over the relevant period to determine whether it is subject 
to delisting. The Commission notes that as part of its oversight, it 
also will be reviewing trading data of contracts. For contracts and 
contract months listed prior to the effective date of Sec.  38.502(a), 
the Commission proposes that the DCM must initially calculate the 
centralized market trading percentage in each of its contracts within 
thirty days of the effective date of this minimum centralized market 
trading rule. The initial calculation for each existing contract must 
be based on the trading volume in the contract during the 12 month 
period immediately preceding the effective date of this rule.\98\ 
Thereafter, the DCM must calculate the centralized market trading 
percentage in each such contract within thirty days of the 12 month 
anniversary of the initial calculation.
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    \98\ As noted in the discussion under subpart J of this release, 
if a contract has been listed for less than a 12 month period, the 
Commission proposes that a DCM may seek an exemption as to that 
contract(s) and obtain a maximum of 12 additional months to 
calculate its centralized market trading for that contract(s).
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c. Mandatory Delisting
    As noted above, the minimum centralized market trading requirement 
would permit DCMs to list only those contracts that have a minimum 
average over a 12 month period of 85% trading on the centralized 
market. Accordingly, subject to the relief provided for existing 
contracts and the other limited exemptions noted in paragraphs (d) and 
(e) of proposed Sec.  38.502 below, proposed Sec.  38.502(c) requires 
that for those contracts that do not meet the minimum centralized 
market trading percentage requirement, the DCM has the following 
options, which it must effectuate within ninety days of the centralized 
market trading percentage calculation: (i) If the DCM operates a SEF, 
it can delist the swap contract from the DCM and transfer open swap 
positions to the SEF; (ii) the DCM can transfer the swap contract(s) to 
another SEF that accepts the contract; or (iii) the DCM can trade the 
contract on the DCM for liquidation purposes only.
    The Commission notes that contracts that may be required to be 
delisted have a potential alternative venue as Congress created, in the 
Dodd-Frank Act, the SEF,\99\ a new trading facility for the trading, 
processing and execution of swaps.\100\ Among other requirements,

[[Page 80590]]

the Dodd-Frank Act requires SEFs to facilitate the clearing and 
settlement of swaps.\101\ Accordingly, parties seeking clearing and 
segregated account status for swaps may achieve these objectives on a 
SEF.\102\ The Commission invites comments as to these proposals.
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    \99\ The SEF Core Principles, under Section 5h of the CEA, as 
amended by the Dodd-Frank Act, do not include a counterpart to the 
DCM Core Principle 9 requirement to protect the ``price discovery 
process of trading in the centralized market of the board of 
trade.''
    \100\ The Commission notes that based upon a letter sent to 
Chairman Gensler from the Wholesale Markets Brokers' Association 
(``WMBA''), the Commission understands that many of the participants 
that currently facilitate the privately negotiated contracts that 
are listed, but not traded, on a designated contract market intend 
to establish SEFs, confirming that this is an appropriate 
alternative forum for such contracts. The Commission, however, takes 
notice of the fact that the WMBA also proposes a much broader 
reading of Core Principle 9 contending, among other things, that the 
requirements of Core Principle 9 apply only to transactions that are 
traded on a DCM and not to transactions, such as exchanges of 
futures for swaps, that are submitted in compliance with DCM rules; 
that the Commission should consider other execution models that are 
competitive open and efficient; that compliance with Core Principle 
9 does not require that all trades submitted to a DCM be executed on 
the DCM's proprietary electronic trading network; and that Core 
Principle 9 should not be applied in the same way to futures, which 
may be traded by retail investors, as it may be applied to OTC 
products that are only eligible to be traded by Eligible Contract 
Participants. Letter to Chairman Gary Gensler from WMBA dated 
September 10, 2010.
    \101\ CEA Section 5h(f)(7), as amended by the Dodd-Frank Act. In 
addition, this requirement accommodates the creation of Cleared 
Swaps Customer Collateral account with bankruptcy protection. 
Additionally, the Commission may permit the netting of futures and 
swaps within such account. See CEA Section 4d(f)(3)(B), as amended 
by the Dodd-Frank Act.
    \102\ The Commission notes that swaps cleared through an FCM and 
associated collateral are protected in bankruptcy as commodity 
contracts. See section 724(b) of the Dodd Frank Act (to be codified 
at 11 U.S.C. 761(4)(F)). Moreover, to achieve benefits of portfolio 
margining, a designated contract market may still petition for an 
order pursuant to section 4d(a)(2) of the CEA to permit such swap 
transactions to be commingled in the segregated customer account for 
exchange traded transactions, or an order pursuant to CEA section 
4d(f)(3)(B) to permit related exchange traded futures transactions 
to be commingled in the segregated customer account for swaps.
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d. Treatment of Contracts Listed as of the Effective Date of This 
Section
    Proposed Sec.  38.502(d) provides relief from the provisions of 
Sec.  38.502(c) for contracts listed on a DCM as of the effective date 
of this section. The Commission understands that many contracts and 
contract months listed on a DCM before the effective date of the 
proposed rule may not meet the proposed minimum centralized market 
trading percentage requirement and, therefore, would be subject to 
mandatory delisting upon the effective date of the rules in this 
section (``affected contracts''). The Commission also notes that 
delisting a large number of these affected contracts within a short 
period of time may be difficult and result in potential financial 
consequences. Accordingly, the Commission proposes a transition process 
for the affected contracts to be liquidated in a fair and orderly 
manner. Specifically, the Commission proposes in Sec.  38.502(d) that 
affected contracts that do not meet the minimum centralized market 
trading requirement may continue to be listed on the DCM until all open 
positions in such contracts and contract months are closed or 
liquidated. Trading in such contracts will be allowed but only to close 
or liquidate a position.\103\
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    \103\ It is possible that a trader may not desire to close out a 
position. Since the position is carried at the clearing house, a 
trader may instead decide to keep the position in the clearing house 
until expiration. Traders with existing positions as of the 
effective date of the rules in this section will be permitted to 
maintain these positions in the respective margin account.
---------------------------------------------------------------------------

    In essence then, after the effective date of the proposed rules in 
this section, affected contracts that are listed before the effective 
date of this rule and that do not meet the minimum centralized market 
trading requirement will not be required to delist or liquidate within 
90 days as required by the proposed rule. Instead, all affected 
contracts will be allowed to continue to be listed, and either traded 
on the DCM for liquidation purposes only, through offsetting trades, or 
held until settlement at contract expiration. These affected contracts 
would, therefore, either close out at contract expiration or when open 
interest in the contract reaches zero. For any affected contracts that 
may not have been listed and traded for a full 12 month period on the 
effective date of the proposed rule, proposed Sec.  38.502(e) proposes 
additional relief, as described below.
    The Commission points out that with respect to this transition 
period, trades in the affected contracts must comply with the 
provisions of Section 2(h)(8) of the CEA, as amended by the Dodd-Frank 
Act, once effective. Thus, while a DCM will be allowed to continue to 
list and trade in its existing contracts for purposes of liquidating 
respective futures positions, upon the effective date of amended CEA 
Section 2(h)(8), the closing out of that position with an associated 
swaps position must be accomplished in compliance with the requirements 
of amended CEA Section 2(h)(8). To that end, such swaps positions can 
only be executed on a SEF or DCM, or with a bilateral off-exchange 
trade either as a block trade, or where the trade is exempt from the 
provisions of amended CEA Section 2(h)(8) because one party to the 
trade includes an end user.\104\
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    \104\ See generally, section 2(h) of the CEA, as amended by the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission invites comments on its proposal and also invites 
alternative proposals on how to address those DCM contracts listed 
prior to the effective date of these rules.
e. Exemption Upon Petition
    As noted above, the data collected by the Commission illustrates a 
category of contracts that experienced an average off-exchange trading 
volume greater than 15% but less than 100% over the three month period. 
The Commission recognizes that there are contracts that may experience 
off-exchange trading averages that are above the proposed 15% maximum 
off-exchange trading and that circumstances surrounding those contracts 
may warrant an exemption from the minimum centralized market trading 
percentage requirement. For example, there may be situations where a 
newly-listed contract initially may have little on-exchange trading, 
and may fail to meet the minimum centralized market trading requirement 
for the initial 12 month period despite experiencing a steady increase 
in trading volume over time. In those situations, it may be appropriate 
to provide the DCM with an opportunity to petition for an exemption to 
this requirement for a maximum of a 12 month period. Proposed Sec.  
38.502(e)(1) reflects such an exemption.
    In order to promote legitimate petitions, the proposed rule 
specifically provides that the DCM must demonstrate in its petition 
that such contract has achieved an average of at least 50% trading 
volume on the centralized market over the preceding 12 month period, 
and also must make an adequate showing that the contract, if granted 
the exception, is likely to attain the minimum trading requirement 
within the following 12 month period. The Commission also recognizes 
that some affected contracts that are listed as of the effective date 
of the proposed rule may not have been listed and traded for a full 12 
month period at such time, potentially requiring the DCM to calculate 
the contract's on-exchange trading based on some shorter period of 
time. In those situations, the Commission believes it is only fair to 
allow such contracts additional time, if desired, to determine whether 
the minimum centralized market trading percentage requirement is met. 
As such, the Commission proposes in Sec.  38.502(e)(2) to allow a DCM 
in this situation to petition the Commission to exempt a contract from 
the requirements of proposed Sec.  38.502(d) for a maximum period of 12 
months. Under proposed Sec.  38.502(e)(3) petitions seeking an 
exemption from the mandatory delisting requirement in Sec.  38.502(c) 
must be submitted to the Commission within thirty-five days of the 12 
month anniversary of the listing of such contract, or for affected 
contracts

[[Page 80591]]

seeking an exemption because they have been listed for less than 12 
months, thirty-five days after the effective date of this section. The 
filing of a petition shall toll the mandatory delisting requirement 
until such time that a decision is made. The Commission invites 
comments on all aspects of this proposed rule.
    We specifically request comment on how the proposals related to the 
requirement that 85 percent or greater of volume of a contract must be 
traded on the DCM's centralized market will affect the ability of 
market participants to take advantage of efficiencies like portfolio 
margining for swaps and futures positions. We also request comment on 
any negative consequences this proposal may have on the trading of 
swaps and related transactions like exchange of futures for swaps? The 
Commission also is requesting comments on whether any other exemptions 
should be considered for contracts that do not meet the minimum 
centralized market trading percentage threshold of on-exchange trading 
volume but nevertheless appear to serve a price discovery function, and 
what factors should be considered in making the exemption 
determination. For example, would it be acceptable for a contract 
market to provide evidence of the frequency to which cash market bids, 
offers or transactions in a commodity are directly based on, or are 
determined by referencing the prices generated by trading the subject 
contract on the designated contract market? Finally, the Commission 
also requests comments, with supporting information, on whether the 
Commission should consider any other exemptions from proposed Sec.  
38.502.
iii. Proposed Sec.  38.503--Block Trades on Futures Contracts
    As noted above, in addition to updates to Sec.  1.38, the 2008 Core 
Principle 9 Proposed Rulemaking \105\ proposed revised guidance and 
acceptable practices relating to block transactions for futures and 
options. The Commission proposes to codify some of the provisions in 
the guidance and acceptable practices relating to block trading that 
are, to a large degree, already current industry practice. The 
Commission believes that codifying these block trading requirements 
will result in greater regulatory certainty and consistency for DCMs. 
As discussed below, the Commission proposes, however, to maintain 
guidance and acceptable practices with respect to a DCM's determination 
of block sizes and block pricing for futures contracts, as it is 
expected that the determination of block sizes and pricing will evolve 
as both the industry and the Commission continue to gain experience in 
this area.
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    \105\ The Commission first proposed amendments to section 1.38 
and guidance with respect to Core Principle 9 in July 2004. See 69 
FR 39,880, Jul. 1, 2004.
---------------------------------------------------------------------------

    Consistent with the requirements set forth in current Sec.  1.38 
and amended Core Principle 9, proposed Sec.  38.503(a) would require 
that a board of trade that permits block trade transactions on futures 
contracts must have rules governing such transactions. As proposed in 
the 2008 Core Principle 9 Proposed Rulemaking, this regulation will 
require that the rules limit block trades to large transactions and 
impose minimum size requirements. The proposed rule also states that 
the block trade size must be certified or approved by the Commission.
    The Commission recognizes that the minimum size thresholds for 
block trades in a contract may change over time due to changes in sizes 
of trades in the centralized market and the market's volume and 
liquidity. Accordingly, proposed Sec.  38.503(b) proposes that block 
trade size must be reviewed on an annual basis. Any necessary 
adjustments must be made to new and existing contracts.
    Proposed Sec.  38.503(c) codifies the 2008 Core Principle 9 
Proposed Rulemaking proposal to limit block trade parties for futures, 
options and swaps to eligible contract participants (``ECPs'') as that 
term is defined in Section 1a(18) of the CEA, as amended by the Dodd-
Frank Act. However, the rule makes clear that commodity trading 
advisors acting in an asset managerial capacity and investment advisors 
that have over $25 million in assets under management, including 
foreign persons performing equivalent roles, are allowed to carry out 
block trades for non-ECP customers. The proposed rule also prohibits 
any person from conducting a block trade on behalf of a customer, 
unless the person receives instruction or prior consent to do so from 
the customer.\106\
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    \106\ All of these requirements mirror block trade rules 
previously approved by the Commission. The Commission approved block 
trade rules of the Cantor Financial Futures Exchange, Inc. on 
February 11, 2000; the Commission also approved Chicago Mercantile 
Exchange block trade rules on May 19, 2000.
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    Proposed Sec.  38.503(d) codifies the concepts in the 2008 Core 
Principle 9 Proposed Rulemaking with respect to affiliated parties for 
futures, options on futures and options on commodities. The proposed 
rule defines an ``affiliated party,'' for purposes of block trades on 
futures, as a party that directly or indirectly through one or more 
persons, controls, is controlled by, or is under common control with 
another party. As noted in the 2008 Core Principle 9 Proposed 
Rulemaking, appropriate safeguards are important for block trades 
between affiliated parties, because transactions between two closely 
related parties are more susceptible to abuse, such as setting 
unreasonable prices, artificially boosting volume, money passing, or 
wash trading. This is because it is possible that two related parties 
are not motivated by their own separate interests, but by the interests 
of a person or entity that may control both of the parties. Thus, under 
proposed Sec.  38.502(d)(3), block trades can take place between 
affiliated parties under the following conditions: (i) The block trade 
prices must be based on a competitive market price, either by falling 
within the contemporaneous bid/ask spread on the centralized market or 
calculated based on a contemporaneous market price in a related cash 
market; (ii) each party must have a separate and independent bona fide 
business purpose for engaging in the trades; and (iii) each party's 
decision to enter into the block trade must be made by a separate and 
independent decision-maker. As noted in the 2008 Core Principle 9 
Proposed Rulemaking, the Commission believes that the proposed rules 
for block trades between affiliated parties strike an appropriate 
balance between allowing such trades and ensuring that each party is 
acting independently when it agrees to enter into such a transaction.
    Proposed Sec.  38.503(e) codifies the practices proposed in the 
2008 Core Principle 9 Proposed Rulemaking relating to aggregation of 
orders. The proposed rule prohibits aggregation of orders for different 
trading accounts in order to satisfy the minimum block size 
requirement, except if done by a commodity trading advisor acting in an 
asset manager capacity or an investment advisor who has $25 million in 
total assets under management.
    Proposed Sec.  38.503(f) and (g) set forth the requirements for 
recordkeeping and reporting of block trades for futures and options. As 
to recordkeeping, proposed Sec.  38.502(f) reflects the provisions 
contained in Sec.  1.38(b) with certain updates. Thus, as is the 
current requirement, persons handling, executing, clearing, or carrying 
transactions off the centralized market must follow the rules of the 
DCM, including providing the appropriate identification of such 
transactions to the DCM. In addition, the proposed rule codifies the 
concept initially proposed in the 2008 Core Principle 9 Proposed 
Rulemaking that the DCM must have rules for keeping appropriate 
records.

[[Page 80592]]

Proposed Sec.  38.503(f) requires that parties to, and members 
facilitating, block trades keep accurate block trade records that 
comply with Core Principles 10 and 18 and the associated 
regulations.\107\ The proposed rule also requires that block trade 
orders and records must be accessible to the DCM, the Commission or the 
Department of Justice, upon request.
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    \107\ An acceptable practice under this regulation is set forth 
in proposed appendix B of part 38 and provides that records kept in 
accordance with the requirements of FASB Statement No. 133 
(``Accounting for Derivative Instruments and Hedging Activities''), 
as amended by FASB Statement No. 161 (``Disclosures About Derivative 
Instruments and Hedging Activities--An amendment of FASB Statement 
No. 133'') are acceptable records.
---------------------------------------------------------------------------

    Proposed Sec.  38.503(g) reflects a revised approach from the 2008 
Core Principle 9 Proposed Rulemaking pertaining to the reporting of 
block trades. While the 2008 Core Principle 9 Proposed Rulemaking 
proposed that block trades be reported to the contract market within a 
reasonable time, proposed Sec.  38.503(g) codifies the practice already 
enforced by a great majority of DCMs by requiring that DCMs have up to 
5 \108\ minutes to report block trades.\109\ The Commission believes 
that this is an appropriate amount of time for reporting block trades 
and balances the goals of providing transparency while enabling market 
participants involved in block trades with time to hedge risks 
associated with such trades. The Commission seeks comments as to 
whether this is an appropriate time period or whether and why another 
time period is more appropriate.
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    \108\ The Commission notes that for a few contracts with lower 
liquidity, such as weather and housing, CME allows for a 15 minute 
reporting time.
    \109\ See 73 FR 54,097, at note 18, Sep. 18, 2008 (noting CBOT 
Rule 331.05(d), CMD Rule 526(F); NYMEX Rule 6.21C).
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    In addition, proposed Sec.  38.503(g) requires DCMs to publicize 
the details on block trades immediately upon the receipt of the 
transaction report, and to publicize daily the total quantity of the 
block trades that are included in the total volume of trading under the 
procedures set forth in Sec.  16.01.
    Proposed Sec.  38.503(h) refers applicants and DCMs to the guidance 
in Appendix B to part 38 for purposes of determining block size and 
pricing determinations. As noted above, the Commission is proposing 
amended guidance and acceptable practices in Appendix B of part 38 
pertaining to block size and block pricing. The Commission believes 
that a one-size fits all approach to determining block size and pricing 
is inappropriate for block trades as it is expected, as noted above, 
that the determination of block sizes and pricing will evolve as both 
the industry and the Commission continue to gain experience in this 
area. Accordingly, the Commission is re-proposing, with some changes, 
the acceptable practices that were proposed in the 2008 Core Principle 
9 Proposed Rulemaking regarding establishing an acceptable minimum 
block size.
    The 2008 Core Principle 9 Proposed Rulemaking proposed replacing an 
earlier-proposed numerical test with the concept that, in establishing 
requirements for minimum block size, it was more appropriate to utilize 
a procedural approach that takes into consideration the purposes for 
allowing blocks and the trading in the particular contract. The 2008 
Core Principle 9 Proposed Rulemaking explained that one of the bases 
for permitting block trades to be transacted off the centralized market 
is that prices attendant to the execution of large transactions on the 
centralized market may diverge from prevailing market prices that 
reflect supply and demand of the commodity. This is because the 
centralized market may not provide sufficient liquidity to execute 
large transactions without additional costs that may reflect the cost 
of executing the trade. Consequently, reporting these prices as 
conventional market trades would be misleading to the public. As 
explained in the 2008 Core Principle 9 Proposed Rulemaking, another 
basis for allowing block trades is that such trades facilitate hedging 
by providing a means for commercial firms to transact large orders 
without the need for significant price concessions, and resulting price 
uncertainty for parties to the transaction that would occur if 
transacted on the centralized market. Finally, a procedural approach is 
more appropriate because the size of a typical trade varies between 
contracts, and is dependent on the liquidity in the centralized market 
and other commercial factors.
    Given these reasons, the Commission previously proposed a standard 
whereby the minimum block trade sizes should be larger than the size at 
which a single buy or sell order is customarily able to be filled in 
its entirety at a single price in that contract's centralized market, 
and exchanges should determine a fixed minimum number of contracts 
needed to meet this threshold. The Commission is re-proposing this 
acceptable practice with some modifications. Specifically, the 
Commission proposes that block trade sizes should be a number larger 
than the size at which a single buy or sell order is customarily able 
to be filled in its entirety without incurring a substantial price 
concession. The Commission believes this is a more appropriate 
threshold because in less liquid markets even a small number of trades 
could have a slight movement on price and would not present an accurate 
picture of the market.
    In the 2008 Core Principle 9 Proposed Rulemaking, the Commission 
also proposed, as part of the acceptable practice, certain factors that 
the DCM could consider in determining the appropriate minimum block 
size. These factors included the market's volume, liquidity and depth, 
a review of typical trade sizes and/order sizes and any input it may 
receive from floor brokers, floor traders and/or market users 
regarding, for example, what size order is generally too large to fill 
without major price concessions. The Commission believes that these 
factors are likely to lead to an appropriate block size and thus 
proposes them as acceptable practices in this release. In addition, the 
Commission is proposing that DCMs also take into account, as an 
additional factor, the block sizes on comparable swap products. This 
additional factor is necessary and appropriate in light of the 
inclusion of swap trading and execution on DCMs and SEFs, and the 
corresponding swap block rules discussed below.
    The Commission proposes similar acceptable practices for 
determining the acceptable minimum size for block trades in new futures 
contracts and options. However, because a new contract will not have 
any trading history, the Commission proposes that the acceptable 
minimum block trade size in such contracts is the trade size that the 
DCM reasonably anticipates will not be able to be filled in its 
entirety in the contract's centralized market, without major price 
concessions. In determining an acceptable block size, the DCM should 
consider centralized market data in a related futures contract, the 
same contract traded on another exchange, or trading activity in the 
underlying cash market. For the reasons discussed above, the DCM should 
also consider, as an additional factor, the block sizes on comparable 
swap products.
    The Commission also re-proposes in this release the acceptable 
practices proposed in the 2008 Core Principle 9 Proposed Rulemaking 
relating to the pricing of blocks. The proposed acceptable practice 
requires that block trades between non-affiliated parties must be at a 
fair and reasonable price. The proposed acceptable practices set forth 
the factors that could be considered by DCMs in determining what is 
fair and reasonable, including:

[[Page 80593]]

(1) The size of the block, (2) the price and size of other block trades 
in any relevant markets at the applicable time, and (3) the 
circumstances of the market or the parties to the block trade. The 
proposed acceptable practice states that relevant markets include the 
DCM itself, the underlying cash markets and/or related futures or 
option markets. As noted in the proposed acceptable practices, if the 
contract market rule requiring a fair and reasonable price includes the 
circumstances of the parties or of the market, a block trade 
participant can execute a block transaction at a price that is away 
from the market provided that the participant retains documentation to 
demonstrate that the price was indeed fair and reasonable under the 
participant's or market's particular circumstances. In addition, the 
proposed acceptable practices note that block trades between affiliated 
parties are subject to the pricing requirements in Sec.  38.503(d).
iv. Proposed Sec.  38.504--Block Trades on Swap Contracts
    The Dodd-Frank Act amended the CEA to expand the list of products 
that may be traded on a DCM to include swaps, in addition to futures 
and options contracts. The Commission recognizes that there exists 
certain inherent differences between futures and options, on the one 
hand, and swaps on the other, which may necessitate that DCMs apply 
different rules to these products. While the Commission generally 
believes that the same block trade rules should apply to futures, 
options and swaps listed and traded on the DCM, the Commission proposes 
that characteristics of swaps do warrant a different approach for 
purposes of determining minimum block size. In addition, the Dodd-Frank 
Act provides specific statutory requirements for reporting of swap 
block transactions. The rules governing each of these requirements are 
currently being addressed in a forthcoming Commission release titled 
``Real Time Reporting,'' which is proposing rules that will be codified 
in part 43 of the Commission's regulations.\110\ Accordingly, DCMs must 
comply with the provisions of proposed part 43 for purposes of setting 
the minimum size of swap block trades, and for reporting swap block 
trades. Proposed Sec.  38.504 provides that DCMs must have rules that 
require compliance with these rules for swaps traded on their markets.
---------------------------------------------------------------------------

    \110\ See supra note 43.
---------------------------------------------------------------------------

v. Proposed Sec.  38.505--Exchange of Derivatives for Related Position
    In the 2008 Core Principle 9 Proposed Rulemaking, the Commission 
proposed acceptable practices relating to exchange of futures for 
related position transactions. The acceptable practices proposed in 
that rulemaking were based on previous publications by the Commission, 
including the 1987 EFP Report prepared by the Commission's then-
Division of Trading and Markets and the Commission's 1998 EFP Concept 
Release.\111\ Proposed Sec.  38.505 codifies the practices that the 
Commission historically has required from DCMs with respect to these 
types of transactions.
---------------------------------------------------------------------------

    \111\ See Division of Trading and Markets, Report on Exchanges 
of Futures for Physicals (1987) (the ``1987 EFP Report''); 
Regulation of Non-Competitive Transactions Executed on or Subject to 
the Rules of a Contract Market, 63 FR 3708, Jan. 26, 1998 (the 
``1998 EFP Concept Release'').
---------------------------------------------------------------------------

    As an initial matter, proposed Sec.  38.505 (a) revises the 
nomenclature for referring to transactions that have been referred to 
in the past as ``exchange of futures for commodities or derivatives 
positions,'' to refer to all such transactions under the umbrella term 
``exchange of derivatives for related position'' (``EDRP''). The 
Commission believes that this is a more accurate and descriptive term 
as it will include transactions not limited to futures, such as swaps. 
Proposed Sec.  38.505(a) codifies the requirements and characteristics 
of a bona fide EDRP and is based on Commission standards that have 
developed over the years. Specifically, the proposed rule sets forth 
the elements of a bona fide EDRP to include separate but integrally 
related transactions, price correlation and quantitative equivalence of 
the two legs, an actual transfer of ownership of the commodity or 
derivatives position and both legs transacted between the same two 
parties.
    As to pricing of these transactions, proposed Sec.  38.505 
maintains the methodology set forth in the acceptable practices 
proposed in the 2008 Core Principle 9 Proposed Rulemaking.\112\ 
Accordingly, the proposed rule provides that the price differential 
between the two legs should reflect commercial realities, and at least 
one leg of the transaction should be priced at the prevailing market 
price.
---------------------------------------------------------------------------

    \112\ The Commission is codifying the EDRP pricing methodology 
based on its experience over the past years in determining the 
reasonability of EDRP pricing.
---------------------------------------------------------------------------

    Further, proposed Sec.  38.505(b) codifies the requirements 
applicable to bona fide transitory exchange of derivatives for related 
position transactions. A transitory exchange of derivatives for a 
related position transaction involves both an EDRP and an off-setting 
transaction to one of the legs of that transaction. As codified in 
Sec.  38.504(b), the proposed rule will permit parties to an EDRP to 
engage in a separate transaction that offsets a leg of the EDRP if the 
offsetting transaction results in an actual transfer of ownership and 
demonstrates other indicia of being a bona fide transaction, and the 
offsetting transaction is able to stand on its own as a commercially 
appropriate transaction; that is, there must be no obligation on either 
party that the offsetting transaction will require the execution of a 
related EDRP, or vice versa.
    Proposed Sec.  38.505(c) prohibits DCMs from permitting a 
contingent exchange of derivative for a related position transaction 
where the exchange of derivative for the related position is contingent 
upon an offsetting transaction.
    In the 2008 Core Principle 9 Proposed Rulemaking, the Commission 
proposed that EDRP transactions be reported to the DCM within a 
reasonable time. Given the continuous changes and advancements in 
electronic trading over the years, the Commission believes that such 
trades also should be reported in a five minute time period, as is 
proposed for block trades. Thus, proposed Sec.  38.505(d) requires that 
such trades be reported to the market within five minutes of 
consummation. The Commission invites comments on this proposal and, in 
particular, if and why any other time period should be allowed.
    Proposed Sec.  38.505(e) codifies the acceptable practice proposed 
in the 2008 Core Principle 9 Proposed Rulemaking requiring the DCM to 
follow procedures set forth in current section 16.01 to publicize daily 
the total quantity of exchange for derivatives for related position.
vi. Proposed Sec.  38.506--Office Trades and Transfer Trades
    In the 2008 Core Principle 9 Proposed Rulemaking, the Commission 
noted that transfer trades and office trades move existing positions 
between accounts and are bookkeeping in nature. Such transactions, 
therefore, do not affect the price discovery process of the centralized 
market because they do not establish or offset positions. The 
Commission will not require these transactions to follow the 
publication requirements under Sec.  16.01 as required for blocks and 
EDRPs. Instead, proposed Sec.  38.506 requires that records of such

[[Page 80594]]

transactions be kept in accordance with the recordkeeping regulation 
Sec.  1.31.
10. Subpart K--Trade Information
    Section 5(d)(10) of the CEA, as amended by the Dodd-Frank Act, 
requires DCMs to capture, verify, and retain detailed trade information 
(i.e., audit trail data) for all transactions in their markets. Amended 
Core Principle 10--Trade Information is almost identical to the 
requirements contained in the current Core Principle 10. Both the 
amended and current Core Principle 10 require DCMs to maintain rules 
and procedures that provide for the recording and safe storage of all 
identifying trade information in a manner that enables the DCM to 
assist in the prevention of customer and market abuses and provide 
evidence of any rule violations. Because the amended core principle has 
almost identical statutory text, the Commission interprets amended Core 
Principle 10 as imposing the same substantive content as its 
predecessor.\113\
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    \113\ The Commission previously expressed the regulatory 
requirements of former Core Principle 10 through its application 
guidance for that core principle. See 17 CFR part 38, App. B, 
Application Guidance and Acceptable Practices for Core Principle 10. 
It also provided additional insight regarding the core principle 
through detailed acceptable practices that all DCMs could use to 
demonstrate compliance with former Core Principle 10. The acceptable 
practices explained that ``the goal of an audit trail is to detect 
and deter customer and market abuse.'' Id. at (b)(1). It also 
outlined the elements of an effective audit trail. Those elements 
included original source documents, which help to establish the 
accuracy and authenticity of an audit trail. They also included a 
transaction history database and electronic analysis capability, 
which allow a DCM to more easily access and review audit trail data 
to identify possible trading abuses and rule violations. Finally, 
the acceptable practices pointed to a DCM's safe storage capability, 
emphasizing that audit trail data must be stored in a manner that 
protects it from unauthorized alteration, accidental erasure, or 
other loss.
---------------------------------------------------------------------------

    The application guidance and acceptable practices for current Core 
Principle 10 provide the basis of the Commission's proposed audit trail 
regulations in proposed subpart K, particularly proposed Sec. Sec.  
38.551 (Audit Trail Required) and 38.552 (Elements of an Acceptable 
Audit Trail Program), summarized below. In addition, the proposed rules 
update the guidance and acceptable practices in that the proposed 
regulations address audit trail requirements for electronic trading. 
The Commission notes that the proposed rules for electronic trading 
audit trails are substantially similar to the long-standing 
requirements for open-outcry trading. However, because those 
requirements reflected a time when electronic trading accounted for 
less than 10 percent of U.S. futures volume, they did not explicitly 
address electronic trading.\114\
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    \114\ This figure is based on fiscal year 2000, as reported in 
the Commission's FY 2009 Performance and Accountability Report, p. 
14.
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    The proposed rules also draw on recent RERs analyzing DCMs' 
compliance with former Core Principle 10. In the context of RERs, staff 
has made a number of findings and recommendations regarding DCMs' audit 
trail enforcement programs, including recommendations regarding more 
frequent audit trail reviews and larger sanctions for audit trail 
violations. Staff also has directed DCMs to develop audit trail 
programs for electronic trading that are comparable in rigor and scope 
to their audit trail programs for open-outcry trading.\115\ These 
findings and recommendations, including those with respect to 
electronic trading audit trails, are reflected in proposed Sec.  
38.553, also summarized below.
---------------------------------------------------------------------------

    \115\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (August 27, 2009), and Rule Enforcement Review of ICE 
Futures U.S. (Feb. 2, 2010).
---------------------------------------------------------------------------

    Whether applicable to open-outcry or to electronic trading, the 
proposed rules in subpart K seek to ensure that DCMs capture, verify, 
and retain sufficient order and trade-related information for DCM staff 
to detect possible trading violations and other market and customer 
abuses. They also require DCMs to possess specific resources and 
capabilities with respect to their audit trails. These include the 
ability to promptly reconstruct all transactions and the ability to 
track customer orders from the time of receipt through fill, 
allocation, or any other disposition. The proposed rules also require a 
DCM's audit trail program to collect original source documents, to 
build a transaction history database, and to develop an electronic 
analysis capability with respect to all trade information in that 
database. DCMs also must possess a safe storage capability with respect 
to their audit trail data. Finally, they must develop meaningful 
enforcement programs to ensure member and market participant compliance 
with all applicable audit trail requirements. In each respect, the 
Commission's proposed rules are consistent with its long-standing 
requirements and expectations regarding reliable, complete, and 
effective audit trails. The specific requirements of the proposed rules 
implementing amended Core Principle 10 are summarized below.
i. Proposed Sec.  38.551--Audit Trail Required
    Proposed Sec.  38.551 is based on the application guidance and 
acceptable practices for former Core Principle 10.\116\ It establishes 
the overarching requirements for DCMs' audit trail programs to ensure 
that DCMs can appropriately monitor and investigate any potential 
customer and market abuse. Proposed Sec.  38.551 provides that the 
audit trail data captured by DCMs must be sufficient to reconstruct all 
transactions within a reasonable period of time, and to provide 
evidence of any rule violations that may have occurred. The proposed 
rule also provides that audit trails must be sufficient to track 
customer orders from the time of receipt through fill, allocation, or 
other disposition. Audit trail data must include both order and trade 
information. Proposed Sec.  38.551 applies equally to open-outcry and 
electronic trading.
---------------------------------------------------------------------------

    \116\ 17 CFR Part 38, App. B, Core Principle 10, Application 
Guidance and Acceptable Practices.
---------------------------------------------------------------------------

ii. Proposed Sec.  38.552--Elements of an Acceptable Audit Trail 
Program
    Proposed Sec.  38.552 prescribes the four elements of an acceptable 
audit trail program. These elements are necessary to ensure that a DCM 
can capture and retain sufficient trade-related information, can 
reconstruct trading promptly, and has the necessary tools to detect and 
deter potential customer and market abuses through its audit trail. 
First, proposed Sec.  38.552(a) requires that a DCM's audit trail 
include original source documents, defined to include unalterable, 
sequentially-identified records on which trade execution information is 
originally recorded, whether manually or electronically. It also 
requires that customer order records demonstrate the terms of the 
order, the account identifier that relates to the account owner, and 
the time of the order entry. Finally, proposed Sec.  38.552(a) requires 
that, for open-outcry trades, the time of report of order of execution 
must also be captured in the audit trail.
    Second, proposed Sec.  38.552(b) requires that a DCM's audit trail 
program must include a transaction history database. A transaction 
history database facilitates rapid access and analysis of all original 
source documents, thereby aiding DCMs in monitoring for customer and 
market abuses. Proposed Sec.  38.552(b) also specifies the trade 
information that must be included in a transaction history database. 
Mandatory information includes a history of all orders and trades; all 
data input in the trade

[[Page 80595]]

matching system for clearing; the categories of participants for which 
trades are executed (i.e., customer type indicator or ``CTI'' codes); 
timing and sequencing data sufficient to reconstruct trading; and 
identification of each account to which fills are allocated.
    Third, proposed Sec.  38.552(c) requires that a DCM's audit trail 
program have electronic analysis capability for all data in its 
transaction history database. This requirement helps ensure effective 
use of audit trail data by requiring appropriate tools to use in 
conjunction with a DCM's transaction history database. Proposed Sec.  
38.552(c) also provides that a DCM's electronic analysis capability 
must allow it to reconstruct trades in order to identify possible rule 
violations.
    Finally, proposed Sec.  38.552(d) requires that a DCM's audit trail 
program include the ability to safely store all audit trail data, and 
to retain it in accordance with the recordkeeping requirements of DCM 
Core Principle 18 and the associated regulations under part 38. Safe 
storage capability enables a DCM to properly preserve and protect the 
audit trail data so that it is readily available for the DCM to use in 
any future investigation or inquiry into possible violations of DCM 
rules. Safe storage capability requires a DCM to protect its audit 
trail data from unauthorized alteration, accidental erasure or other 
loss.
iii. Proposed Sec.  38.553--Enforcement of Audit Trail Requirements
    Proposed Sec.  38.553 prescribes the elements of an effective audit 
trail enforcement program. The proposed rule is organized in two parts. 
First, proposed Sec.  38.553(a) requires a DCM to develop an effective 
audit trail enforcement program. An effective enforcement program must, 
at a minimum, review all members and market participants annually to 
verify their compliance with all applicable audit trail requirements.
    Proposed Sec.  38.553(a) is further divided into two paragraphs. 
Paragraph (a)(2) of proposed Sec.  38.553 establishes minimum review 
criteria for open-outcry trading. It requires that DCMs conduct annual 
reviews of all members and market participants to verify their 
compliance with their trade timing, order ticket and trading card 
requirements. Similarly, paragraph (a)(1) sets forth minimum review 
criteria for an electronic trading audit trail. It requires annual 
examinations by DCMs of randomly selected samples of front-end audit 
trail data from order routing systems to ensure the presence and 
accuracy of required audit trail data. In addition, paragraph (a)(1) 
requires that DCMs: Review the processes used by members and market 
participants to assign and maintain exchange user identifications; 
review usage patterns of the user identifications; and review account 
numbers and Customer Trading Identification codes in trade records to 
test for accuracy and improper usage. The Commission notes that, 
compared to the corresponding requirements for open-outcry trading, 
audit trail and audit trail enforcement requirements for electronic 
trading are still evolving, and that the Commission's expectations in 
this area, pursuant to amended Core Principle 10, are likely to evolve 
as well.
    Second, proposed Sec.  38.553(b) requires DCMs to develop programs 
to ensure effective enforcement of their audit trail and recordkeeping 
requirements. It applies equally to both open-outcry and electronic 
trading. Proposed Sec.  38.553(b) requires DCMs' enforcement programs 
to identify members and market participants that routinely fail to 
comply with the requirements of Core Principle 10. DCMs also must levy 
meaningful sanctions when deficiencies are found. Sanctions may not 
include more than one warning letter or other non-financial penalty for 
the same violation within a rolling twelve-month period.
11. Subpart L--Financial Integrity of Transactions
    Core Principle 11, as amended by the Dodd-Frank Act, retains the 
provisions of current Core Principle 11.\117\ This core principle 
requires that a DCM establish and enforce rules and procedures for 
ensuring the financial integrity of transactions entered into, on or 
through the facilities of the contract market, including the clearing 
and settlement of the transactions with a DCO. Amended Core Principle 
11 also requires that a DCM establish and enforce rules to ensure: (i) 
The financial integrity of any futures commission merchant (``FCM'') 
and introducing broker (``IB''); and (ii) the protection of customer 
funds. Because textually the language is almost the same, the 
Commission is interpreting the provisions as it has in the past. 
Proposed Sec. Sec.  38.600 through 38.607, largely codify language 
found in the existing application guidance for current Core Principle 
11 and former Designation Criterion 5.\118\ However, based upon its 
past experience, the Commission is proposing some new practices and 
requirements for DCMs in implementing amended Core Principle 11.
---------------------------------------------------------------------------

    \117\ There were no substantive changes to the amended Core 
Principle 11 from the current one. The amended core principle reads 
as follows: The board of trade shall establish and enforce--(A) 
rules and procedures for ensuring the financial integrity of 
transactions entered into on or through the facilities of the 
contract market (including the clearance and settlement of the 
transactions with a derivatives clearing organization); and (B) 
rules to ensure: (i) The financial integrity of any (I) futures 
commission merchant, and (II) introducing broker; and (ii) the 
protection of customer funds.
    \118\ Former Designation Criterion 5 stated that ``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.'' 17 CFR part 38, App. A.
---------------------------------------------------------------------------

    Proposed Sec.  38.601 would require that all transactions executed 
on or through a DCM, other than transactions in security futures 
products, be cleared through a Commission-registered DCO. This proposed 
rule codifies current practice, as well as the requirements of amended 
Core Principle 11 to mandate clearing. The Commission interprets the 
mandatory clearing requirement in Section 723(a)(3) of the Dodd-Frank 
Act \119\ to mean that a DCO must clear a swap for any DCM or SEF that 
requests such clearing services, so long as the DCO offers the swap for 
clearing. In addition, a DCO that is clearing particular swaps must 
also clear the same swaps when listed on DCMs or SEFs, whether 
affiliated or unaffiliated, on a nondiscriminatory basis.
---------------------------------------------------------------------------

    \119\ Among other things, section 723(a)(3) of the Dodd-Frank 
Act adds a new section 2(h)(1) to the CEA that provides that: (i) 
All swaps that are required to be cleared be cleared by a 
Commission-registered DCO; and (ii) a DCO must have open access 
rules, including rules providing for the non-discriminatory clearing 
of a swap executed bilaterally on or through the rules of an 
unaffiliated DCM or SEF.
---------------------------------------------------------------------------

    Proposed Sec. Sec.  38.602 and 38.603 provide that DCMs must adopt 
rules establishing minimum financial standards for both member FCMs and 
IBs and non-intermediated market participants, as well as rules for the 
protection of customer funds, including the segregation of customer and 
proprietary funds, the custody of customer funds, the investment 
standards for customer funds, intermediary default procedures and 
related recordkeeping. Proposed Sec.  38.604 requires that a DCM must 
routinely receive and promptly review financial and related information 
from its members and conduct ongoing financial surveillance of the risk 
created by the positions the customers of an FCM take on the DCM. To 
meet this requirement, the DCM must have rules pertaining to minimum 
financial standards of intermediaries that include, among other things, 
rules prescribing minimum capital requirements for

[[Page 80596]]

member FCMs and IBs.\120\ Rules or procedures pertaining to protection 
of customer funds must include, among other things, that each DCM must 
continually survey the obligations of each FCM created by the positions 
of its customers, and, as appropriate, compare those obligations to the 
financial resources of the FCM. The DCM should use this information to 
protect customer funds by, for example, taking appropriate steps to 
verify that its member FCMs have sufficient capital to continue to 
guarantee the positions of each customer. If the obligations of a 
member FCM appear excessive as compared to the capital of such FCM, a 
DCM should take appropriate action, including contacting the FCM or the 
FCM's designated self-regulatory organization.
---------------------------------------------------------------------------

    \120\ An FCM that is a clearing member will also have additional 
obligations to the DCO as a result of its clearing membership.
---------------------------------------------------------------------------

    Proposed Sec.  38.605 requires DCMs as self-regulatory 
organizations (``SRO'') to comply with the standards of amended Sec.  
1.52 to ensure the financial integrity of intermediaries by 
establishing and carrying out an SRO program for the examination and 
financial supervision of intermediaries. Section 1.52, as proposed to 
be amended in this release, sets forth the required elements of SRO 
supervisory programs and permits one or more SROs to establish, subject 
to Commission approval, a joint audit plan to provide for the SRO 
supervision of members of more than one SRO. Proposed amendments to 
Sec.  1.52 include references to existing guidance to SROs contained in 
the Division of Trading and Markets Financial and Segregation 
Interpretations 4-1 and 4-2, which currently guide the practices of 
members of the Joint Audit Committee operating a joint audit plan that 
has been approved by the Commission.\121\
---------------------------------------------------------------------------

    \121\ See 73 FR 52832, Sept. 11, 2008 (requesting comments prior 
to the Commission's approval of the most recent Joint Audit 
Committee agreement, which approval was granted March 18, 2009).
---------------------------------------------------------------------------

    Proposed Sec.  38.606 would provide that DCMs may satisfy their 
financial surveillance responsibilities under proposed Sec. Sec.  
38.604 and 38.605 by outsourcing such responsibilities to a registered 
futures association or other regulated entity. Proposed Sec.  38.606 
would provide that a DCM must ensure that the regulatory service 
provider has the capacity and resources to conduct the necessary 
financial surveillance, and would further provide that the DCM remains 
responsible for compliance with its financial surveillance obligations 
notwithstanding the use of a regulatory service provider.
    As noted above, amended Core Principle 11 provides that a DCM must 
establish and enforce rules to, among other things, ensure both the 
financial integrity of any FCM, and the protection of customer funds. 
With an increasing number of DCMs permitting the customers of an FCM to 
transmit orders directly to the DCM in real time, the ability of an FCM 
to control and monitor its level of risk may become compromised. In 
this automated trading environment, the only controls that effectively 
can enforce limitations on risk are automated controls.\122\ Proposed 
Sec.  38.607 would require a DCM that allows customers direct access to 
its contract market to implement certain direct access controls and 
procedures in order to provide member FCMs with tools to manage their 
financial risk. The proposed rule contemplates that an FCM would 
continue to have primary responsibility for overall risk management, 
but that the DCM would be required to establish an automated risk 
management system permitting an FCM to set appropriate risk limits for 
each customer with direct access to the contract market. As an SRO, the 
DCM would be responsible for implementing and enforcing rules requiring 
the FCM to use the provided controls and procedures appropriately. The 
specific type of pre-trade controls implemented by a DCM shall be a 
matter for determination by the DCM, its member FCMs, and the DCM's 
DCO. This proposed rule requiring direct access controls and procedures 
where direct access is permitted is consistent with current 
international guidance.\123\ The Commission requests comments on the 
proposed rule, and specifically on the following questions:
---------------------------------------------------------------------------

    \122\ International Organization of Security Commissions 
[IOSCO], Final Report of the IOSCO Technical Committee, Principles 
for Direct Electronic Access to Markets, at 4, IOSCO Doc. FR08/10 
(August 12, 2010).
    \123\ Id.
---------------------------------------------------------------------------

    <bullet> Whether DCMs should provide additional controls to permit 
FCMs to manage their risks? If so, what specific direct access controls 
and procedures should DCMs implement?
    <bullet> Should such controls be mandatory?
12. Subpart M--Protection of Markets and Market Participants
    Section 735 of the Dodd-Frank Act amends Core Principle 12. Current 
Core Principle 12 states that 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. The 
amended Core Principle 12 requires that the DCM establish and enforce 
rules to protect markets and market participants from abusive practices 
committed by any party, including abusive practices committed by a 
party acting as an agent for a participant, and promote fair and 
equitable trading on the contract market. The current guidance for this 
core principle \124\ provides that a DCM should have methods and 
resources appropriate to the nature of the trading system and the 
structure of the market to detect trade practice and market abuses, and 
to prohibit, detect and discipline intermediary behavior that is 
abusive, fraudulent, noncompetitive or unfair, in connection with the 
execution of trades.
---------------------------------------------------------------------------

    \124\ The current guidance for Core Principle 12 provides that 
``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.'' 17 CFR part 38, App. B.
---------------------------------------------------------------------------

    The Commission believes that compliance with this core principle 
requires the DCM to implement trade practice and market surveillance 
programs and provide a competitive, open and efficient market and 
mechanism for executing transactions in accordance with other core 
principles and the regulations thereunder. To provide clarity and 
certainty of these requirements, the Commission proposes Sec.  38.651 
that specifically states compliance requirements, including the core 
principles that must be followed. Specifically, a trade practice 
surveillance program should be conducted in accordance with Core 
Principle 2 and the associated regulations in subpart C of this part 
38, which would require, among other things, that a DCM prohibit 
certain enumerated abusive and disruptive trading practices, have 
arrangements and resources for effective rule enforcement and enforce 
compliance with its rules and have the capacity to detect, investigate, 
and sanction violations.
    A market surveillance program should include monitoring the market 
to prevent manipulation, price distortion and disruptions of daily 
trading and the physical delivery or cash-settlement process. A market 
surveillance program should be conducted in accordance with Core 
Principle 4 and the associated regulations in subpart E of this part 38 
that would require, among other things, that the DCM demonstrate the 
capability of conducting real-time monitoring of trading and 
comprehensive and accurate

[[Page 80597]]

trade reconstructions and require that traders in their markets keep 
records, including their activity in the underlying commodity and 
related derivative markets. Effectively monitoring the market would 
require sufficient, well trained market surveillance staff and, where 
appropriate, automated tools to assist in the monitoring of the market 
for, among other things, potential market disruptions. Such automated 
tools should be capable of providing automated trading alerts to detect 
many types of potential violations of exchange or Commission rules.
    Finally, in order to promote fair and equitable trading, the DCM 
must establish and enforce trading rules with adequate specificity to 
include, among other things, providing to market participants, on a 
fair, equitable and timely basis, information regarding prices, bids 
and offers. The DCM should provide a competitive, open and efficient 
market and mechanism for executing transactions in accordance with Core 
Principle 9 and the associated regulations in subpart J of this part 38 
that, among other things, recognizes that trading in the centralized 
market provides a price discovery function and would specifically 
require that the execution of transactions be in a manner that protects 
that price discovery process.
13. Subpart N--Disciplinary Procedures
    Section 735 of the Dodd-Frank Act amends the disciplinary procedure 
requirements applicable to DCMs in two significant ways. First, Section 
735(a) eliminates all DCM designation criteria, including Designation 
Criterion 6 (Disciplinary Procedures).\125\ Second, Section 735(b) 
creates a new Core Principle 13 (Disciplinary Procedures) that is 
devoted exclusively to exchange disciplinary proceedings, and that 
captures disciplinary concepts inherent in both Designation Criterion 6 
and in current DCM Core Principle 2 (Compliance with Rules).\126\ The 
rules proposed under subpart N implement new Core Principle 13.\127\
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    \125\ See Sec.  735(a) of the Dodd-Frank Act.
    \126\ Compare current CEA Sec.  5(b)(6) and Sec.  5(d)(2) with 
CEA Sec.  5(d)(13) as amended by the Dodd-Frank Act.
    \127\ Prior to the passage of the Dodd-Frank Act, the standards 
for DCMs' disciplinary practices were found in Designation Criterion 
6 and the statutory language, guidance, and acceptable practices for 
former Core Principle 2. Designation Criterion 6 required that a DCM 
establish and enforce disciplinary procedures that authorized it to 
discipline, suspend, or expel members or market participants that 
violated the rules of the DCM, or similar methods for performing the 
same functions, including delegation of the functions to third 
parties. Paragraph (a)(2) of the application guidance for former 
Core Principle 2 required DCMs to have the ``arrangements, 
resources, and authority [necessary] for effective rule 
enforcement,'' and the ``authority and ability to discipline and 
limit, or suspend the activities of a member or market participant 
pursuant to clear and fair standards.'' 17 CFR part 38, App. B, 
Application Guidance for Core Principle 2 at (a)(2). In addition, 
paragraph (b)(4) of the former core principle's acceptable practices 
required any DCM that wished to take advantage of the acceptable 
practice's safe harbor to have ``prompt and effective disciplinary 
action for any violation * * * found to have been committed.'' 17 
CFR part 38, App. B, Acceptable Practices for Core Principle 2 at 
(b)(4). Paragraph (b)(4) also referenced part 8 of the Commission's 
regulations as an example that DCMs could follow to comply with Core 
Principle 2. 17 CFR 8.01 et seq. In its experience, the Commission 
has found that many DCMs' disciplinary programs do in fact model the 
disciplinary structures and processes in part 8. While the 
acceptable practices for former Core Principle 2 offered the 
disciplinary procedures in part 8 as an example of appropriate 
disciplinary procedures, DCMs were exempt from part 8 pursuant to 
Sec.  38.2. The disciplinary procedures proposed herein do not re-
subject DCMs to part 8, but rather propose new disciplinary 
procedures for inclusion in part 38.
---------------------------------------------------------------------------

    The proposed rules in subpart N are consistent with current 
disciplinary practices at most DCMs. They reflect disciplinary concepts 
formerly found in Designation Criterion 6 and the guidance and 
acceptable practices for former Core Principle 2. The proposed rules 
also are similar to the text of the disciplinary procedures in part 8 
of the Commission's regulations.\128\ In general, the Commission's 
proposed rules seek to ensure a fair, prompt, and effective 
disciplinary program. They require meaningful sanctions against persons 
and entities that violate DCM rules. The proposed rules also provide 
numerous procedural safeguards to ensure fairness for all respondents 
in disciplinary actions. Finally, they require full customer 
restitution in any disciplinary matter where customer harm is 
demonstrated.
---------------------------------------------------------------------------

    \128\ See supra note 47.
---------------------------------------------------------------------------

    In those cases where the proposed rules place new requirements on 
DCMs with respect to their disciplinary procedures, such requirements 
are derived from findings and recommendations made by Commission staff 
through its RERs. Proposed Sec.  38.701 (Enforcement Staff), for 
example, requires a DCM to have sufficient staff and resources to 
effectively and promptly prosecute possible violations of exchange 
rules. It also requires a DCM to monitor the size and workload of its 
enforcement staff annually, and to increase its enforcement resources 
and staff as appropriate. The text of proposed rule 38.701 mirrors that 
of proposed rule 38.155, which requires DCMs to retain sufficient 
compliance staff and resources to comply with new DCM Core Principle 
2--Compliance with Rules.\129\
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    \129\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (Aug. 27, 2009), Rule Enforcement Review of ICE Futures 
U.S. (Feb. 2, 2010), and Rule Enforcement Review of the Chicago 
Board of Trade and the Chicago Mercantile Exchange (Sep. 13, 2010) 
for findings and recommendations pertaining to the adequate staff 
size of DCM compliance departments.
---------------------------------------------------------------------------

    Other proposed requirements in subpart N that are based on findings 
and recommendations in recent RERs include a requirement that 
disciplinary panels improve their written documentation in disciplinary 
decisions and settlements.\130\ These heightened documentation 
requirements appear in proposed Sec.  38.703 (Review of Investigation 
Report), proposed Sec.  38.709 (Settlement Offers), and proposed Sec.  
38.711 (Decisions), all of which require that the facts and analysis 
supporting disciplinary settlements and decisions be explained 
carefully and in writing by the relevant disciplinary panel. The 
Commission believes that improved written documentation, as required by 
the proposed rules, will yield a number of significant benefits. 
Disciplinary panels will be required to focus their analysis more 
carefully in order to articulate the rationale for their decisions. DCM 
enforcement staff will gain a better understanding of the evidentiary 
expectations to which different disciplinary panels adhere. DCM 
enforcement staff and respondents will both have an improved record to 
base any appeals they may wish to file. Finally, improved written 
documentation of the facts and analysis supporting settlements and 
disciplinary decisions will help facilitate subsequent review of DCMs' 
disciplinary programs by the Commission.
---------------------------------------------------------------------------

    \130\ See Rule Enforcement Review of the New York Mercantile 
Exchange (Sep. 16, 2004) and Rule Enforcement Review of the Chicago 
Board of Trade and the Chicago Mercantile Exchange (Sep. 13, 2010). 
The structure of disciplinary panels is discussed in the context of 
proposed Sec.  38.702, below.
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    Proposed Sec.  38.714 (Disciplinary Sanctions), further provides 
that all disciplinary penalties imposed by a DCM or its disciplinary 
panels must be commensurate with the violations committed, and be 
sufficient to deter recidivist activity. This proposed rule reflects 
DMO staff's concerns with respect to the adequacy of disciplinary 
sanctions in cases it has examined through its RER process.\131\ 
Finally, proposed Sec.  38.715 (Summary Fines for Violations of Rules 
Regarding Timely

[[Page 80598]]

Submission of Records, Decorum, or Other Similar Activities) makes 
clear that a DCM should issue no more than one warning letter in a 
rolling 12-month period before sanctions are imposed, again reflecting 
DMO staff's concerns with respect to the adequacy of sanctions imposed. 
Proposed subpart N is divided into a total of 16 rules, each of which 
is described in detail below.
---------------------------------------------------------------------------

    \131\ See Rule Enforcement Review of the New York Mercantile 
Exchange (Sep. 16, 2004); Rule Enforcement Review of the Kansas City 
Board of Trade (June 16, 2006); and Rule Enforcement Review of the 
Minneapolis Grain Exchange (Aug. 27, 2009).
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i. Proposed Sec.  38.701--Enforcement Staff
    Proposed Sec.  38.701 requires that a DCM establish and maintain 
sufficient enforcement staff and resources to effectively and promptly 
prosecute possible rule violations within the jurisdiction of the 
contract market. A DCM must also monitor the size and workload of its 
enforcement staff annually and increase its resources and staff as 
appropriate. The Commission recognizes that at some DCMs, compliance 
staff also serves as enforcement staff. That is, they both investigate 
cases and present them before disciplinary panels. These proposed rules 
are not intended to prohibit that practice.
    The Commission believes that adequate staff and resources are 
essential to the effective performance of a DCM's disciplinary program. 
As noted previously, this is reflected in DMO staff's findings and 
recommendations in recent RERs, in which DMO staff recommended that 
DCMs increase their compliance staff levels and monitor the size of 
their staff and increase the number of staff appropriately as trading 
volume increases, new responsibilities are assigned to compliance 
staff, or internal reviews demonstrate that work is not completed in an 
effective or timely manner.
    Proposed Sec.  38.701 also provides that a DCM's enforcement staff 
may not include members of the exchange or persons whose interests 
conflict with their enforcement duties. Moreover, a member of the 
enforcement staff may not operate under the direction or control of any 
person or persons with trading privileges at the contract market. These 
provisions seek to ensure the independence of enforcement staff, and 
help promote disciplinary procedures that are free of potential 
conflicts of interest.
ii. Proposed Sec.  38.702--Disciplinary Panels
    Proposed Sec.  38.702 requires a DCM to establish one or more 
Review Panels and one or more Hearing Panels (together, ``disciplinary 
panels'') to fulfill its obligations under this section. The 
composition of both panels must meet the composition requirements of 
proposed Sec.  40.9(c)(3)(ii)\132\ and may not include any members of 
the DCM's compliance staff, or any person involved in adjudicating any 
other stage of the same proceeding. Paragraph (b) of the proposed rule 
provides that a Review Panel must be responsible for determining 
whether a reasonable basis exists for finding a violation of contract 
market rules, and for authorizing the issuance of a notice of charges 
against persons alleged to have violated exchange rules. If a notice of 
charges is issued, then Paragraph (c) of the proposed rule helps to 
ensure an impartial hearing by requiring a separate Hearing Panel to 
adjudicate the matter and issue sanctions. The Commission notes that, 
while proposed Sec.  38.702 requires DCMs to empanel distinct bodies to 
issue charges and to adjudicate charges in a particular matter, DCMs 
may determine for themselves whether their Review and Hearing Panels 
are separate standing panels or ad hoc bodies whose members are chosen 
from a larger ``disciplinary committee'' to serve in one capacity or 
the other for a particular disciplinary matter.
---------------------------------------------------------------------------

    \132\ Section 40.9(c)(3)(ii), as proposed in the separate 
release titled Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest, provides that ``Each 
Disciplinary Panel shall include at least one person who would not 
be disqualified from serving as a Public Director by Sec.  
1.3(ccc)(1)(i)-(vi) and (2) of this chapter (a ``Public 
Participant''). Such Public Participant shall chair each 
Disciplinary Panel. In addition, any registered entity specified in 
paragraph (c)(3)(i) of this section shall adopt rules that would, at 
a minimum: (A) Further preclude any group or class of participants 
from dominating or exercising disproportionate influence on a 
Disciplinary Panel and (B) Prohibit any member of a Disciplinary 
Panel from participating in deliberations or voting on any matter in 
which the member has a financial interest.'' See 75 FR 63732, Oct. 
18, 2010.
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iii. Proposed Sec.  38.703--Review of Investigation Report
    Proposed Sec.  38.703 requires a Review Panel to promptly review an 
investigation report received pursuant to proposed Sec.  38.158(c). In 
addition, a Review Panel must take action on any investigation report 
received within 30 days of such receipt. The Commission believes that 
prompt action by all disciplinary panels is necessary for an effective 
disciplinary program. Among other considerations, prompt disciplinary 
action provides the best opportunity for witnesses to recall 
conversations, facts, and other information relevant to the matter. In 
addition, prompt and effective disciplinary action provides a clear 
signal to the market and to market participants that violations of 
exchange rules will not be tolerated by the DCM.
    After receipt of the investigation report, if a Review Panel 
determines that additional investigation or evidence is needed, it must 
promptly direct the compliance staff to conduct further investigation. 
In the alternative, if a Review Panel determines that no reasonable 
basis exists for finding a violation, or that prosecution is 
unwarranted, it may direct that no further action be taken. This 
determination must include a written statement setting forth the facts 
and analysis supporting the decision. Finally, if a Review Panel 
determines that a reasonable basis exists for finding a violation and 
adjudication is warranted, it must direct that the person or entity 
alleged to have committed the violation be served with a notice of 
charges.
iv. Proposed Sec.  38.704--Notice of Charges
    Proposed Sec.  38.704 describes the minimally acceptable contents 
of a notice of charges (``notice'') issued by a Review Panel. The 
notice must adequately state the acts, conduct, or practices in which 
the respondent is alleged to have engaged; state the rule, or rules, 
alleged to have been violated; and prescribe the period within which a 
hearing on the charges may be requested. Further, the notice must also 
advise the respondent charged that he is entitled, upon request, to a 
hearing on the charges. Pursuant to paragraphs (a) and (b) of the 
proposed rule, the DCM may adopt rules providing that (1) the failure 
to request a hearing within the time prescribed in the notice, except 
for good cause, may be deemed a waiver of the right to a hearing; and 
(2) the failure to answer or deny expressly a charge may be deemed to 
be an admission of such charge.
v. Proposed Sec.  38.705--Right to Representation
    Proposed Sec.  38.705 requires that, upon being served with a 
notice of charges, a respondent must have the right to be represented 
by counsel or any other representative of his choosing in all 
succeeding stages of the disciplinary process. Together with proposed 
Sec. Sec.  38.704 (requiring an adequate notice of charges to the 
respondent), 38.708 (conferring the right to hearing), and 38.710 
(hearing procedures), 38.705 is one of the primary proposed rules in 
subpart N that helps ensure basic fairness for respondents in 
disciplinary proceedings.

[[Page 80599]]

vi. Proposed Sec.  38.706--Answer to Charges
    Proposed Sec.  38.706 provides that a respondent must be given a 
reasonable period of time to file an answer to a charge. In general, 
paragraphs (a) through (c) of the proposed rule provide that the rules 
of the DCM may require that: (1) The answer must be in writing and 
include a statement that the respondent admits, denies or does not have 
and is unable to obtain sufficient information to admit or deny each 
allegation; (2) failure to file an answer on a timely basis shall be 
deemed an admission of all allegations in the notice of charges; and 
(3) failure in an answer to deny expressly a charge shall be deemed to 
be an admission of such charge.
vii. Proposed Sec.  38.707--Admission or Failure to Deny Charges
    Proposed Sec.  38.707 provides that, if a respondent admits or 
fails to deny any of the violations alleged in a notice of charges, 
then a Hearing Panel may find that the violations admitted or not 
denied have in fact been committed. If a DCM adopts a rule concerning 
the admission or failure to deny charges, then Sections (a) through (c) 
of the proposed rule provide that: (1) The Hearing Panel must impose a 
sanction for each violation found to have been committed; (2) the DCM 
must promptly notify the respondent in writing of any sanction to be 
imposed and advise the respondent that they may request a hearing on 
such sanction within the period of time stated in the notice; and (3) 
the rules of the DCM may provide that if the respondent fails to 
request a hearing within the period of time stated in the notice, then 
the respondent will be deemed to have accepted the sanction.
viii. Proposed Sec.  38.708--Denial of Charges and Right to Hearing
    Proposed Sec.  38.708 provides that in every instance where a 
respondent has requested a hearing on a charge that he or she denies, 
or on a sanction set by the Hearing Panel pursuant to proposed Sec.  
38.707, the respondent must be given the opportunity for a hearing in 
accordance with the requirements of proposed Sec.  38.710. The DCM's 
rules may provide that, except for good cause, the hearing must be 
concerned only with those charges denied or sanctions set by the 
Hearing Panel under proposed Sec.  38.707 for which a hearing has been 
requested.
ix. Proposed Sec.  38.709--Settlement Offers
    Proposed Sec.  38.709 provides the procedures a DCM must follow if 
it permits the use of settlements to resolve disciplinary cases. 
Section (a) of the proposed rule states that the rules of a DCM may 
permit a respondent to submit a written offer of settlement any time 
after an investigation report is completed. The disciplinary panel 
presiding over the matter may accept the offer of settlement, but may 
not alter the terms of the offer unless the respondent agrees. In 
addition, Section (b) of the proposed rule provides that the rules of 
the DCM may allow a disciplinary panel to permit the respondent to 
accept a sanction without admitting or denying the rule violations upon 
which the sanction is based.
    Section (c) of proposed Sec.  38.709 states that a disciplinary 
panel accepting a settlement offer must issue a written decision 
specifying the rule violations it has reason to believe were committed, 
and any sanction imposed, including any order of restitution where 
customer harm has been demonstrated. Importantly, Section (c) also 
provides that if an offer of settlement is accepted without the 
agreement of a DCM's enforcement staff, the decision must carefully 
explain the disciplinary panel's acceptance of the settlement. Finally, 
Section (d) of proposed Sec.  38.709 allows a respondent to withdraw 
his or her offer of settlement at any time before final acceptance by a 
disciplinary panel. If an offer is withdrawn after submission, or is 
rejected by a disciplinary panel, the respondent must not be deemed to 
have made any admissions by reason of the offer of settlement and must 
not be otherwise prejudiced by having submitted the offer of 
settlement.
x. Proposed Sec.  38.710--Hearings
    Proposed Sec.  38.710 requires a DCM to adopt rules that provide 
certain minimum requirements for any hearing conducted pursuant to a 
notice of charges. In general, Sections (a)(1) through (a)(7) of the 
proposed rule require the following requirements: (1) A fair hearing; 
(2) authority for a respondent to examine evidence relied on by 
enforcement staff in presenting the charges contained in the notice of 
charges; (3) the DCM's enforcement and compliance staffs must be 
parties to the hearing and the enforcement staff must present its case 
on those charges and sanctions that are the subject of the hearing; (4) 
the respondent must be entitled to appear personally at the hearing, 
have the authority to cross-examine persons appearing as witnesses at 
the hearing, and call witnesses and present evidence as may be relevant 
to the charges; (5) the DCM must require persons within its 
jurisdiction who are called as witnesses to participate in the hearing 
and produce evidence; (6) a copy of the hearing must be made and become 
a record of the proceeding if the respondent has requested a hearing; 
and (7) the rules of the DCM may provide that the cost of transcribing 
the record must be borne by a respondent who requests a transcript. 
Additionally, proposed paragraph (b) specifies that the rules of the 
DCM may provide that a sanction be summarily imposed upon any person 
within its jurisdiction whose actions impede the progress of a hearing.
xi. Proposed Sec.  38.711--Decisions
    Proposed Sec.  38.711 details the procedures that a Hearing Panel 
must follow in rendering disciplinary decisions. The proposed rule 
requires that all decisions include: (1) A notice of charges or a 
summary of the charges; (2) the answer, if any, or a summary of the 
answer; (3) a summary of the evidence produced at the hearing or, where 
appropriate incorporation by reference in the investigation report; (4) 
a statement of findings and conclusions with respect to each charge, 
and a careful explanation of the evidentiary and other basis for such 
findings and conclusions with respect to each charge; (5) an indication 
of each specific rule with which the respondent was found to have 
violated; and (6) a declaration of any penalty imposed against the 
respondent, including the basis for such sanctions and the effective 
date of such sanctions.
xii. Proposed Sec.  38.712--Right to Appeal
    Proposed Sec.  38.712 provides the procedures that a DCM must 
follow in the event that the DCM's rules authorize an appeal of adverse 
decisions in all or in certain classes of cases. Notably, the proposed 
rule requires a DCM that permits appeals by disciplinary respondents to 
also permit appeals by its enforcement staff. This provision reflects 
the Commission's belief that DCM enforcement staff must have the 
discretion to appeal disciplinary panel decisions that, for example, do 
not adequately sanction a respondent's violative conduct.
    For DCMs that permit appeals, the language in paragraphs (a) 
through (d) of proposed Sec.  38.712 generally requires the DCM to: (1) 
Establish an appellate panel that is authorized to hear appeals; (2) 
ensure that the appellate panel composition is consistent with

[[Page 80600]]

Sec.  40.9(c)(iv) of the Commission's regulations and does not include 
any members of the DCM's compliance staff, or any person involved in 
adjudicating any other stage of the same proceeding; (3) except for 
good cause shown, conduct the appeal or review solely on the record 
before the Hearing Panel, the written exceptions filed by the parties, 
and the oral or written arguments of the parties; and (4) issue a 
written decision of the board of appeals and provide a copy to the 
respondent promptly following the appeal or review proceeding.
xiii. Proposed Sec.  38.713--Final Decisions
    Proposed Sec.  38.713 requires that each DCM establish rules 
setting forth when a decision rendered under this subpart N will become 
the final decision of the DCM.
xiv. Proposed Sec.  38.714--Disciplinary Sanctions
    Proposed Sec.  38.714 requires that every disciplinary sanction 
imposed by a DCM must be commensurate with the violations committed and 
must be clearly sufficient to deter recidivism or similar violations by 
other market participants. Additionally, the proposed rule requires 
that, in the event of demonstrated customer harm, any disciplinary 
sanction must include full customer restitution. In evaluating 
appropriate sanctions, the proposed rule requires the DCM to take into 
account a respondent's disciplinary history.\133\
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    \133\ Proposed Sec.  38.158(c), which is being proposed as part 
of this release with respect to Core Principle 2, requires that a 
copy of a member or market participant's disciplinary history be 
included in the compliance staff's investigation report.
---------------------------------------------------------------------------

xv. Proposed Sec.  38.715--Summary Fines for Violations of Rules 
Regarding Timely Submission of Records, Decorum, or Other Similar 
Activities
    Proposed Sec.  38.715 permits a DCM to adopt a summary fine 
schedule for violations of rules relating to timely submission of 
accurate records required for clearing or verifying each day's 
transactions, decorum, attire, or other similar activities. A DCM may 
authorize its compliance staff to summarily impose minor sanctions 
against persons within the DCM's jurisdiction for violating such rules. 
The proposed rule makes clear that a DCM should issue no more than one 
warning letter in a rolling 12-month period for the same violation 
before sanctions are imposed. Additionally, the proposed rule specifies 
that a summary fine schedule must provide for progressively larger 
fines for recurring violations.
xvi. Proposed Sec.  38.716--Emergency Disciplinary Actions
    Proposed Sec.  38.716 provides that a DCM may impose a sanction, 
including a suspension, or take other summary action against a person 
or entity subject to its jurisdiction upon a reasonable belief that 
such immediate action is necessary to protect the best interest of the 
marketplace. The proposed rule also provides that any emergency action 
taken by the DCM must be in accordance with certain procedural 
safeguards that protect the respondent, including the right to be 
served with notice before the action is taken or otherwise at the 
earliest possible opportunity after action has been taken; the right to 
be represented by legal counsel in any proceeding subsequent to the 
emergency disciplinary action; the right to a hearing as soon as 
reasonably practical; and the right to receive a written decision on 
the summary action taken by the DCM.
14. Subpart O--Dispute Resolution
    Under the Dodd-Frank Act current Core Principle 13 is not 
substantively changed but it is renumbered as Core Principle 14. This 
core principle governs the obligations of DCMs to implement and enforce 
a dispute resolution program for their market participants and market 
intermediaries.\134\ Currently, compliance with the core principle is 
guided by application guidance and acceptable practices in Appendix B 
of part 38. Based upon the Commission's experience over the last 10 
years, this guidance has been successful in enabling DCMs to structure 
the appropriate dispute resolution program for themselves. Accordingly, 
the Commission proposes to maintain the guidance and acceptable 
practices, adding only clarifying changes that do not revise the 
substantive obligations of DCMs with respect to this core principle.
---------------------------------------------------------------------------

    \134\ 17 CFR part 38, App. B.
---------------------------------------------------------------------------

15. Subpart P--Governance Fitness Standards
    The Dodd-Frank Act redesignated former current Core Principle 14 as 
Core Principle 15. The language of this core principle remains 
unchanged and requires the DCM to 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). This release proposes to 
codify the statutory text of the core principle in proposed Sec.  
38.800. The applicable regulations implementing this core principle 
will be proposed in a forthcoming rulemaking, expected to be completed 
by the statutory deadline of July 15, 2011.\135\
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    \135\ See CFTC Web site for additional information on the 
``Governance Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities, 
Additional Requirements Regarding the Mitigation of Conflicts of 
Interest,'' at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_9_DCOGovernance/index.htm (last visited Dec. 14, 
2010).
---------------------------------------------------------------------------

16. Subpart Q--Conflicts of Interest
    The Dodd-Frank Act redesignated current Core Principle 15 
(Conflicts of Interest) as Core Principle 16. However, in all other 
respects, Dodd-Frank did not substantively amend the core principle. 
This release proposes to codify the statutory text of the core 
principle in proposed Sec.  38.850. The applicable regulations 
implementing this core principle were proposed in a separate release 
titled ``Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest.'' \136\
---------------------------------------------------------------------------

    \136\ 75 FR 63732, Oct. 18, 2010.
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17. Subpart R--Composition of Governing Boards of Contract Markets
    The Dodd-Frank Act redesignated the former Core Principle 16 
(Composition of Governing Boards of Mutually Owned Contract Markets) as 
Core Principle 17. In addition, current Core Principle 16 was amended 
by: (i) Changing the title of the core principle to ``Composition of 
Governing Boards of Contract Markets''; and (ii) revising the scope of 
the core principle such that it now requires the governance 
arrangements of all DCMs to be designed to permit the consideration of 
the views of market participants.\137\ This release proposes to codify 
the statutory text of the core principle in proposed Sec.  38.900. The 
applicable regulations implementing this core principle will be 
proposed in a forthcoming rulemaking, which is expected to be completed 
by the statutory deadline of July 15, 2011.\138\
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    \137\ Former Core Principle 16, which applied only to mutually 
owned DCMs, required such DCMs to ensure that the composition of 
their governing boards included market participants.
    \138\ See supra note 131.
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18. Subpart S--Recordkeeping
    The Dodd-Frank Act designated current Core Principle 17 
(Recordkeeping) as Core Principle 18. In almost all respects, Dodd-
Frank did not substantively amend the Core Principle. Under current 
Core Principle 17, DCMs

[[Page 80601]]

are required to maintain records of all activities related to their 
business as DCMs, in a form and manner acceptable to the Commission, 
``for a period of 5 years.'' \139\ The Commission adopted acceptable 
practices for this core principle by stating that DCMs could comply 
with the core principle by complying with Sec.  1.31 of the 
Commission's regulations (``Sec.  1.31''). Section 1.31 establishes 
recordkeeping requirements for all books and records required to be 
kept under the CEA, whether by a DCM or otherwise and requires that 
books and records be kept ``for a period of 5 years.'' \140\ The 
Commission proposes to maintain compliance with Sec.  1.31 as a primary 
component of compliance with this core principle, and proposes to 
incorporate the requirements in Sec.  1.31 into proposed Sec.  38.951.
---------------------------------------------------------------------------

    \139\ See 7 U.S.C. 7(d)(17).
    \140\ 17 CFR 1.31(a)(1).
---------------------------------------------------------------------------

    One notable change in the amended core principle is that while 
current Core Principle 17 requires that records be retained for 5 
years, the amended Core Principle (18) now requires that records be 
retained for ``at least 5 years.'' \141\ Accordingly, proposed Sec.  
38.951 permits the Commission to extend DCMs' recordkeeping 
requirements beyond the five years otherwise required of all entities 
by Sec.  1.31, should it elect to do so. Thus, by its terms, the 
proposed rule requires DCMs to ``maintain records of all activities 
relating to the business of the contract market, in a form and manner 
acceptable to the Commission, for a period of at least 5 years.'' In 
addition, DCMs must ``maintain such records, including trade records 
and investigatory and disciplinary files, in accordance with the 
requirements of Sec.  1.31 [of the Commission's regulations].''
---------------------------------------------------------------------------

    \141\ Compare 7 USC 7(d)(17) with Section 5(d)(18) of the CEA as 
amended by the Dodd-Frank Act (emphasis added).
---------------------------------------------------------------------------

    By incorporating Sec.  1.31, and more specifically, by 
incorporating Sec.  1.31(a), proposed Sec.  38.951 effectively requires 
that DCMs' books and records be readily accessible for the first two 
years of the minimum five-year statutory period and be open to 
inspection by any representatives of the Commission or the United 
States Department of Justice. The DCM, at its own expense, must 
promptly provide either a copy or the original book or record upon 
request.
    Proposed Sec.  38.951 also effectively incorporates current Sec.  
1.31(b)'s description of the permissible methods of storing books and 
records. Consequently, a DCM may store its books and records on either 
micrographic media, such as microfilm or microfiche or any similar 
medium, or electronic storage media as defined by Sec.  
1.31(b)(1)(ii).\142\ DCMs must, at all times, have the facilities to 
immediately produce the micrographic media or electronic storage media 
images and be prepared to present legible hard-copy images of such 
records. Additionally, DCM's must keep only Commission-required records 
on the media, store a duplicate of the record at a separate location, 
and organize and maintain an accurate index of all information 
maintained on both the original and duplicate storage media. DCMs that 
use electronic storage media are also required to develop and maintain 
an audit system to track the initial entry of original or duplicate 
records and any subsequent changes made thereafter.
---------------------------------------------------------------------------

    \142\ Among other criteria, Sec.  1.31(b)(1)(ii) defines 
electronic storage media as ``any digital storage medium or system 
that preserves the records exclusively in a non-rewritable, non-
erasable format [and] verifies automatically the quality and 
accuracy of the storage media recording process * * *.''
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    Finally, proposed Sec.  38.951 also incorporates Sec. Sec.  1.31(c) 
and 1.31(d). Section 1.31(c) of the Commission's regulations requires 
record-keepers who employ an electronic storage system to certify with 
the Commission that the system meets the requirements of an electronic 
storage media as defined in Sec.  1.31(b)(1)(ii). Section 1.31(d) 
states that trading cards, documents on which trade information is 
originally recorded in writing, certain written orders, and paper 
copies of certain electronically filed forms and reports with original 
signatures must be retained in hard-copy for the requisite time period. 
The proposed rule also requires a DCM to comply with the requirements 
of proposed Sec.  45.1--``Swap Recordkeeping Requirements''--if 
applicable to the DCM.
19. Subpart T--Antitrust Considerations
    Current Core Principle 18 governs the antitrust obligations of 
DCMs.\143\ The Dodd-Frank Act renumbered this core principle as Core 
Principle 19, but in all other respects the statutory text of the core 
principle is the same. The Commission believes that the existing 
guidance to this Core Principle remains appropriate. Accordingly, other 
than to codify the statutory text of Core Principle 19 into the 
proposed Sec.  38.1000, the Commission at this time is not proposing 
any amendments to the relevant guidance under part 38.
---------------------------------------------------------------------------

    \143\ Part 38 contains guidance governing compliance with Core 
Principle 18. 17 CFR part 38, App. B.
---------------------------------------------------------------------------

    Proposed Sec.  38.1001 refers applicants and DCMs to the guidance 
in Appendix B to part 38 for purposes of demonstrating to the 
Commission their compliance with the requirements of proposed Sec.  
38.1000.20.
20. Subpart U--System Safeguards
    Proposed Sec.  38.1051 establishes system safeguards requirements 
for all DCMs, pursuant to new Core Principle 20 added under the Dodd-
Frank Act. Core Principle 20, codified in Sec.  38.1050 requires DCMs 
to: (1) Establish and maintain a program of risk oversight to identify 
and minimize sources of operational risk through the development of 
appropriate controls and procedures and the development of automated 
systems that are reliable, secure, and have adequate scalable capacity; 
(2) establish and maintain emergency procedures, backup facilities, and 
a plan for disaster recovery that allow for the timely recovery and 
resumption of operations and the fulfillment of the responsibilities 
and obligations of the DCM; and (3) periodically conduct tests to 
verify that backup resources are sufficient to ensure continued order 
processing and trade matching, price reporting, market surveillance, 
and maintenance of a comprehensive and accurate audit trail. The rules 
proposed under subpart U implement these requirements.
    Because automated systems play a central and critical role in 
today's electronic financial market environment, oversight of core 
principle compliance by DCMs with respect to automated systems is an 
essential part of effective oversight of both futures and swaps 
markets. Sophisticated computer systems are crucial to a DCM's ability 
to meet its obligations and responsibilities. Safeguarding the 
reliability, security, and capacity of such systems is also essential 
to mitigation of systemic risk for the nation's financial sector as a 
whole. This is particularly true in light of the fact that the over-
the-counter swaps market is estimated to have in excess of $600 
trillion in outstanding contracts, roughly 40 times the gross domestic 
product of the United States.\144\ The ability of DCMs to recover and 
resume trading promptly in the event of a disruption of their 
operations is highly important to the U.S. economy. Ensuring the 
resilience of the automated systems of DCMs is a vitally important

[[Page 80602]]

part of the Commission's mission, and will be crucial to the robust and 
transparent systemic risk management framework established by the Dodd-
Frank Act. DCM compliance with generally accepted standards and best 
practices with respect to the development, operation, reliability, 
security and capacity of automated systems can reduce the frequency and 
severity of automated system security breaches or functional failures, 
thereby augmenting efforts to mitigate systemic risk. Notice to the 
Commission concerning systems malfunctions, systems security incidents, 
or any events leading to the activation of a DCM's business continuity-
disaster recovery (``BC-DR'') plan will assist the Commission's 
oversight and its ability to assess systemic risk levels. It would 
present unacceptable risks to the U.S. financial system if futures and 
swaps markets that comprise critical components of the world financial 
system were to become unavailable for an extended period of time for 
any reason, and adequate system safeguards are crucial to mitigation of 
such risks.
---------------------------------------------------------------------------

    \144\ These figures derived from Bank for International 
Settlements, BIS Quarterly Review, June 2010, Page A121, Table 19 at 
http://www.bis.org/statistics/otcder/dt1920a.pdf.; see also, Bureau 
of Economic Analysis news release, BEA 10-47, issued September 30, 
2010 at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.
---------------------------------------------------------------------------

    Based on the aforementioned, the rules proposed under Sec.  38.1051 
would require a DCM's program of risk analysis and oversight to address 
five categories of risk analysis and oversight, including information 
security; BC-DR planning and resources, capacity and performance 
planning; systems operations; systems development and quality 
assurance; and physical security and environmental controls. The 
proposed rules specifically would require each DCM to maintain a BC-DR 
plan and BC-DR resources sufficient to enable resumption of trading and 
of all of the responsibilities and obligations of the DCM during the 
next business day following any disruption of its operations, either 
through sufficient infrastructure and personnel resources of its own or 
through sufficient contractual arrangements with other DCMs or disaster 
recovery service providers. The proposed rules also would require each 
DCM to notify Commission staff of various system security-related 
events; to provide relevant documents to the Commission; and to conduct 
regular, periodic, objective testing and review of its automated 
systems. Moreover, the proposed rules would require each DCM, to the 
extent practicable, to coordinate its BC-DR plan with those of the 
members and market participants upon whom it depends to provide 
liquidity, to initiate coordinated testing of such plans, and to take 
into account in its own BC-DR plan, the BC-DR plans of relevant 
telecommunications, power, water, and other essential service 
providers.
21. Subpart V--Financial Resources
    The Dodd-Frank Act added new Core Principle 21. This core principle 
requires that a DCM must have adequate financial resources to discharge 
its responsibilities. The new core principle also requires that boards 
of trade must maintain financial resources sufficient to cover 
operating costs for a period of at least one year, calculated on a 
rolling basis.
    The Commission notes that a DCM is the first entity in the trading 
process to ensure that trading occurs in a liquid, fair, and 
financially secure trading facility. For instance, a DCM must have, 
among other things, adequate trade practice and market surveillance, 
disciplinary, recordkeeping, and alternate dispute resolution programs 
in place in order to comply with the relevant core principles. In order 
to fulfill these responsibilities, a DCM must have appropriate minimum 
financial resources on hand and on an ongoing basis to sustain 
operations for a reasonable period of time. Furthermore, DCMs must have 
sufficient resources at any given time to allow them, if necessary, to 
close out trading in a manner not disruptive to the market.
    Proposed Sec.  38.1101 sets out financial resource requirements for 
DCMs, to implement new Core Principle 21. Under proposed Sec.  38.1101, 
DCMs that also operate as DCOs are also subject to the financial 
resource requirements for DCOs in proposed Sec.  39.11.\145\
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    \145\ Commission regulation Sec.  39.11 establishes requirements 
that a DCO will have to meet in order to comply with DCO Core 
Principle B (Financial Resources), as amended by the Dodd-Frank Act. 
Amended Core Principle B requires a DCO to possess financial 
resources that, at a minimum, exceed the total amount that would 
enable the DCO to meet its financial obligations to its clearing 
members notwithstanding a default by the clearing member creating 
the largest financial exposure for the DCO in extreme but plausible 
conditions; and enable the DCO to cover its operating costs for a 
period of 1 year, as calculated on a rolling basis. See 75 FR 63113, 
Oct. 14, 2010.
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i. Proposed Sec.  38.1101 (a)--General Requirements
    Proposed Sec.  38.1100 recites the language of Core Principle 21, 
as set forth in Section 5(d)(21) of the CEA, as amended by the Dodd-
Frank Act. Proposed Sec.  38.1101(a)(1) and (3) would require DCMs to 
maintain sufficient financial resources to cover operating costs for at 
least one year, calculated on a rolling basis--i.e., at all times. The 
DCM must have sufficient financial resources to cover operating costs 
for at least one year from any particular point in time. The one year 
period is required under the amended core principle, and the Commission 
considers one year an appropriate timeframe given the potential need to 
allow contracts to expire and to allow the DCM's business to wind down 
in an orderly fashion. The Commission believes that this requirement 
will provide a clear baseline for financial resources, thus enhancing 
the financial integrity of the markets.\146\
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    \146\ Some foreign regulatory authorities already have similar 
requirements for the equivalent entities they regulate. For example, 
the UK Financial Services Authority's (``FSA'') recognition 
requirements for UK recognized investment exchanges and UK 
recognized clearing houses (collectively, ``UK recognized bodies'') 
include the maintenance of financial resources sufficient to ensure 
that the UK recognized body would be able to complete an orderly 
closure or transfer of its business without being prevented from 
doing so by insolvency or lack of available funds. Section 2.3.7 of 
the FSA Recognition Requirements calls for a UK recognized body to 
have at all times liquid financial assets amounting to at least six 
months' operating costs and net capital of at least that amount.
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    The one-year period also is consistent with established accounting 
standards, under which an entity's ability to continue as a going 
concern comes into question if there is evidence that the entity may be 
unable to continue to meet its obligations in the next 12 months 
without substantial disposition of assets outside the ordinary course 
of business, restructuring of debt, externally forced revisions of its 
operations, or similar actions.\147\
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    \147\ See American Institute of Certified Public Accountants 
Auditing Standards Board Statement of Auditing Standards No. 59, The 
Auditor's Consideration of an Entity's Ability to Continue as a 
Going Concern, as amended.
---------------------------------------------------------------------------

ii. Proposed Sec.  38. 1101(b)--Types of Financial Resources
    Under proposed Sec.  38.1101(b), financial resources available to 
DCMs to satisfy the applicable financial requirements would include the 
DCM's own capital (assets in excess of liabilities) and any other 
financial resource deemed acceptable by the Commission. A DCM would be 
able to request an informal interpretation from Commission staff on 
whether a particular financial resource would be acceptable to the 
Commission. The Commission invites commenters to recommend particular 
financial resources for inclusion in the final regulation.
iii. Proposed Sec.  38.1101(c)--Computation of Financial Resource 
Requirement
    Proposed Sec.  38.1101(c) would require a DCM at the end of each 
fiscal quarter to make a reasonable calculation of the financial 
resources it needs to meet the

[[Page 80603]]

requirements of proposed Sec.  38.1101(b). In the first instance, the 
DCM would have reasonable discretion in determining a methodology it 
uses to make the calculation. However, the Commission may review the 
methodology and require changes as appropriate.
iv. Proposed Sec.  38.1101(d)--Valuation of Financial Resources
    Proposed Sec.  38.1101(d) would require DCMs, no less frequently 
than at the end of each fiscal quarter, to calculate the current market 
value of each financial resource used to meet their obligations under 
these proposed rules. Additionally, the DCMs would be required to 
perform the valuation at other times as appropriate. This provision is 
designed to address the need to update valuations in circumstances 
where there may have been material fluctuations in market value that 
could impact a DCM's ability to meet its obligations on a rolling basis 
as required by proposed Sec.  38.1101(a). When valuing a financial 
resource, a DCM would be required to reduce the value, as appropriate, 
to reflect any market or credit risk specific to that particular 
resource, i.e., apply a haircut.\148\ The Commission would permit each 
DCM to exercise its discretion in determining the applicable haircuts. 
However, such haircuts are subject to Commission review and must be 
acceptable to the Commission.
---------------------------------------------------------------------------

    \148\ A ``haircut'' is a deduction taken from the value of an 
asset to reserve for potential future adverse price movements in 
such asset.
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v. Proposed Sec.  38.1101(e)--Liquidity of Financial Resources
    Proposed Sec.  38.1101(e) would require DCMs to maintain 
unencumbered liquid financial assets, such as cash or highly liquid 
securities, equal to at least six months' operating costs. The 
Commission believes that having six months' worth of unencumbered 
liquid financial assets would give a DCM time to liquidate the 
remaining financial assets it would need to continue operating for the 
last six months of the required one-year period. If a DCM does not have 
six months' worth of unencumbered liquid financial assets, it would be 
allowed to use a committed line of credit or similar facility to 
satisfy this requirement.
    The Commission notes that a committed line of credit or similar 
facility is not listed in proposed Sec.  38.1101(b) as a financial 
resource available to a DCM to satisfy the requirements of proposed 
Sec.  38.1101(a). A DCM may only use a committed line of credit or 
similar facility to meet the liquidity requirements set forth in 
proposed Sec.  38.1101(e).
vi. Proposed Sec.  38.1101(f)--Reporting Requirements
    Under proposed Sec.  38.1101(f), at the end of each fiscal quarter, 
or at any time upon Commission request, DCMs would be required to 
report to the Commission: (i) the amount of financial resources 
necessary to meet the requirements set forth in the regulation; and 
(ii) the value of each financial resource available to meet those 
requirements. A DCM would also have to provide the Commission with a 
financial statement, including the balance sheet, income statement, and 
statement of cash flows, of the DCM or of its parent company (if the 
DCM does not have an independent financial statement and the parent 
company's financial statement is prepared on a consolidated basis).
    Proposed Sec.  38.1101(f) requires a DCM to provide the Commission 
with sufficient documentation that explains the methodology it used to 
calculate its financial requirements and the basis for its 
determinations regarding valuation and liquidity. The DCM also must 
provide copies of any agreements establishing or amending a credit 
facility, insurance coverage, or any similar arrangement that evidences 
or otherwise supports its conclusions. The sufficiency of the 
documentation would be determined by the Commission in its sole 
discretion. The DCM would have 17 business days \149\ from the end of 
the fiscal quarter to file the report, but would also be able to 
request an extension of time from the Commission.
---------------------------------------------------------------------------

    \149\ This filing deadline is consistent with the deadline 
imposed on FCMs for the filing of monthly financial reports. See 17 
CFR 1.10(b).
---------------------------------------------------------------------------

    The Commission invites comments on all these proposed rules 
relating to requirements for financial resources for DCMs.
22. Subpart W--Diversity of Boards of Directors
    The Dodd-Frank Act added new Core Principle 22, requiring that 
publicly traded DCMs must endeavor to recruit individuals to serve on 
their board of directors from among a broad and culturally diverse pool 
of qualified candidates. This release proposes to codify the statutory 
text of the core principle in proposed Sec.  38.1150. This core 
principle will be addressed in a forthcoming release that is expected 
to be completed by the statutory deadline of July 15, 2011.
23. Subpart X--Securities and Exchange Commission
    The Dodd-Frank Act added new Core Principle 23, requiring that DCMs 
keep any records relating to swaps defined in CEA Section 1a(47)(A)(v), 
as amended by the Dodd-Frank Act, open to inspection and examination by 
the Securities and Exchange Commission (``SEC'').\150\ Consistent with 
the text of this core principle, the Commission proposes guidance under 
part 38 that provides that each DCM should have arrangements and 
resources for collecting and maintaining accurate records pertaining to 
any swap agreements defined in section 1a(47)(A)(v) of the amended CEA.
---------------------------------------------------------------------------

    \150\ 7 U.S.C. 7; see also Section 5(d)(23) of the CEA, as 
amended by the Dodd-Frank Act.
---------------------------------------------------------------------------

    Proposed Sec.  38.1201 refers applicants and DCMs to the guidance 
in Appendix B to part 38 for purposes of demonstrating to the 
Commission their compliance with the requirements of Proposed Sec.  
38.1200, which codifies the text of the core principle.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \151\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. The rules adopted herein will affect designated 
contract markets. 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.\152\ The Commission previously determined that designated 
contract markets are not small entities for the purpose of the 
RFA.\153\ Therefore, the Chairman, on behalf of the Commission, 
pursuant to 5 U.S.C. 605(b) certifies that the proposed rules will not 
have a significant economic impact on a substantial number of small 
entities.
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    \151\ 5 U.S.C. 601 et seq.
    \152\ 47 FR 18618-21, Apr. 30, 1982.
    \153\ Id.
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B. Paperwork Reduction Act

    This proposed rulemaking contains information collection 
requirements. The Paperwork Reduction Act (PRA) \154\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. The Commission is

[[Page 80604]]

proposing to amend Collection 3038-0052 to allow for an increase in 
response hours for the proposed rulemaking amending part 38, which 
captures associated proposed amendments to rules 1.52 and 16.01, as 
required under the Dodd-Frank Act.\155\ The Commission therefore is 
submitting this proposal to the Office of Management and Budget (OMB) 
for its review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 
The title for this collection is ``Part 38--Designated Contract 
Markets'' (OMB Control number 3038-0052). Responses to this collection 
of information would be mandatory. The Commission will protect 
proprietary information according to the Freedom of Information Act 
(FOIA) and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the Act, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' \156\ The Commission is also required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974.\157\
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    \154\ 44 U.S.C. 3501 et seq.
    \155\ Dodd Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \156\ 7 U.S.C. 12.
    \157\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

1. Additional Information Provided by Designated Contract Markets
    The proposed rules require each respondent to file information with 
the Commission. For instance, contract markets must file applications 
and supporting documents and information with the Commission for 
designation pursuant to Commission rule 38.3. Designated contract 
markets must either request approval or certify rules and products with 
the Commission pursuant to Commission rule 38.4. Designated contract 
markets must disclose information related to prices, volume, open 
interest and certain trading information pursuant to Core Principle 8 
(Daily Publication of Trading Information).\158\
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    \158\ See Section 735(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Commission staff previously estimated 300 hours average response 
time from each respondent for this collection of information for 
designation and compliance purposes pursuant to part 38. Based on its 
experience with administering registered entities' submission 
requirements since implementation of the Commodity Futures 
Modernization Act of 2000,\159\ Commission staff believes that the 
response time for designation and compliance would generally increase 
by 10% with the implementation of swaps trading on designated contract 
markets pursuant to Section 723(a)(3) of the Dodd-Frank Act and the 
addition of new core principles with which designated contract markets 
must comply. Commission staff estimates that it would receive filings 
from 17 respondents.\160\ Accordingly, the additional burden in terms 
of hours would be 30 additional hours per respondent and 510 additional 
hours annually for all respondents for designation and compliance.
---------------------------------------------------------------------------

    \159\ Public Law 106-554, 114 Stat. 2763 (2000).
    \160\ The number of designated contract markets increased from 
13 to 17 since the last amendment to Collection 3038-0052.
---------------------------------------------------------------------------

    In addition to the general increase noted above, pursuant to the 
proposed rulemaking, respondents are subject to new Core Principle 21 
(Financial Resources) that requires the respondent to have adequate 
financial, operational and managerial resources.\161\ In order to 
demonstrate compliance with Core Principle 21, each respondent will 
need to file specific reports to the Commission on a quarterly basis, 
which would result in four quarterly responses per respondent per year. 
Commission staff estimates that each respondent would expend 10 hours 
to prepare each filing required under the proposed regulations. As 
noted above, Commission staff estimates that it would receive filings 
from 17 respondents. Accordingly, the additional burden in terms of 
hours would be 40 additional hours annually per respondent and 680 
additional hours annually for all respondents to comply with Core 
Principle 21.
---------------------------------------------------------------------------

    \161\ See section 735(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Commission staff estimates that respondents could expend up to an 
additional $3,640 annually based on an hourly wage rate of $52 (30 
hours + 40 hours x $52) to comply with the proposed rules. This would 
result in an aggregated additional cost of $61,880 per annum (17 
respondents x $3,640).
    OMB Control Number 3038-005.
    Estimated Number of Respondents: 17.
    Quarterly Responses by Each Respondent: 4.
    Total Quarterly Responses by Each Respondent: 68.
    Estimated Additional Average Hours per Response: 70.
    Aggregate Annual Hourly Reporting Burden: 1190.
2. Information Collection Comments
    Copies of the submission from the Commission to OMB are available 
by visiting RegInfo.gov. The Commission will consider public comments 
on this proposed collection of information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on designated clearing organizations, designated contract 
markets, and swap execution facilities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should contact the Office 
of Information and Regulatory Affairs, Office of Management and Budget, 
by fax at (202) 395-6566 or by e-mail at <a href="/cdn-cgi/l/email-protection#94dbddc6d5e7e1f6f9fde7e7fdfbfad4fbf9f6baf1fbe4baf3fbe2"><span class="__cf_email__" data-cfemail="5817110a192b2d3a35312b2b3137361837353a763d3728763f372e">[email protected]</span></a>. 
Please provide the Commission with a copy of submitted comments so that 
they may be summarized and addressed in the final rulemaking. Refer to 
the Addresses section of this notice of proposed rulemaking for comment 
submission instructions to the Commission.
    OMB is required to make a decision concerning the proposed 
information collection requirements between 30 and 60 days after 
publication of this Release in the Federal Register. Therefore, a 
comment to OMB is best assured of receiving full consideration if OMB 
receives it within 30 days of publication of this Release. Nothing in 
the foregoing affects the deadline enumerated above for public comment 
to the Commission on the proposed rules.

C. Cost Benefit Analysis

    Section 15(a) of the CEA \162\ requires that the Commission 
consider the costs and benefits of its actions before issuing a 
regulation under the Act. By its terms, Section 15(a) does not require 
the Commission to quantify the costs and

[[Page 80605]]

benefits of a new rule or determine whether the benefits of the 
rulemaking outweigh its costs; rather, Section 15(a) requires the 
Commission to ``consider'' the costs and benefits of its actions.
---------------------------------------------------------------------------

    \162\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Section 15(a) of the CEA 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 
considerations 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 CEA.
Summary of Proposed Requirements
    The proposed rulemaking would change the criteria applicants for 
designation as a contract market must meet by: (1) Eliminating all of 
the existing eight designation criteria and incorporating those 
criteria into various DCM core principles; (2) revising, in some 
instances, the wording of the 18 pre-existing DCM core principles; and 
(3) adding five additional DCM core principles. In addition to revising 
the DCM core principles, the Dodd-Frank Act requires that the trading 
or processing of clearable swaps must occur only on a registered DCM or 
SEF.\163\ This rulemaking will implement, in part 38 of the 
Commission's regulations, these amended provisions of the Act relevant 
to DCMs. Specific provisions include a proposal to replace guidance and 
acceptable practices associated with certain core principles with 
regulations. The Commission also is proposing several procedural 
changes for new applications for designation as a contract market, 
including the elimination of the expedited approval procedures and the 
creation of a DCM application form. Under the proposal, the timing of 
reviews of designation applications would be governed only by the 180-
day statutory review period.
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    \163\ See section 723 of Dodd-Frank Act.
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Costs
    As highlighted by recent events in the global credit markets, 
transacting of swaps in unregulated, over-the-counter markets does not 
contribute to the goal of stability in the broader financial markets. 
The public would continue to be at risk to such financial instability 
if certain derivatives were allowed to trade over the counter rather 
than on regulated exchanges. Designated contract markets that determine 
to list swaps for trading will be subject to core principles for 
trading of swaps just as they are for futures contracts. If swaps were 
allowed to continue to be transacted bilaterally, rather than on the 
centralized market of a DCM, price discovery and transparency in the 
swaps markets would continue to be inhibited.
    Under the proposed rulemaking, designated contract markets will be 
required to comply with five additional core principles for trading 
futures and option contracts. Moreover, designated contract markets 
that determine to list standardized swaps for trading will be required 
to comply with the same core principles as for trading futures 
contracts. These procedures are mandatory pursuant to the Dodd-Frank 
Act and any additional costs associated with these procedures are 
required by the implementation of the Dodd-Frank Act. The Commission is 
also proposing to replace guidance and acceptable practices associated 
with certain core principles with regulations. While these new 
regulations generally codify existing industry practice, bringing their 
procedures into full compliance with these new regulations may impose 
some costs on DCMs.
    Regarding new applications for designation as a contract market, 
the Commission is proposing several procedural changes, including the 
elimination of the expedited approval procedures, such that the timing 
of such reviews would be governed only by the 180-day statutory review 
period. This may impose costs on DCM applicants that may have to wait 
longer for designation than under current procedures. However, in light 
of the difficulties in submitting a complete application under the 
expedited procedures, few DCMs have been eligible for designation under 
the expedited procedures, so these costs should be limited.
Benefits
    The Commission believes that the benefits of the rulemaking are 
significant. The proposed regulations provide for the transacting of 
swaps on DCMs. DCMs will compete with swap execution facilities to list 
new standardized swaps contracts, while certain customized swaps will 
continue to transact bilaterally. This competition will benefit the 
marketplace. Providing market participants with the ability to trade 
standardized swaps openly and competitively additionally will provide 
market participants with enhanced price transparency resulting in 
greater protection of market participants and the public.
    The proposed regulations also require DCMs that determine to list 
swaps for trading will have to coordinate with DCOs so that the swaps 
may be listed swaps for clearing. This will subject the swaps to the 
DCO's risk management and margining procedures, which addresses the 
consideration of sound risk management practices and will add to the 
financial integrity of the swaps markets.
    The proposed regulations eliminate all of the existing eight 
designation criteria and incorporate those criteria into various 
existing DCM core principles. The proposed regulations additionally 
implement five new core principles, specifically Core Principle 13 
(Disciplinary Procedures), Core Principle 20 (System Safeguards), Core 
Principle 21 (Financial Resources), Core Principle 22 (Diversity of 
Boards of Directors), and Core Principle 23 (Securities and Exchange 
Commission). The proposed rules also modify existing core principles. 
For example, newly amended Core Principle 9 (Execution of Transactions) 
requires the board of trade to provide a competitive, open and 
efficient market and mechanism for executing transactions that protects 
the price discovery process of trading in the centralized market. These 
changes will benefit the public by further enhancing the transparency 
and integrity of futures and options markets as well as swap markets on 
DCMs.
    Further, the Commission proposes to replace guidance and acceptable 
practices associated with certain core principles with regulations. 
This will have the benefit to DCMs and the public of providing greater 
regulatory certainty. Finally the changes to the procedures for 
applying for contract market designation will benefit new applicants by 
improving the workability and efficiency of the application process.
Public Comment
    The Commission invites public comment on its cost-benefit 
considerations. Commenters are also invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the Proposal with their comment letters.

[[Page 80606]]

IV. Text of Proposed Rules

List of Subjects

17 CFR Part 1

    Commodity futures, Designated contract markets, Minimum financial 
requirements for intermediaries, Reporting and recordkeeping 
requirements.

17 CFR Part 16

    Commodity futures, Reporting and Recordkeeping requirements.

17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets, 
Reporting and Recordkeeping requirements, Transactions off the 
centralized market.

    For the reasons stated in the preamble, and under the authority of 
7 U.S.C. 1, et seq., the Commodity Futures Trading Commission proposes 
to amend 17 CFR parts 1, 16 and 38 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. Revise the authority citation for part 1 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-2, 7b, 8, 9, 12, 12a, 12c, 
13a, 13a-1, 16, 19, 21, 23 and 24, as amended by Pub. L. No. 111-
203, 124 Stat 1376.


Sec.  1.38  [Removed and Reserved]

    2. Remove and reserve Sec.  1.38.
    3. Revise Sec.  1.52 to read as follows:


Sec.  1.52  Self-regulatory organization adoption and surveillance of 
minimum financial requirements.

    (a) Each self-regulatory organization must adopt rules prescribing 
minimum financial and related reporting requirements for members who 
are registered futures commission merchants, registered retail foreign 
exchange dealers, or registered introducing brokers. The self-
regulatory minimum financial and related reporting requirements must be 
the same as, or more stringent than, the requirements contained in 
Sec. Sec.  1.10 and 1.17 of this chapter, for futures commission 
merchants and introducing brokers, and Sec. Sec.  5.7 and 5.12 of this 
chapter for retail foreign exchange dealers; Provided, however, a self-
regulatory organization may permit its member registrants that are 
registered with the Securities and Exchange Commission as securities 
brokers or dealers to file (in accordance with Sec.  1.10(h) of this 
chapter) a copy of their Financial and Operational Combined Uniform 
Single Report under the Securities Exchange Act of 1934, Part II, Part 
IIA, or Part II CSE, in lieu of Form 1-FR. The definition of adjusted 
net capital must be the same as that prescribed in Sec.  1.17(c) of 
this chapter for futures commission merchants and introducing brokers, 
and Sec.  5.7(b)(2) of this chapter for futures commission merchants 
offering or engaging in retail forex transactions and for retail 
foreign exchange dealers.
    (b) Each self-regulatory organization must establish and operate a 
supervisory program for the purpose of assessing whether each member 
registrant is in compliance with the applicable self-regulatory 
organization and Commission rules and regulations governing minimum net 
capital and related financial requirements, the obligation to segregate 
customer funds, financial reporting requirements, recordkeeping 
requirements, and sales practice and other compliance requirements. The 
supervisory program also must address the following elements:
    (1) Adequate levels and independence of audit staff. A self-
regulatory organization must maintain staff of an adequate size, 
training, and experience to effectively implement a supervisory 
program. Staff of the self-regulatory organization, including officers, 
directors and supervising committee members, must maintain independent 
judgment and its actions must not impair its independence nor appear to 
impair its independence in matters related to the supervisory program. 
The self-regulatory organization must provide annual ethics training to 
all staff with responsibilities for the supervisory program.
    (2) Ongoing surveillance. A self-regulatory organization's ongoing 
surveillance of member registrants must include the review and analysis 
of financial reports and regulatory notices filed by member registrants 
with the designated self-regulatory organization.
    (3) High-risk firms. A self-regulatory organization's supervisory 
program must include procedures for identifying member registrants that 
are determined to pose a high degree of potential financial risk, 
including the potential risk of loss of customer funds. High-risk 
member registrants must include firms experiencing financial or 
operational difficulties, failing to meet segregation or net capital 
requirements, failing to maintain current books and records, or 
experiencing material inadequacies in internal controls. Enhanced 
monitoring for high risk firms should include, as appropriate, daily 
review of net capital, segregation, and secured calculations, to assess 
compliance with self-regulatory and Commission requirements.
    (4) On-site examinations. (i) A self-regulatory organization must 
conduct routine periodic on-site examinations of member registrants. 
Member futures commission merchants and retail foreign exchange dealers 
must be subject to on-site examinations no less frequently than once 
every eighteen months. A self-regulatory organization may establish a 
risk-based method of establishing the scope of each on-site 
examination, provided however, that the scope of each on-site 
examination of a futures commission merchant or retail foreign exchange 
dealer must include an assessment of whether the registrant is in 
compliance with applicable Commission and self-regulatory organization 
minimum capital and customer fund protection requirements, 
recordkeeping, and reporting requirements.
    (ii) A self-regulatory organization must establish the frequency of 
on-site examinations of member introducing brokers that do not operate 
pursuant to guarantee agreements with futures commission merchants or 
retail foreign exchange dealers using a risk-based approach, provided 
however, that each introducing broker is subject to an on-site 
examination no less frequently than once every three years.
    (iii) A self-regulatory organization must conduct on-site 
examinations of member registrants in accordance with uniform audit 
programs and procedures that have been submitted to the Commission.
    (5) Adequate documentation. A self-regulatory organization must 
adequately document all aspects of the operation of the supervisory 
program, including the conduct of risk-based scope setting and the 
risk-based surveillance of high-risk member registrants, and the 
imposition of remedial and punitive action(s) for material violations.
    (c) Any two or more self-regulatory organizations may file with the 
Commission a plan for delegating to a designated self-regulatory 
organization, for any registered futures commission merchant, retail 
foreign exchange dealer, or introducing broker that is a member of more 
than one such self-regulatory organization, the responsibility of:
    (1) Monitoring and auditing for compliance with the minimum 
financial and related reporting requirements adopted by such self-
regulatory organizations and the Commission in accordance with 
paragraphs (a) and (b) of this section; and

[[Page 80607]]

    (2) Receiving the financial reports necessitated by such minimum 
financial and related reporting requirements.
    (d) Any plan filed under this section may contain provisions for 
the allocation of expenses reasonably incurred by the designated self-
regulatory organization among the self-regulatory organizations 
participating in such a plan.
    (e) A plan's designated self-regulatory organization must report 
to:
    (1) That plan's other self-regulatory organizations any violation 
of such other self-regulatory organizations' rules and regulations for 
which the responsibility to monitor, audit or examine has been 
delegated to such designated self-regulatory organization under this 
section; and
    (2) The Commission any violation of a self-regulatory 
organization's rules and regulations or any violation of the 
Commission's regulations for which the responsibility to monitor, audit 
or examine has been delegated to such designated self-regulatory 
organization under this section.
    (f) The self-regulatory organizations may, among themselves, 
establish programs to provide access to any necessary financial or 
related information.
    (g) After appropriate notice and opportunity for comment, the 
Commission may, by written notice, approve such a plan, or any part of 
the plan, if it finds that the plan, or any part of it:
    (1) Is necessary or appropriate to serve the public interest;
    (2) Is for the protection and in the interest of customers or 
option customers;
    (3) Reduces multiple monitoring and multiple auditing for 
compliance with the minimum financial rules of the self-regulatory 
organizations submitting the plan of any futures commission merchant, 
retail foreign exchange dealer, or introducing broker that is a member 
of more than one self-regulatory organization;
    (4) Reduces multiple reporting of the financial information 
necessitated by such minimum financial and related reporting 
requirements by any futures commission merchant, retail foreign 
exchange dealer, or introducing broker that is a member of more than 
one self-regulatory organization;
    (5) Fosters cooperation and coordination among the self-regulatory 
organizations; and
    (6) Does not hinder the development of a registered futures 
association under Section 17 of the Act.
    (h) After the Commission has approved a plan, or part thereof, 
under Sec.  1.52(g), a self-regulatory organization relieved of 
responsibility must notify each of its members that are subject to such 
a plan:
    (1) Of the limited nature of its responsibility for such a member's 
compliance with its minimum financial and related reporting 
requirements; and
    (2) Of the identity of the designated self-regulatory organization 
that has been delegated responsibility for such a member.
    (i) The Commission may at any time, after appropriate notice and 
opportunity for hearing, withdraw its approval of any plan, or part 
thereof, established under this section, if such plan, or part thereof, 
ceases to adequately effectuate the purposes of Section 4f(b) of the 
Act or of this section.
    (j) Whenever a registered futures commission merchant, a registered 
retail foreign exchange dealer, or a registered introducing broker 
holding membership in a self-regulatory organization ceases to be a 
member in good standing of that self-regulatory organization, such 
self-regulatory organization must, on the same day that event takes 
place, give electronic notice of that event to the Commission at its 
Washington, DC, headquarters and send a copy of that notification to 
such futures commission merchant, retail foreign exchange dealer, or 
introducing broker.
    (k) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant, retail foreign exchange 
dealer, or introducing broker for compliance with the minimum financial 
and related reporting requirements to which such futures commission 
merchant, retail foreign exchange dealer, or introducing broker is 
subject.
    (l) In the event a plan is not filed and/or approved for each 
registered futures commission merchant, retail foreign exchange dealer, 
or introducing broker that is a member of more than one self-regulatory 
organization, the Commission may design and, after notice and 
opportunity for comment, approve a plan for those futures commission 
merchants, retail foreign exchange dealers, or introducing brokers that 
are not the subject of an approved plan (under paragraph (g) of this 
section), delegating to a designated self-regulatory organization the 
responsibilities described in paragraph (c) of this section.

PART 16--REPORTS BY CONTRACT MARKETS AND SWAP EXECUTION FACILITIES

    4. The authority citation for part 16 is revised to read as 
follows:

    Authority:  7 U.S.C. 2, 6a, 6c, 6g, 6i, and 7, and 7b-3, as 
amended by Pub. L. 111-203, 124 Stat. 1376.

    5. The heading for part 16 is revised to read as set forth above.
    6. Revise Sec.  16.01 to read as follows:


Sec.  16.01  Publication of market data on futures, swaps and options 
thereon: Trading volume, open contracts, prices, and critical dates.

    (a) Trading volume and open contracts. (1) Each reporting market, 
as defined in part 15 of this chapter, must record for each business 
day the following information separately:
    (i) For futures, by commodity and by futures expiration date;
    (ii) For options by underlying futures contracts for options on 
futures contracts or by underlying physical for options on physicals, 
and by put, by call, by expiration date and by strike price;
    (iii) For swaps or class of swaps, by product type and by term life 
of the swap; and
    (iv) For swaptions or class of swaptions, by underlying swap 
contracts for options on swap contracts or by underlying physical for 
swaptions on physicals, and by put, by call, by expiration date and by 
strike price.
    (2) Volume for swaps and swaptions shall be reported in terms of 
contracts for standard-sized contracts (i.e., contracts with a set 
contract size for all contracts) or in terms of notional value for non-
standard-sized contracts (i.e., contracts whose contract size is not 
set and can vary for each transaction):
    (i) The option delta, where a delta system is used;
    (ii) The total gross open contracts for futures, excluding those 
contracts against which delivery notices have been stopped;
    (iii) For futures products that specify delivery, open contracts 
against which delivery notices have been issued on that business day;
    (iv) The total volume of trading, excluding transfer trades or 
office trades;
    (v) The total volume of futures/options/swaps/swaptions exchanged 
for commodities or for derivatives positions that are included in the 
total volume of trading; and
    (vi) The total volume of block trades included in the total volume 
of trading.
    (b) Prices. (1) Each reporting market must record the following 
information separately:
    (i) For futures, by commodity and by futures expiration,
    (ii) For options, by underlying futures contracts for options on 
futures contracts or by underlying physical for

[[Page 80608]]

options on physicals, and by put, by call, by expiration date and by 
strike price,
    (iii) For swaps, by product type and contract month or term life of 
the swap, and
    (iv) For swaptions or class of swaptions, by underlying swap 
contracts for options on swap contracts or by underlying physical for 
swaptions on physicals, and by put, by call, by expiration date and by 
strike price.
    (2) Each reporting market must record for the trading session and 
for the opening and closing periods of trading as determined by each 
reporting market:
    (i) The opening and closing prices of each futures, option, swap or 
swaption.
    (ii) The price that is used for settlement purposes, if different 
from the closing price.
    (iii) The lowest price of a sale or offer, whichever is lower, and 
the highest price of a sale or bid, whichever is higher, that the 
reporting market reasonably determines accurately reflects market 
conditions. Bids and offers vacated or withdrawn shall not be used in 
making this determination. A bid is vacated if followed by a higher bid 
or price and an offer is vacated if followed by a lower offer or price.
    (3) If there are no transactions, bids, or offers during the 
opening or closing periods, the reporting market may record as 
appropriate:
    (i) The first price (in lieu of opening price data) or the last 
price (in lieu of closing price data) occurring during the trading 
session, clearly indicating that such prices are the first and last 
prices; or
    (ii) Nominal opening or nominal closing prices that the reporting 
market reasonably determines to accurately reflect market conditions, 
clearly indicating that such prices are nominal.
    (4) Additional information. Each reporting market must record the 
following information with respect to transactions in commodity 
futures, commodity options, swaps or swaptions on that reporting 
market:
    (i) The method used by the reporting market in determining nominal 
prices and settlement prices; and
    (ii) If discretion is used by the reporting market in determining 
the opening and/or closing ranges or the settlement prices, an 
explanation that certain discretion may be employed by the reporting 
market and a description of the manner in which that discretion may be 
employed. Discretionary authority must be noted explicitly in each case 
in which it is applied (for example, by use of an asterisk or 
footnote).
    (c) Critical dates. Each reporting market must report to the 
Commission, for each futures contract, the first notice date and the 
last trading date, and for each option contract, the expiration date in 
accordance with paragraph (d) of this section.
    (d) Form, manner and time of filing reports. Unless otherwise 
approved by the Commission or its designee, reporting markets must 
submit to the Commission the information specified in paragraphs 
(a)(2), (b), and (c) of this section as follows:
    (1) Using the format, coding structure and electronic data 
transmission procedures approved in writing by the Commission or its 
designee; provided however, that the information must be made available 
to the Commission or its designee in hard copy upon request;
    (2) When each such form of the data is first available, but not 
later than 7 a.m. on the business day following the day to which the 
information pertains for the delta factor and settlement price and not 
later than 12 p.m. for the remainder of the information. Unless 
otherwise specified by the Commission or its designee, the stated time 
is U.S. eastern standard time for information concerning markets 
located in that time zone, and U.S. central time for information 
concerning all other markets; and
    (3) For information on reports to the Commission for swap or 
swaption contracts, refer to part 20 of this chapter.
    (e) Publication of recorded information. (1) Reporting markets must 
make the information in paragraph (a) of this section readily available 
to the news media and the general public without charge, in a format 
that readily enables the consideration of such data, no later than the 
business day following the day to which the information pertains. The 
information in paragraphs (a)(2)(iv) through (vi) of this section shall 
be made readily available in a format that presents the information 
together.
    (2) Reporting markets must make the information in paragraphs 
(b)(2) and (3) of this section readily available to the news media and 
the general public, and the information in paragraph (b)(4)(ii) of this 
section readily available to the general public, in a format that 
readily enables the consideration of such data, no later than the 
business day following the day to which the information pertains. 
Information in paragraph (b)(4)(i) of this section must be made 
available in the registered entity's rulebook, which is publicly 
accessible on its Web site.

PART 38--DESIGNATED CONTRACT MARKETS

    7. Revise the authority citation for part 38 to read as follows:

    Authority:  7 U.S.C. 2, 4c,. 6, 6a, 6d, 6e, 6f, 6g, 6i, 6j, 6k, 
6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21 as amended by 
Pub. L. 111-203, 124 Stat. 1376.

    8. Designate existing Sec. Sec.  38.1 through 38.6 as subpart A 
under the following subpart heading:

Subpart A--General Provisions

* * * * *


Sec.  38.1  [Amended]

    9. Amend Sec.  38.1 by removing the reference ``Parts 36 or 37 of 
this chapter'' and adding in its place the reference ``parts 37 or 49 
of this chapter''.
    10. Revise Sec.  38.2 to read as follows:


Sec.  38.2  Applicable provisions.

    A designated contract market, the contract market's operator and 
transactions traded on or through a designated contract market under 
Section 5 of the Act shall comply with the requirements of this part 
38, Sec. Sec.  1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.52, 1.59(d), 1.60, 
1.63(c), 1.67, 33.10, part 9, parts 15 through 21, part 40, part 41, 
part 43, part 45, part 46, part 49, part 151, and part 190 of this 
chapter, including any related definitions and cross-referenced 
sections.
    11. Revise Sec.  38.3 to read as follows:


Sec.  38.3  Procedures for designation.

    (a) Application procedures. (1) A board of trade seeking 
designation as a contract market must file electronically Application 
Form DCM provided in Appendix A of this part, with the Secretary of the 
Commission at its Washington, DC headquarters at <a href="/cdn-cgi/l/email-protection#89fafcebe4e0fafae0e6e7fac9eaeffdeaa7eee6ff"><span class="__cf_email__" data-cfemail="6b181e0906021818020405182b080d1f08450c041d">[email protected]</span></a> 
and the Division of Market Oversight at <a href="/cdn-cgi/l/email-protection#c98d84869abcaba4a0babaa0a6a7ba89aaafbdaae7aea6bf"><span class="__cf_email__" data-cfemail="6521282a361007080c16160c0a0b1625060311064b020a13">[email protected]</span></a>. The 
Commission will review the application for designation as a contract 
market pursuant to the 180-day timeframe and procedures specified in 
Section 6(a) of the Act. The Commission shall approve or deny the 
application or, if deemed appropriate, designate the applicant as a 
contract market subject to conditions.
    (2) The application must include information sufficient to 
demonstrate compliance with the core principles specified in Section 
5(d) of the Act. Application Form DCM consists of instructions, general 
questions and a list of Exhibits (documents, information and evidence) 
required by the Commission in order to determine whether an applicant 
is able to comply with the core principles. An application will not

[[Page 80609]]

be considered to be materially complete unless the applicant has 
submitted, at a minimum, the Exhibits as required in Application Form 
DCM. If the application is not materially complete, the Commission 
shall notify the applicant that the application will not be deemed to 
have been submitted for purposes of the 180-day review period set forth 
in paragraph (a)(1) of this section.
    (3) The applicant must identify with particularity any information 
in the application that will be subject to a request for confidential 
treatment pursuant to Sec.  145.9 of this chapter.
    (4) Section 40.8 of this chapter sets forth those sections of the 
application that will be made publicly available, notwithstanding a 
request for confidential treatment pursuant to Sec.  145.9 of this 
chapter.
    (5) If any information contained in the application or in any 
Exhibit is or becomes inaccurate for any reason, an amendment to the 
application or a submission filed under part 40 of this chapter must be 
filed promptly correcting such information.
    (b) Reinstatement of dormant designation. Before listing or 
relisting products for trading, a dormant designated contract market as 
defined in Sec.  40.1 of this chapter must reinstate its designation 
under the procedures of paragraphs (a)(1) and (a)(2) of this section; 
provided, however, that an application for reinstatement may rely upon 
previously submitted materials that still pertain to, and accurately 
describe, current conditions.
    (c) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, upon consultation with the General Counsel 
or the General Counsel's delegate, authority to notify the applicant 
seeking designation under Section 6(a) of the Act that the application 
is materially incomplete and the running of the 180-day period is 
stayed.
    (2) The Director 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 (c)(1) 
of this section.
    (d) Request for transfer of designation. (1) Request for transfer 
of designation, listed contracts and open interest. A designated 
contract market that wants to request the transfer of its designation 
from its current legal entity to a new legal entity, as a result of a 
corporate reorganization or otherwise, must file a request with the 
Commission for approval to transfer the designation, listed contracts 
and positions comprising all associated open interest. Such request 
must be filed electronically with the Secretary of the Commission at 
its Washington, DC headquarters at <a href="/cdn-cgi/l/email-protection#077472656a6e74746e686974476461736429606871"><span class="__cf_email__" data-cfemail="f88b8d9a95918b8b9197968bb89b9e8c9bd69f978e">[email protected]</span></a> and the 
Division of Market Oversight at <a href="/cdn-cgi/l/email-protection#a9ede4e6fadccbc4c0dadac0c6c7dae9cacfddca87cec6df"><span class="__cf_email__" data-cfemail="efaba2a0bc9a8d82869c9c8680819caf8c899b8cc1888099">[email protected]</span></a>.
    (2) Timing of submission. The request must be filed no later than 
three months prior to the anticipated corporate change; provided that 
the designated contract market may file a request with the Commission 
later than three months prior to the anticipated change if the 
designated contract market does not know and reasonably could not have 
known of the anticipated change three months prior to the anticipated 
change. In such event, the designated contract market shall be required 
to immediately file the request with the Commission as soon as it knows 
of such change with an explanation as to the timing of the request.
    (3) Required information. The request shall include the following:
    (i) The underlying agreement that governs the corporate change.
    (ii) A narrative description of the corporate change, including the 
reason for the change and its impact on the designated contract market, 
including its governance, and operations, and its impact on the rights 
and obligations of market participants holding the open interest 
positions.
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to designated contract 
markets, and the Commission's regulations thereunder.
    (iv) The governing documents of the transferee including, but not 
limited to, articles of incorporation and bylaws.
    (v) The transferee's rules marked to show changes from the current 
rules of the designated contract market.
    (vi) A list of contracts, agreements, transactions or swaps for 
which the designated contract market requests transfer of open 
interest.
    (vii) A representation by the transferee that it:
    (A) Will be the surviving corporation and successor-in-interest to 
the transferor designated contract market and will retain and assume, 
without limitation, all the assets and liabilities of the transferor;
    (B) Will assume responsibility for complying with all applicable 
provisions of the Act and the Commission's regulations thereunder, 
including part 38 and Appendices thereto;
    (C) Will assume, maintain and enforce all rules implementing and 
complying with these core principles, including the adoption of the 
transferor's rulebook, as amended in the request, and that any such 
amendments will be submitted to the Commission pursuant to Section 
5c(c) of the Act and part 40 of the Commission's regulations; and
    (D) Will comply with all self-regulatory responsibilities except if 
otherwise indicated in the request, and will maintain and enforce all 
self-regulatory programs.
    (viii) A representation by the transferee that upon the transfer:
    (A) All open interest in all contracts listed on the transferor 
will be transferred to and represent equivalent open interest in all 
such contracts listed on the transferee;
    (B) It will assume responsibility for and maintain compliance with 
product core principles for all contracts previously listed for trading 
through the transferor, whether by certification or approval; and
    (C) That none of the proposed rule changes will affect the rights 
and obligations of any participant with open positions transferred to 
it and that the proposed rule changes do not modify the manner in which 
such contracts are settled or cleared.
    (ix) A representation by the transferee that market participants 
will be notified of all changes to the transferor's rulebook prior to 
the transfer and will be further notified of the concurrent transfer of 
the contract market designation and the related transfer of all listed 
contracts and all associated open interest, to the transferee upon 
Commission approval and issuance of an order permitting this transfer.
    (4) Commission determination. The Commission will review a request 
as soon as practicable and such request will be approved or denied 
pursuant to a Commission order and based on the Commission's 
determination as to the transferee's ability to continue to operate the 
designated contract market in compliance with the Act and the 
Commission's regulations thereunder.
    (e) Request for withdrawal of application for designation. An 
applicant for designation may withdraw its application submitted 
pursuant to paragraphs (a)(1) and (a)(2) of this section by filing such 
a request with the Commission at its Washington, DC headquarters. 
Withdrawal of an application for designation shall not affect any 
action taken or to be taken by the Commission based upon actions, 
activities or events occurring during the

[[Page 80610]]

time that the application for designation was pending with the 
Commission.
    (f) Request for vacation of designation. A designated contract 
market may vacate its designation under Section 7 of the Act by filing 
electronically such a request with the Commission at its Washington, DC 
headquarters. 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 facility was designated by 
the Commission.
    (g) Requirements for existing designated contract markets. A board 
of trade that is designated as a contract market as of [EFFECTIVE DATE 
OF FINAL RULE], will be considered to be a designated contract market 
under this section, provided that such existing designated contract 
market certifies to the Commission in writing that it is in compliance 
with each of the designated contract market core principles and 
associated regulations in this part, within 60 days of [EFFECTIVE DATE 
OF FINAL RULE].
    12. In Sec.  38.4, revise paragraphs (a) and (b) to read as 
follows:


Sec.  38.4  Procedures for listing products and implementing designated 
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 contract terms and conditions, and subsequent 
amendments thereto, prior to their implementation or, notwithstanding 
the provisions of Section 5c(c)(2) of the Act, at anytime thereafter, 
under the procedures of Sec. Sec.  40.3 or 40.5 of this chapter, as 
applicable. A designated contract market may label a future, swap or 
options product in its rules as ``Listed for trading pursuant to 
Commission approval,'' if the future, swap or options 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 timeline under Sec. Sec.  40.3(c) and 
40.5(c) of this chapter, the operating rules and terms and conditions 
of futures, swaps and option products that have been submitted for 
Commission approval at the same time as an application for contract 
market designation or an application under Sec.  38.3(b) of this part 
to reinstate the designation of a dormant designated contract market, 
as defined in Sec.  40.1 of this chapter, or while one of the foregoing 
is pending, will be deemed approved by the Commission no earlier than 
when the facility is deemed to be designated or reinstated.
    (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 futures, swaps and 
option 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 futures, swap or options product 
complies with the Act or rules thereunder pursuant to the procedures of 
Sec.  40.6 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 swap or a contract 
for future delivery in an agricultural commodity enumerated in Section 
1a(9) of the Act, or of an option on such contract or commodity, must 
be submitted to the Commission prior to its implementation for review 
and approval under Sec.  40.4 of this chapter.
* * * * *
    13. Revise Sec.  38.5 to read as follows:


Sec.  38.5  Information relating to contract market compliance.

    (a) Requests for information. Upon request by the Commission, a 
designated contract market must file with the Commission such 
information related to its business as a designated contract market, 
including information relating to data entry and trade details, in the 
form and manner, and within the time specified by the Commission in its 
request.
    (b) Demonstration of compliance. Upon request by the Commission, a 
designated contract market must 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, or that is requested by the Commission to satisfy its 
obligations under the Act.
    (c) Equity interest transfers. (1) Equity transfer notification. 
Upon entering into any agreement(s) that could result in an equity 
interest transfer of ten percent or more in the contract market, the 
designated contract market must file a notification of the equity 
interest transfer with the Secretary of the Commission at its 
Washington, DC headquarters at <a href="/cdn-cgi/l/email-protection#a7d4d2c5caced4d4cec8c9d4e7c4c1d3c489c0c8d1"><span class="__cf_email__" data-cfemail="64171106090d17170d0b0a1724070210074a030b12">[email protected]</span></a> and the Division of 
Market Oversight at <a href="/cdn-cgi/l/email-protection#9cd8d1d3cfe9fef1f5efeff5f3f2efdcfffae8ffb2fbf3ea"><span class="__cf_email__" data-cfemail="88ccc5c7dbfdeae5e1fbfbe1e7e6fbc8ebeefceba6efe7fe">[email protected]</span></a>, no later than the business 
day, as defined in Sec.  40.1 of this chapter, following the date on 
which the designated contract market enters into a firm obligation to 
transfer the equity interest.
    (2) Required information. (i) The notification must include and be 
accompanied by:
    (A) Any relevant agreement(s), including any preliminary 
agreements;
    (B) Any associated changes to relevant corporate documents;
    (C) A chart outlining any new ownership or corporate or 
organizational structure;
    (D) A brief description of the purpose and any impact of the equity 
interest transfer; and
    (E) A representation from the designated contract market that it 
meets all of the requirements of Section 5(d) of the Act and Commission 
regulations adopted thereunder.
    (ii) The designated contract market must keep the Commission 
apprised of the projected date that the transaction resulting in the 
equity interest transfer will be consummated, and must provide to the 
Commission any new agreements or modifications to the original 
agreement(s) filed pursuant to this section. The designated contract 
market must notify the Commission of the consummation of the 
transaction on the day in which it occurs.
    (3) Certification. (i) Upon a transfer of an equity interest of ten 
percent or more in a designated contract market, the designated 
contract market must file with the Secretary of the Commission at its 
Washington, DC headquarters, at <a href="/cdn-cgi/l/email-protection#582b2d3a35312b2b3137362b183b3e2c3b763f372e"><span class="__cf_email__" data-cfemail="6b181e0906021818020405182b080d1f08450c041d">[email protected]</span></a>, and the Division 
of Market Oversight, at <a href="/cdn-cgi/l/email-protection#e3a7aeacb096818e8a90908a8c8d90a380859780cd848c95"><span class="__cf_email__" data-cfemail="9fdbd2d0cceafdf2f6ececf6f0f1ecdffcf9ebfcb1f8f0e9">[email protected]</span></a>, a certification that 
the designated contract market meets all of the requirements of Section 
5(d) of the Act and Commission regulations adopted thereunder, no later 
than two business days, as defined in Sec.  40.1 of this chapter, 
following the date on which the equity interest transfer of ten percent 
or more was consummated. Such certification must state whether changes 
to any aspects of the designated contract market's operations were made 
as a result of such change in ownership, and include a description of 
any such change(s).
    (ii) The certification required under this paragraph may rely on 
and be supported by reference to an application for designation or 
prior filings made pursuant to a product or rule submission 
requirement, along with any necessary new filings, including new 
filings that provide any and all material

[[Page 80611]]

updates of prior submissions. The DCM shall also amend any information 
that is no longer accurate on Form DCM consistent with the procedures 
set forth in Sec.  38.3 of this part.
    (d) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, the authority set forth in paragraph (b) of this 
section to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time. The Director 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.
    14. Add Sec.  38.7 to subpart A to read as follows:


Sec.  38.7  Prohibited use of data collected for regulatory purposes.

    A designated contract market may not use for business or marketing 
purposes any proprietary data or personal information it collects or 
receives, from or on behalf of any person, for the purpose of 
fulfilling its regulatory obligations; provided however, that a 
designated contract market, where necessary, may share such information 
with one or more designated contract markets, or swap execution 
facilities registered with the Commission, for regulatory purposes.
    15. Add Sec.  38.8 to subpart A to read as follows:


Sec.  38.8  Listing of swaps on a designated contract market.

    (a) A designated contract market that lists for the first time a 
swap contract for trading on its contract market must, either prior to 
or at the time of such listing, file with the Commission a written 
demonstration detailing how the designated contract market is 
addressing its self-regulatory obligations and is fulfilling its 
statutory and regulatory obligations with respect to swap transactions.
    (b) Prior to listing swaps for trading on or through a designated 
contract market, each designated contract market must request from the 
Commission a unique, extensible, alphanumeric code for the purpose of 
identifying the designated contract market pursuant to part 45 of this 
chapter.
    16. Add Sec.  38.9 to subpart A to read as follows:


Sec.  38.9  Boards of trade operating both a designated contract market 
and a swap execution facility.

    (a) A board of trade that operates a designated contract market and 
that intends to also operate a swap execution facility must separately 
register, pursuant to the swap execution facility registration 
requirements set forth in part 37 of this chapter, and on an ongoing 
basis, comply with the core principles under Section 5h of the Act, and 
the swap execution facility rules under part 37 of this chapter.
    (b) A board of trade that operates both a designated contract 
market and a swap execution facility, and that uses the same electronic 
trade execution system for executing and trading swaps that it uses in 
its capacity as a designated contract market must clearly identify to 
market participants for each swap whether the execution or trading of 
such swap is taking place on the designated contract market or on the 
swap execution facility.
    17. Add Sec.  38.10 to subpart A to read as follows:


Sec.  38.10  Reporting of swaps traded on a designated contract market.

    With respect to swaps traded on or through a designated contract 
market, each designated contract market must report specified swap data 
as provided under parts 43 and 45 of this chapter.
    18. Add subparts B through X to read as follows:
Subpart B--Designation as Contract Market
Sec.
38.100 Core Principle 1.
Subpart C--Compliance With Rules
38.150 Core Principle 2.
38.151 Access requirements.
38.152 Abusive trading practices prohibited.
38.153 Capacity to detect and investigate rule violations.
38.154 Regulatory services provided by a third party.
38.155 Compliance staff and resources.
38.156 Automated trade surveillance system.
38.157 Real-time market monitoring.
38.158 Investigations and investigation reports.
38.159 Ability to obtain information.
38.160 Additional rules required.
Subpart D--Contracts Not Readily Susceptible to Manipulation
38.200 Core Principle 3.
38.201 Additional sources for compliance.
Subpart E--Prevention of Market Disruption
38.250 Core Principle 4.
38.251 General requirements.
38.252 Additional requirements for physical delivery markets.
38.253 Additional requirements for cash-settled markets.
38.254 Ability to obtain information.
38.255 Risk controls for trading.
38.256 Trade reconstruction.
38.257 Regulatory service provider.
38.258 Additional rules required.
Subpart F--Position Limitations or Accountability
38.300 Core Principle 5.
38.301 Position limitations and accountability.
Subpart G--Emergency Authority
38.350 Core Principle 6.
38.351 Additional sources for compliance.
Subpart H--Availability of General Information
38.400 Core Principle 7.
38.401 General requirements.
Subpart I--Daily Publication of Trading Information
38.450 Core Principle 8.
38.451 Reporting of trade information.
Subpart J--Execution of Transactions
38.500 Core Principle 9.
38.501 General requirements.
38.502 Minimum centralized trading requirement.
38.503 Blocks trades on futures contracts.
38.504 Block trades on swap contracts.
38.505 Exchange of derivatives for related position.
38.506 Office trades and transfer trades.
Subpart K--Trade Information
38.550 Core Principle 10.
38.551 Audit trail required.
38.552 Elements of an acceptable audit trail program.
38.553 Enforcement of audit trail requirements.
Subpart L--Financial Integrity of Transactions
38.600 Core Principle 11.
38.601 Mandatory clearing.
38.602 General financial integrity.
38.603 Protection of customer funds.
38.604 Financial surveillance.
38.605 Requirements for financial surveillance program.
38.606 Financial regulatory services provided by a third party.
38.607 Direct access.
Subpart M--Protection of Markets and Market Participants
38.650 Core Principle 12.
38.651 Additional sources for compliance.
Subpart N--Disciplinary Procedures
38.700 Core Principle 13.
38.701 Enforcement staff.
38.702 Disciplinary panels.
38.703 Review of investigation report.
38.704 Notice of charges.
38.705 Right to representation.
38.706 Answer to charges.
38.707 Admission or failure to deny charges.
38.708 Denial of charges and right to hearing.
38.709 Settlement offers.
38.710 Hearings.
38.711 Decisions.
38.712 Right to appeal.
38.713 Final decisions.
38.714 Disciplinary sanctions.
38.715 Summary fines for violations of rules regarding timely 
submission of

[[Page 80612]]

records, decorum, or other similar activities.
38.716 Emergency disciplinary actions.
Subpart O--Dispute Resolution
38.750 Core Principle 14.
38.751 Additional sources for compliance.
Subpart P--Governance Fitness Standards
38.800 Core Principle 15.
Subpart Q--Conflicts of Interest
38.850 Core Principle 16.
Subpart R--Composition of Governing Boards of Contract Markets
38.900 Core Principle 17.
Subpart S--Recordkeeping
38.950 Core Principle 18.
38.951 Additional sources for compliance.
Subpart T--Antitrust Considerations
38.1000 Core Principle 19.
38.1001 Additional sources for compliance.
Subpart U--System Safeguards
38.1050 Core Principle 20.
38.1051 General requirements.
Subpart V--Financial Resources
38.1100 Core Principle 21.
38.1101 General requirements.
Subpart W--Diversity of Boards of Directors
38.1150 Core Principle 22.
Subpart X--Securities and Exchange Commission
38.1200 Core Principle 23.
38.1201 Additional sources for compliance.
Subpart B--Designation as Contract Market


Sec.  38.100  Core Principle 1.

    (a) In general. To be designated, and maintain a designation, as a 
contract market, a board of trade shall comply with:
    (1) Any core principle described in Section 5(d) of the Act, and
    (2) Any requirement that the Commission may impose by rule or 
regulation pursuant to Section 8a(5) of the Act.
    (b) Reasonable discretion of the contract market. Unless otherwise 
determined by the Commission by rule or regulation, a board of trade 
described in paragraph (a) of this section shall have reasonable 
discretion in establishing the manner in which the board of trade 
complies with the core principles described in this subsection.

Subpart C--Compliance With Rules


Sec.  38.150  Core Principle 2.

    (a) In general. The board of trade shall establish, monitor, and 
enforce compliance with the rules of the contract market, including:
    (1) Access requirements;
    (2) The terms and conditions of any contracts to be traded on the 
contract market; and
    (3) Rules prohibiting abusive trade practices on the contract 
market.
    (b) Capacity of contract market. The board of trade shall have the 
capacity to detect, investigate, and apply appropriate sanctions to any 
person that violates any rule of the contract market.
    (c) Requirement of rules. The rules of the contract market shall 
provide the board of trade with the ability and authority to obtain any 
necessary information to perform any function described in this 
section, including the capacity to carry out such international 
information-sharing agreements, as the Commission may require.


Sec.  38.151  Access requirements.

    (a) Jurisdiction. Prior to granting any member or market 
participant access to its markets, a designated contract market must 
require that the member or market participant consent to its 
jurisdiction.
    (b) Impartial access by members, market participants and 
independent software vendors. A designated contract market must provide 
its members, market participants and independent software vendors with 
impartial access to its markets and services, including:
    (1) Access criteria that are impartial, transparent, and applied in 
a non-discriminatory manner; and
    (2) Comparable fee structures for members, market participants and 
independent software vendors receiving equal access to, or services 
from, the designated contract market.
    (c) Limitations on access. A designated contract market must 
establish and impartially enforce rules governing denials, suspensions, 
and revocations of a member's and market participant's access 
privileges to the designated contract market, including when such 
actions are part of a disciplinary or emergency action by the 
designated contract market.


Sec.  38.152  Abusive trading practices prohibited.

    A designated contract market must prohibit abusive trading 
practices on its markets by members and market participants. Designated 
contract markets that permit intermediation must prohibit customer-
related abuses including, but not limited to, trading ahead of customer 
orders, trading against customer orders, accommodation trading, and 
improper cross trading. Specific trading practices that must be 
prohibited by all designated contract markets include front-running, 
wash trading, pre-arranged trading, fraudulent trading, money passes, 
and any other trading practices that a designated contract market deems 
to be abusive. In addition, a designated contract market also must 
prohibit any other manipulative or disruptive trading practices 
prohibited by the Act or by the Commission pursuant to Commission 
regulation.


Sec.  38.153  Capacity to detect and investigate rule violations.

    A designated contract market must have arrangements and resources 
for effective enforcement of its rules. Such arrangements must include 
the authority to collect information and documents on both a routine 
and non-routine basis, including the authority to examine books and 
records kept by the designated contract market's members and by market 
participants. A designated contract market's arrangements and resources 
must also facilitate the direct supervision of the market and the 
analysis of data collected to determine whether a rule violation 
occurred.


Sec.  38.154  Regulatory services provided by a third party.

    (a) Use of third-party provider permitted. A designated contract 
market may choose to contract with a registered futures association or 
another registered entity, as such terms are defined under the CEA, 
(collectively, ``regulatory service provider''), for the provision of 
services to assist in complying with the core principles, as approved 
by the Commission. Any designated contract market that chooses to 
contract with a regulatory service provider must ensure that its 
regulatory service provider has the capacity and resources necessary to 
provide timely and effective regulatory services, including adequate 
staff and automated surveillance systems. A designated contract market 
will at all times remain responsible for the performance of any 
regulatory services received, for compliance with the designated 
contract market's obligations under the CEA and Commission regulations, 
and for the regulatory service provider's performance on its behalf.
    (b) Duty to supervise third party. A designated contract market 
that elects to utilize a regulatory service provider must retain 
sufficient compliance staff to supervise the quality and effectiveness 
of the services provided on its behalf. Compliance staff of the 
designated contract market must hold regular meetings with the 
regulatory service provider to discuss ongoing investigations, trading 
patterns, market participants, and any other matters of

[[Page 80613]]

regulatory concern. A designated contract market also must conduct 
periodic reviews of the adequacy and effectiveness of services provided 
on its behalf. Such reviews must be documented carefully and made 
available to the Commission upon request.
    (c) Regulatory decisions required from the designated contract 
market. A designated contract market that elects to utilize a 
regulatory service provider must retain exclusive authority in 
decisions involving the cancellation of trades, the issuance of 
disciplinary charges against members or market participants, and 
denials of access to the trading platform for disciplinary reasons. A 
designated contract market may also retain exclusive authority in other 
areas of its choosing; provided however, that the decision to open an 
investigation into a possible rule violation must always reside 
exclusively with the regulatory service provider. A designated contract 
market must document any instances where its actions differ from those 
recommended by its regulatory service provider, including the reasons 
for the course of action recommended by the regulatory service provider 
and the reasons why the designated contract market chose a different 
course of action.


Sec.  38.155  Compliance staff and resources.

    (a) Sufficient compliance staff. A designated contract market must 
establish and maintain sufficient compliance department resources and 
staff to ensure that it can conduct effective audit trail reviews, 
trade practice surveillance, market surveillance, and real-time market 
monitoring. The designated contract market's compliance staff must also 
be sufficient to address unusual market or trading events as they 
arise, and to conduct and complete investigations in a timely manner, 
as set forth in Sec.  38.158(b) of this part.
    (b) Ongoing monitoring of compliance staff resources. A designated 
contract market must monitor the size and workload of its compliance 
staff annually, and ensure that its compliance resources and staff are 
at appropriate levels. In determining the appropriate level of 
compliance resources and staff, the designated contract market should 
consider projected trading volume increases, the number of new products 
or contracts projected to be listed for trading, any new 
responsibilities expected to be assigned to compliance staff, the 
results of any internal review demonstrating that work is not completed 
in an effective or timely manner, and any other factors suggesting the 
need for increased resources and staff.


Sec.  38.156  Automated trade surveillance system.

    A designated contract market must maintain an automated trade 
surveillance system capable of detecting and investigating potential 
trade practice violations. Such system must maintain all data 
reflecting the details of each order entered into the trading system, 
including all order modifications and cancellations and maintain all 
data reflecting transactions executed on the designated contract 
market. The automated system must load and process daily orders and 
trades no later than 24 hours after the completion of the trading day. 
In addition, the automated trade surveillance system must have the 
capability to detect and flag specific trade execution patterns and 
trade anomalies; compute, retain, and compare trading statistics; 
compute trade gains, losses, and futures-equivalent positions; 
reconstruct the sequence of market activity; perform market analyses; 
and support system users to perform in-depth analyses and ad hoc 
queries of trade-related data.


Sec.  38.157  Real-time market monitoring.

    A designated contract market must conduct real-time market 
monitoring of all trading activity on its electronic trading 
platform(s) to ensure orderly trading and identify any market or system 
anomalies. A designated contract market must have the authority to 
adjust trade prices or cancel trades when necessary to mitigate market 
disrupting events caused by malfunctions in its electronic trading 
platform(s) or errors in orders submitted by members and market 
participants. Any trade price adjustments or trade cancellations must 
be transparent to the market and subject to standards that are clear, 
fair, and publicly available.


Sec.  38.158  Investigations and investigation reports.

    (a) Procedures. A designated contract market must establish and 
maintain procedures that require its compliance staff to conduct 
investigations of possible rule violations. An investigation must be 
commenced upon the receipt of a request from Commission staff or upon 
the discovery or receipt of information by the designated contract 
market that, in the judgment of its compliance staff, indicates a 
possible basis for finding that a violation has occurred or will occur.
    (b) Timeliness. Each compliance staff investigation must be 
completed in a timely manner. Absent mitigating factors, a timely 
manner is no later than 12 months after the date that an investigation 
is opened. Mitigating factors that may reasonably justify an 
investigation taking longer than 12 months to complete include the 
complexity of the investigation, the number of firms or individuals 
involved as potential wrongdoers, the number of potential violations to 
be investigated, and the volume of documents and data to be examined 
and analyzed by compliance staff.
    (c) Investigation reports when a reasonable basis exists for 
finding a violation. Compliance staff must submit a written 
investigation report for disciplinary action in every instance in which 
compliance staff determines from surveillance or from an investigation 
that a reasonable basis exists for finding a rule violation. The 
investigation report must include the reason the investigation was 
initiated; a summary of the complaint, if any; the relevant facts; 
compliance staff's analysis and conclusions; and a recommendation as to 
whether disciplinary action should be pursued. The report must also 
include the member or market participant's disciplinary history at the 
designated contract market.
    (d) Investigation reports when no reasonable basis exists for 
finding a violation. If after conducting an investigation, compliance 
staff determines that no reasonable basis exists for finding a 
violation, it must prepare a written report including the reason the 
investigation was initiated; a summary of the complaint, if any; the 
relevant facts; compliance staff's analysis and conclusions; and if 
applicable, any recommendation that a disciplinary committee issue a 
warning letter in accordance with paragraph (e) of this section. If 
compliance staff recommends that a warning letter be issued to a member 
or market participant pursuant to paragraph (e) of this section, the 
investigation report must include a copy of the letter as well as the 
member or market participant's disciplinary history at the designated 
contract market.
    (e) Warning letters. In addition to the action required to be taken 
under paragraphs (c) and (d) of this section, the rules of a designated 
contract market may authorize compliance staff to issue a warning 
letter to a person or entity under investigation or to recommend that a 
disciplinary committee take such an action. A warning letter issued in 
accordance with this section is not a penalty or an indication that a 
finding

[[Page 80614]]

of a violation has been made. A copy of a warning letter issued by 
compliance staff must be included in the investigation report required 
by paragraphs (c) and (d) of this section. No more than one warning 
letter for the same potential violation may be issued to the same 
person or entity during a rolling 12-month period.


Sec.  38.159  Ability to obtain information.

    A designated contract market must have the ability and authority to 
obtain any necessary information to perform any function required under 
this subpart C of the Commission's regulations, including the capacity 
to carry out international information-sharing agreements as the 
Commission may require. Appropriate information-sharing agreements can 
be established with other designated contract markets and swap 
execution facilities, or the Commission can act in conjunction with the 
designated contract market to carry out such information sharing.


Sec.  38.160  Additional rules required.

    A designated contract market must adopt and enforce any additional 
rules that it believes are necessary to comply with the requirements of 
this subpart C.

Subpart D--Contracts Not Readily Subject to Manipulation


Sec.  38.200  Core Principle 3.

    The board of trade shall list on the contract market only contracts 
that are not readily susceptible to manipulation.


Sec.  38.201  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance in appendix C of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  38.200 of this part.

Subpart E--Prevention of Market Disruption


Sec.  38.250  Core Principle 4.

    The board of trade shall have the capacity and responsibility to 
prevent manipulation, price distortion, and disruptions of the delivery 
or cash-settlement process through market surveillance, compliance, and 
enforcement practices and procedures, including:
    (a) Methods for conducting real-time monitoring of trading; and
    (b) Comprehensive and accurate trade reconstructions.


Sec.  38.251  General requirements.

    A designated contract market must:
    (a) Collect and evaluate data on individual traders' market 
activity on an ongoing basis in order to detect and prevent 
manipulation, price distortions and, where possible, disruptions of the 
delivery or cash-settlement process;
    (b) Monitor and evaluate general market data in order to detect and 
prevent manipulative activity that would result in the failure of the 
market price to reflect the normal forces of supply and demand;
    (c) Have the capacity to conduct real-time monitoring of trading 
and comprehensive and accurate trade reconstructions. The monitoring of 
intraday trading must include the capacity to detect abnormal price 
movements, unusual trading volumes, impairments to market liquidity, 
and position-limit violations; and
    (d) Have either manual processes or automated alerts that are 
effective in detecting and preventing trading abuses.


Sec.  38.252  Additional requirements for physical delivery contracts.

    (a) For physical delivery contracts, the designated contract market 
must:
    (1) Monitor a contract's terms and conditions as to whether there 
is convergence between the contract price and the price of the 
underlying commodity;
    (2) Monitor that the deliverable supply is adequate so that the 
contract will not be susceptible to price manipulation or distortion;
    (3) Assess whether the deliverable commodity reasonably can be 
expected to be available to short traders and salable by long traders 
at its market value in normal cash marketing channels; and
    (4) When available, monitor data related to the size and ownership 
of deliverable supplies.
    (b) The designated contract market must continually monitor the 
appropriateness of the contract's terms and conditions, including the 
delivery instrument, the delivery locations and location differentials, 
and the commodity characteristics and related differentials. The 
designated contract market must address conditions that are interfering 
with convergence or causing price distortions or market disruptions, 
including, when appropriate, changes to contract terms.


Sec.  38.253  Additional requirements for cash-settled contracts.

    (a) For cash-settled contracts, the designated contract market must 
monitor:
    (1) The availability and pricing of the commodity making up the 
index to which the contract will be settled; and
    (2) The continued appropriateness of the methodology for deriving 
the index. Designated contract markets must promptly amend any 
methodologies that result, or are likely to result, in manipulation, 
price distortions, or market disruptions, or must impose new 
methodologies to resolve the threat of disruptions or distortions.
    (b) If a contract listed on a designated contract market is settled 
by reference to the price of a contract or commodity traded in another 
venue, including a price or index derived from prices on another 
designated contract market, the designated contract market must have 
rules that require traders on the DCM market to provide the DCM with 
their positions in the reference markets as the traders' contracts 
approach settlement. In the alternative, the DCM may have an 
information sharing agreement with the other venue or designated 
contract market.


Sec.  38.254  Ability to obtain information.

    (a) The designated contract market must have rules that require 
traders in its contracts to keep records of their trading, including 
records of their activity in the underlying commodity and related 
derivatives markets and make such records available, upon request, to 
the designated contract market.
    (b) A designated contract market with customers trading through 
intermediaries must either use a comprehensive large-trader reporting 
system (LTRS) or be able to demonstrate that it can obtain position 
data from other sources in order to conduct an effective surveillance 
program.


Sec.  38.255  Risk controls for trading.

    The designated contract market must establish and maintain risk 
control mechanisms to reduce the potential risk of market disruptions, 
including but not limited to market restrictions that pause or halt 
trading in market conditions prescribed by the designated contract 
market. If a contract is linked to, or a substitute for, other 
contracts on the designated contract market or on other trading venues, 
such risk controls must, to the extent practicable, be coordinated with 
any similar controls placed on those other contracts. If a contract is 
based on the price of an equity security or the level of an equity 
index, such risk controls must, to the extent practicable, be 
coordinated with any similar controls placed on national security 
exchanges.


Sec.  38.256  Trade reconstruction.

    The designated contract market must have the ability to 
comprehensively and accurately reconstruct all trading on its trading 
facility. All audit-trail data and reconstructions must be made 
available

[[Page 80615]]

to the Commission in a form, manner, and time as determined by the 
Commission.


Sec.  38.257  Regulatory service provider.

    A designated contract market must comply with the regulations in 
this subpart through a dedicated regulatory department, or by 
delegation of that function to a registered futures association or a 
registered entity (collectively, ``regulatory service provider''), as 
such terms are defined under the Act and over which the designated 
contract market has supervisory authority.


Sec.  38.258  Additional rules required.

    A designated contract market must adopt and enforce any additional 
rules that it believes are necessary to comply with the requirements of 
subpart E of this part.

Subpart F--Position Limitations or Accountability


Sec.  38.300  Core Principle 5.

    To reduce the potential threat of market manipulation or congestion 
(especially during trading in the delivery month), the board of trade 
shall adopt for each contract of the board of trade, as is necessary 
and appropriate, position limitations or position accountability for 
speculators. For any contract that is subject to a position limitation 
established by the Commission pursuant to Section 4a(a), the board of 
trade shall set the position limitation of the board of trade at a 
level not higher than the position limitation established by the 
Commission.


Sec.  38.301  Position limitations and accountability.

    A designated contract market must meet the requirements of part 151 
of this chapter.

Subpart G--Emergency Authority


Sec.  38.350  Core Principle 6.

    The board of trade, in consultation or cooperation with the 
Commission, shall adopt rules to provide for the exercise of emergency 
authority, as is necessary and appropriate, including the authority:
    (a) To liquidate or transfer open positions in any contract;
    (b) To suspend or curtail trading in any contract; and
    (c) To require market participants in any contract to meet special 
margin requirements.


Sec.  38.351  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and/or acceptable practices in Appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.350.

Subpart H--Availability of General Information


Sec.  38.400  Core Principle 7.

    The board of trade shall make available to market authorities, 
market participants, and the public accurate information concerning:
    (a) The terms and conditions of the contracts of the contract 
market; and
    (b)(1) The rules, regulations and mechanisms for executing 
transactions on or through the facilities of the contract market, and
    (2) The rules and specifications describing the operation of the 
contract market's:
    (i) Electronic matching platform, or
    (ii) Trade execution facility.


Sec.  38.401  General requirements.

    (a) General. (1) A designated contract market must have procedures, 
arrangements and resources for disclosing to the Commission, market 
participants and the public accurate information pertaining to:
    (i) Contract terms and conditions;
    (ii) Rules and regulations pertaining to the trading mechanisms; 
and
    (iii) Rules and specifications pertaining to operation of the 
electronic matching platform or trade execution facility.
    (2) Through such procedures, arrangements and resources, the 
designated contract market must ensure public dissemination of 
information pertaining to new product listings, new rules, rule 
amendments or other changes to previously disclosed information, in 
accordance with the timeline provided in paragraph (c) of this section.
    (3) A designated contract market shall meet the requirements of 
this paragraph (a), by placing the information on the designated 
contract market's Web site within the time prescribed in paragraph (c) 
of this section.
    (b) Accuracy Requirement. A designated contract market must provide 
accurate and complete information and not omit material information 
with respect to any communication with the Commission, and any 
information required to be transmitted or made available to market 
participants and the public, including on its Web site or otherwise.
    (c) Notice of Regulatory Submissions. (1) A designated contract 
market, in making available on its Web site information pertaining to 
new product listings, new rules, rule amendments or other changes to 
previously-disclosed information, must place such information on its 
Web site simultaneous with the filing of such information with the 
Secretary of the Commission. Satisfaction of the requirements of this 
paragraph (c) shall be in addition to the requirements of paragraph (d) 
of this section.
    (2) To the extent that a designated contract market requests 
confidential treatment of any information filed with the Secretary of 
the Commission, the designated contract market must post on its Web 
site the public version of such filing or submission.
    (d) Rulebook. A designated contract market must ensure that the 
rulebook posted on its Web site is accurate, complete, current and 
readily accessible to the public. A designated contract market must 
publish or post in its rulebook all new or amended rules, both 
substantive and non-substantive, on the date of implementation of such 
new or amended rule, the day a new product is listed, or the day any 
changes to previously disclosed information take effect. Satisfaction 
of the requirements of this paragraph (d) is in addition to the 
requirements of paragraph (c) of this section.

Subpart I--Daily Publication of Trading Information


Sec.  38.450  Core Principle 8.

    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.


Sec.  38.451  Reporting of trade information.

    A designated contract market must meet the reporting requirements 
set forth in part 16 of this chapter.

Subpart J--Execution of Transactions


Sec.  38.500  Core Principle 9.

    The board of trade shall provide a competitive, open, and efficient 
market and mechanism for executing transactions that protects the price 
discovery process of trading in the centralized market of the board of 
trade. The rules of the board of trade may authorize, for bona fide 
business purposes:
    (a) Transfer trades or office trades;
    (b) An exchange of:
    (1) Futures in connection with a cash commodity transaction;
    (2) Futures for cash commodities; or
    (3) 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

[[Page 80616]]

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.


Sec.  38.501  General requirements.

    (a) Transactions on the centralized market; requirements. All 
purchases and sales of any commodity for future delivery, and any 
commodity option or swap, on or subject to the rules of a designated 
contract market, must be executed openly and competitively by open 
outcry, posting of bids and offers, or other equally open and 
competitive methods, in a place or through an electronic system 
provided by the designated contract market, during the hours prescribed 
by the designated contract market for trading in such commodity, 
commodity option or swap.
    (b) Transactions off the centralized market; requirements. 
Notwithstanding paragraph (a) of this section, transactions may be 
executed off of a designated contract market's centralized market, 
including transfer trades, office trades, block trades, or trades 
involving the exchange of derivatives for related positions, if 
transacted in accordance with the written rules of the designated 
contract market that provide for execution of transactions off the 
centralized market and that have been certified to or approved by the 
Commission. Every person handling, executing, clearing, or carrying the 
trades, transactions or positions described in this paragraph shall 
comply with the rules of the appropriate designated contract market, 
including to identify and mark by appropriate symbol or designation all 
such transactions or contracts and all orders, records and memoranda 
pertaining thereto.


Sec.  38.502  Minimum centralized market trading requirement.

    (a) Minimum centralized market trading percentage requirement. No 
designated contract market may continue to list a contract for trading 
unless an average of 85% or greater of the total volume of such 
contract is traded on the designated contract market's centralized 
market, as calculated over a 12 month period as specified in paragraph 
(b) of this section.
    (b) Centralized market trading percentage calculation. (1) 
Contracts listed after the effective date of this section. For each new 
contract listed after the effective date of Sec.  38.502, the 
designated contract market must determine the percentage of the total 
volume, in all contract months combined, that is attributable to 
centralized market trading for a 12 month period commencing one year 
following the date of the contract's initial listing on the designated 
contract market, and on each 12 month anniversary of the contract's 
listing thereafter. The designated contract market must calculate the 
centralized market trading percentage for each listed contract within 
thirty days following the conclusion of the 12 month anniversary of 
each contract's listing.
    (2) Contracts listed as of the effective date of this section. For 
contracts and contract months listed as of the effective date of Sec.  
38.502, the designated contract market initially must complete the 
centralized market trading percentage calculation in each such contract 
within thirty days of the effective date of this Sec.  38.502 
(``Initial Calculation'').
    (3) Initial Calculation. The Initial Calculation for each such 
existing contract must be based on:
    (i) The trading volume in such contract during the 12 month period 
immediately preceding the effective date of this section; or
    (ii) If contract has been listed less than 12 months, the trading 
volume in such contract during the time period in which the contract 
was initially listed on the designated contract market.
    (4) Anniversary Calculation. Thereafter, the designated contract 
market must calculate and file with the Commission the centralized 
market trading percentage in each such contract within thirty days of 
the 12 month anniversary of the Initial Calculation.
    (c) Mandatory delisting. Except as otherwise provided in paragraph 
(d) of this section, as to any contract that does not meet the minimum 
centralized market trading percentage requirement of paragraph (a) of 
this section, within ninety days of the centralized market trading 
percentage calculation, the designated contract market must:
    (1) Delist the contract from the designated contract market and 
transfer open positions in the contract to a SEF that it operates;
    (2) Delist the contract from the designated contract market and 
transfer all open positions in the contract to another SEF that will 
accept the contract; or
    (3) Liquidate the contract.
    (d) Treatment of contracts listed as of the effective date of this 
section. Contracts and contract months that are listed on a designated 
contract market as of the effective date of Sec.  38.502 and that do 
not meet the requirements of paragraph (a) of this section, as 
calculated in accordance with paragraph (b) of this section, may 
continue to be listed on the designated contract market until all open 
positions in such contracts and contract months are liquidated. Trading 
in such contracts is allowed for liquidation purposes only.
    (e) Exemptions upon petition. (1) A designated contract market may 
petition the Commission to exempt a contract from the requirements of 
paragraphs (c) or (d) of this section, for a maximum period of 12 
months, or such other time as determined by the Commission.
    (2) The designated contract market must demonstrate in its petition 
that:
    (i) (A) Such contract achieved an average of at least 50% trading 
volume on the centralized market over the preceding 12 month period, 
and
    (B) The contract is likely to attain the minimum centralized market 
trading percentage requirement within the following 12 month period; or
    (ii) As of the effective date of this section, such contract has 
been listed for less than 12 months.
    (3) Petitions seeking an exemption from the mandatory delisting 
requirement must be submitted to the Commission within thirty-five days 
of the 12 month anniversary of the listing of such contract, or for 
contracts listed less than 12 months, thirty-five days after the 
effective date of this section, as applicable.
    (4) The filing of a petition for a mandatory delisting exemption 
shall toll the mandatory delisting requirement set forth in paragraph 
(c) of this section until such time that a decision is made on the 
petition.


Sec.  38.503  Block trades on futures contracts.

    (a) Block trade rules. A designated contract market that permits 
block trade transactions on futures contracts must have rules that 
limit such block trades to large transactions, and impose minimum size 
requirements on such transactions that are appropriate for each listed 
contract subject to a block trading provision. The block trade size for 
each listed contract must be certified to or approved by the 
Commission.
    (b) Block size review. A designated contract market must review the 
minimum size thresholds for all block trades on futures contracts on an 
annual basis to ensure that the minimum size remains appropriate for 
each contract, and in accordance with the provisions of this section 
38.503.
    (c) Eligible block trade participants. Block trading must be 
limited to Eligible Contract Participants, as that term is defined in 
Section 1a(18) of the Act, except that the designated contract market 
may allow a commodity trading advisor acting in an asset managerial

[[Page 80617]]

capacity and registered pursuant to Section 4n of the Act, or a 
principal thereof, including any investment advisor who satisfies the 
criteria of Sec.  4.7(a)(2)(v) of this chapter, or a foreign person 
performing a similar role or function and subject as such to foreign 
regulation, to transact block trades for customers who are not Eligible 
Contract Participants, if such commodity trading advisor, investment 
advisor or foreign person has more than $25,000,000 in total assets 
under management. A person may transact a block trade on behalf of a 
customer only when such person has received an instruction or prior 
consent to do so from the customer.
    (d) Affiliated parties. (1) Block trades between affiliated parties 
are permitted under the circumstances provided in paragraph (d)(3) of 
this section.
    (2) For purposes of block trades, an affiliated party is a party 
that directly or indirectly through one or more persons, controls, is 
controlled by, or is under common control with another party.
    (3) Block trades between affiliated parties are permitted if:
    (i) Priced on a competitive market price, either by falling within 
the contemporaneous bid-ask spread on the centralized market or 
calculated based on a contemporaneous market price in a related cash 
market;
    (ii) Each party has a separate and independent legal bona fide 
business purpose for engaging in the trades; and
    (iii) Each party's decision to enter into the block trade is made 
by a separate and independent decision-maker.
    (e) Aggregation. Except as otherwise stated in this paragraph (e), 
the aggregation of orders for different accounts in order to satisfy 
the minimum block size requirement is prohibited. Aggregation is 
permissible if done by a commodity trading advisor acting in an asset 
managerial capacity and registered pursuant to Section 4n of the Act, 
or a principal thereof, including any investment advisor who satisfies 
the criteria of Sec.  4.7(a)(2)(v) of this chapter, or a foreign person 
performing a similar role or function and subject as such to foreign 
regulation, if such commodity trading advisor, investment advisor or 
foreign person has more than $25,000,000 in total assets under 
management.
    (f) Recordkeeping. Parties to, and members facilitating, a block 
trade must keep accurate block trade records that comply with Sections 
5(d)(10) and 5(d)(18) of the Act and the associated Commission 
regulations in subparts K and S of this part. Block trade orders must 
be recorded by the member and time-stamped with both the time the order 
was received and the time the order was reported to the designated 
contract market, and must indicate if the block trades are between 
affiliated parties. When requested by the designated contract market, 
the Commission or the Department of Justice, parties to, and members 
facilitating, a block trade must provide records to document that the 
block trade is executed in conformance with the board of trade's rules.
    (g) Reporting. (1) Each block trade must be reported to the 
designated contract market within five minutes after its execution.
    (2) The designated contract market must publicize the details of 
each block trade immediately upon receipt of the transaction report, 
and must publicize daily the total quantity of block trades that are 
included in the total volume of trading under the procedures set forth 
in Sec.  16.01 of this chapter.
    (h) Block size determinations; pricing of block trades. Applicants 
and designated contract markets may refer to the guidance and 
acceptable practices in appendix B of this part to demonstrate to the 
Commission compliance with the requirements for block size 
determinations and pricing of block trades.


Sec.  38.504  Block trades on swap contracts.

    A designated contract market must have rules requiring that block 
trades involving swaps comply with the requirements set forth in part 
43 of this chapter.


Sec.  38.505  Exchange of derivatives for related position.

    (a) (1) A designated contract market may permit bona fide exchange 
of derivatives for related positions transactions.
    (2) (i) A bona fide exchange of derivatives for related positions 
transaction must include:
    (A) Separate but integrally related transactions involving the same 
or a related commodity;
    (B) Price correlation and quantitative equivalence of the 
derivative and related position legs; and
    (C) A buyer of a derivative who is the seller of the corresponding 
related position, and a seller of a derivative who is the buyer of the 
corresponding related position.
    (ii) The transaction must result in an actual transfer of ownership 
of the related position and occur between parties with different 
beneficial owners or under separate control.
    (iii) The price differential between the futures leg and the 
commodities leg or derivatives position should reflect commercial 
realities, and at least one leg of the transaction should be priced at 
the prevailing market price.
    (b) A designated contract market may permit parties to an exchange 
of derivatives for related position transaction to engage in a separate 
transaction that offsets a leg of the exchange of derivatives for a 
related position if:
    (1) The offsetting transaction results in an actual transfer of 
ownership and demonstrates other indicia of being a bona fide 
transaction as set forth in paragraph (a) of this section; and
    (2) The offsetting transaction must be able to stand on its own as 
a commercially appropriate transaction, with no obligation on either 
party that the offsetting transaction be dependent upon the execution 
of the exchange of derivatives for related position transaction, or 
that the exchange of derivatives for a related position transaction be 
dependent upon the execution of the offsetting transaction.
    (c) An exchange of derivatives for a related position transaction 
must be bona fide such that the exchange of derivatives for the related 
position is not contingent upon an offsetting transaction.
    (d) An exchange of derivatives for a related position transaction 
must be reported to the designated contract market within five minutes 
after its execution.
    (e) A designated contract market must make public, on a daily 
basis, the total quantity of exchanges of derivatives for a related 
position transactions that are included in the total volume of trading 
under the procedures set forth in Sec.  16.01 of this chapter.


Sec.  38.506  Office trades and transfer trades.

    A designated contract market must keep records of office trades and 
transfer trades under the procedures set forth in Sec.  1.31 of this 
chapter.

Subpart K--Trade Information


Sec.  38.550  Core Principle 10.

    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:
    (a) To assist in the prevention of customer and market abuses; and
    (b) To provide evidence of any violations of the rules of the 
contract market.


Sec.  38.551  Audit trail required.

    A designated contract market must capture and retain all audit 
trail data

[[Page 80618]]

necessary to detect, investigate, and prevent customer and market 
abuses. Such data must be sufficient to reconstruct all transactions 
within a reasonable period of time and to provide evidence of any 
violations of the rules of the designated contract market. An 
acceptable audit trail must also permit the designated contract market 
to track a customer order from the time of receipt through fill, 
allocation, or other disposition, and must include both order and trade 
data.


Sec.  38.552  Elements of an acceptable audit trail program.

    (a) Original source documents. A designated contract market's audit 
trail must include original source documents. Original source documents 
include unalterable, sequentially identified records on which trade 
execution information is originally recorded, whether recorded manually 
or electronically. Records for customer orders (whether filled, 
unfilled or cancelled, each of which shall be retained or 
electronically captured) must 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 open-outcry trades, the time of report of 
execution of the order shall also be captured.
    (b) Transaction history database. A designated contract market's 
audit trail program must include an electronic transaction history 
database. An adequate transaction history database includes a history 
of all orders and trades, and also includes:
    (1) All data that are input into the trade entry or matching system 
for the transaction to match and clear;
    (2) 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;
    (3) Timing and sequencing data adequate to reconstruct trading; and
    (4) Identification of each account to which fills are allocated.
    (c) Electronic analysis capability. A designated contract market's 
audit trail program must include electronic analysis capability with 
respect to all audit trail data in the transaction history database. An 
adequate electronic analysis capability must permit the sorting and 
presentation of data in the transaction history database so as to 
reconstruct trading and identify possible trading violations with 
respect to both customer and market abuse.
    (d) Safe storage capability. A designated contract market's audit 
trail program must include the capability to safely store all audit 
trail data retained in its transaction history database. Such safe 
storage capability must include the capability to store all data in the 
database in a manner that protects it from unauthorized alteration, as 
well as from accidental erasure or other loss. Data must be retained in 
accordance with the recordkeeping requirements of Core Principle 18 and 
the associated regulations in subpart S of this part.


Sec.  38.553  Enforcement of audit trail requirements.

    (a) Annual audit trail and recordkeeping reviews. A designated 
contract market must enforce its audit trail and recordkeeping 
requirements through at least annual reviews of all members and market 
participants to verify their compliance with the contract market's 
audit trail and recordkeeping requirements. Such reviews must include, 
but are not limited to, the following:
    (1) For electronic trading, audit trail and recordkeeping reviews 
must include reviews of randomly selected samples of front-end audit 
trail data for order routing systems; a review of the process by which 
user identifications are assigned and user identification records are 
maintained; a review of usage patterns associated with user 
identifications to monitor for violations of user identification rules; 
and reviews of account numbers and customer type indicator codes in 
trade records to test for accuracy and improper use.
    (2) For open outcry trading, audit trail and recordkeeping reviews 
must include reviews of members' and market participants' compliance 
with the designated contract market's trade timing, order ticket, and 
trading card requirements.
    (b) Enforcement program required. A designated contract market must 
establish a program for effective enforcement of its audit trail and 
recordkeeping requirements for both electronic and open-outcry trading, 
as applicable. An effective program must identify members and market 
participants that have failed to maintain high levels of compliance 
with such requirements, and levy meaningful sanctions when deficiencies 
are found. Sanctions must be sufficient to deter recidivist behavior, 
and may not include more than one warning letter for the same violation 
within a rolling twelve month period.

Subpart L--Financial Integrity of Transactions


Sec.  38.600  Core Principle 11.

    The board of trade shall establish and enforce:
    (a) Rules and procedures for ensuring the financial integrity of 
transactions entered into on or through the facilities of the contract 
market (including the clearance and settlement of the transactions with 
a derivatives clearing organization); and
    (b) Rules to ensure:
    (1) The financial integrity of any:
    (i) Futures commission merchant, and
    (ii) Introducing broker; and
    (2) The protection of customer funds.


Sec.  38.601  Mandatory clearing.

    Transactions executed on or through the designated contract market, 
other than transactions in security futures products, must be cleared 
through a Commission-registered derivatives clearing organization, in 
accordance with the provisions of part 39 of this chapter.


Sec.  38.602  General financial integrity.

    A designated contract market must provide for the financial 
integrity of its transactions by establishing and maintaining 
appropriate minimum financial standards for its members and non-
intermediated market participants.


Sec.  38.603  Protection of customer funds.

    A designated contract market must have rules concerning the 
protection of customer funds. These rules shall 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, intermediary default 
procedures and related recordkeeping. A designated contract market must 
review the default rules and procedures of the derivatives clearing 
organization that clears for such designated contract market to wind 
down operations, transfer customers, or otherwise protect customers in 
the event of a default of a clearing member or the derivatives clearing 
organization.


Sec.  38.604  Financial surveillance.

    A designated contract market must monitor members' compliance with 
the designated contract market's minimum financial standards and, 
therefore, must routinely receive and promptly review financial and 
related information from its members, as well as continuously monitor 
the positions of members and their customers. A designated contract 
market must have rules that prescribe minimum capital requirements for 
member futures commission merchants

[[Page 80619]]

and introducing brokers. A designated contract market must:
    (a) Continually survey the obligations of each futures commission 
merchant created by the positions of its customers;
    (b) As appropriate, compare those obligations to the financial 
resources of the futures commission merchant; and
    (c) Take appropriate steps to use this information to protect 
customer funds.


Sec.  38.605  Requirements for financial surveillance program.

    A designated contract market's financial surveillance program for 
futures commission merchants, retail foreign exchange dealers, and 
introducing brokers must comply with the requirements of Sec.  1.52 of 
this chapter to assess the compliance of such entities with applicable 
contract market rules and Commission regulations.


Sec.  38.606  Financial regulatory services provided by a third party.

    A designated contract market may comply with the requirements of 
Sec.  38.604 (Financial Surveillance) and Sec.  38.605 (Requirements 
for Financial Surveillance Program) of this part through the regulatory 
services of a registered futures association or a registered entity 
(collectively, ``regulatory service provider''), as such terms are 
defined under the Act. A designated contract market must ensure that 
its regulatory service provider has the capacity and resources 
necessary to provide timely and effective regulatory services, 
including adequate staff and appropriate surveillance systems. A 
designated contract market will at all times remain responsible for 
compliance with its obligations under the Act and Commission 
regulations, and for the regulatory service provider's performance on 
its behalf. Regulatory services must be provided under a written 
agreement with a regulatory services provider that shall specifically 
document the services to be performed as well as the capacity and 
resources of the regulatory service provider with respect to the 
services to be performed.


Sec.  38.607  Direct access.

    A designated contract market that permits direct electronic access 
by customers (i.e., allowing customers of futures commission merchants 
to enter orders directly into a designated contract market's trade 
matching system for execution) must have in place effective systems and 
controls reasonably designed to enable the FCM's management of 
financial risk, such as automated pre-trade controls that enable member 
futures commission merchants to implement appropriate financial risk 
limits. A designated contract market must implement and enforce rules 
requiring the member futures commission merchants to use the provided 
systems and controls.

Subpart M--Protection of Markets and Market Participants


Sec.  38.650  Core Principle 12.

    The board of trade shall establish and enforce rules:
    (a) To protect markets and market participants from abusive 
practices committed by any party, including abusive practices committed 
by a party acting as an agent for a participant; and
    (b) To promote fair and equitable trading on the contract market.


Sec.  38.651  Additional sources for compliance.

    A designated contract market must have and enforce rules that are 
designed to promote fair and equitable trading and to protect the 
market and market participants from abusive practices including 
fraudulent, noncompetitive or unfair actions, committed by any party. 
The designated contract market must have methods and resources 
appropriate to the nature of the trading system and the structure of 
the market to detect trade practice and market abuses and to discipline 
such behavior, in accordance with Core Principles 2 and 4, and the 
associated regulations in subparts C and E of this part, respectively. 
The designated contract market also must provide a competitive, open 
and efficient market and mechanism for executing transactions in 
accordance with Core Principle 9 and the associated regulations under 
subpart J of this part.

Subpart N--Disciplinary Procedures


Sec.  38.700  Core Principle 13.

    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.


Sec.  38.701  Enforcement staff.

    A designated contract market must establish and maintain sufficient 
enforcement staff and resources to effectively and promptly prosecute 
possible rule violations within the disciplinary jurisdiction of the 
contract market. A designated contract market must also monitor the 
size and workload of its enforcement staff annually, and ensure that 
its enforcement resources and staff are at appropriate levels. The 
enforcement staff may not include either members of the designated 
contract market or persons whose interests conflict with their 
enforcement duties. A member of the enforcement staff may not operate 
under the direction or control of any person or persons with trading 
privileges at the contract market. A designated contract market's 
enforcement staff may operate as part of the designated contract 
market's compliance department.


Sec.  38.702  Disciplinary panels.

    (a) Disciplinary panels required. A designated contract market must 
establish one or more Review Panels and one or more Hearing Panels 
(collectively, ``disciplinary panels'') that are authorized to fulfill 
their obligations under the rules of this subpart. Disciplinary panels 
must meet the composition requirements of Sec.  40.9(c)(3)(ii) of this 
chapter, and must not include any members of the designated contract 
market's compliance staff, or any person involved in adjudicating any 
other stage of the same proceeding.
    (b) Review panels. A designated contract market's Review Panel(s) 
must be responsible for determining whether a reasonable basis exists 
for finding a violation of contract market rules, and for authorizing 
the issuance of notices of charges against persons alleged to have 
committed violations if the Review Panel believes that the matter 
should be adjudicated.
    (c) Hearing Panels. A designated contract market's Hearing Panel(s) 
must be responsible for adjudicating disciplinary cases pursuant to a 
notice of charges authorized by a Review Panel, and must also be 
responsible for such other duties as are specified in this subpart.


Sec.  38.703  Review of investigation report.

    Promptly after receiving a completed investigation report pursuant 
to Sec.  38.158(c) of this part, a Review Panel must promptly review 
the report and, within 30 days of such receipt, must take one of the 
following actions:
    (a) If the Review Panel determines that additional investigation or 
evidence is needed, it must promptly direct the compliance staff to 
conduct further investigation.
    (b) If the Review Panel determines that no reasonable basis exists 
for finding a violation or that prosecution is otherwise unwarranted, 
it may direct that no further action be taken. Such determination must 
be in writing, and must include a written statement setting

[[Page 80620]]

forth the facts and analysis supporting the decision.
    (c) If the Review Panel determines that a reasonable basis exists 
for finding a violation and adjudication is warranted, it must direct 
that the person or entity alleged to have committed the violation be 
served with a notice of charges and must proceed in accordance with the 
rules of this section.


Sec.  38.704  Notice of charges.

    A notice of charges must adequately state the acts, conduct, or 
practices in which the respondent is alleged to have engaged; state the 
rule, or rules, alleged to have been violated (or about to be 
violated); and prescribe the period within which a hearing on the 
charges may be requested. The notice must also advise the respondent 
charged that he is entitled, upon request, to a hearing on the charges; 
and if the rules of the designated contract market so provide:
    (a) That failure to request a hearing within the period prescribed 
in the notice, except for good cause, may be deemed a waiver of the 
right to a hearing; and
    (b) That failure to answer or to deny expressly a charge may be 
deemed to be an admission of such charge.


Sec.  38.705  Right to representation.

    Upon being served with a notice of charges, a respondent must have 
the right to be represented by legal counsel or any other 
representative of its choosing in all succeeding stages of the 
disciplinary process.


Sec.  38.706  Answer to charges.

    A respondent must be given a reasonable period of time to file an 
answer to a notice of charges. The rules of a designated contract 
market may require that:
    (a) The answer must be in writing and include a statement that the 
respondent admits, denies, or does not have and is unable to obtain 
sufficient information to admit or deny each allegation. A statement of 
a lack of sufficient information shall have the effect of a denial of 
an allegation;
    (b) Failure to file an answer on a timely basis shall be deemed an 
admission of all allegations contained in the notice of charges; and
    (c) Failure in an answer to deny expressly a charge shall be deemed 
to be an admission of such charge.


Sec.  38.707  Admission or failure to deny charges.

    The rules of a designated contract market may provide that if a 
respondent admits or fails to deny any of the charges a Hearing Panel 
may find that the violations alleged in the notice of charges for which 
the respondent admitted or failed to deny any of the charges have been 
committed. If the designated contract market's rules so provide, then:
    (a) The Hearing Panel must impose a sanction for each violation 
found to have been committed;
    (b) The Hearing Panel must promptly notify the respondent in 
writing of any sanction to be imposed pursuant to paragraph (a) of this 
section and shall advise the respondent that it may request a hearing 
on such sanction within the period of time, which shall be stated in 
the notice;
    (c) The rules of a designated contract market may provide that if a 
respondent fails to request a hearing within the period of time stated 
in the notice, the respondent will be deemed to have accepted the 
sanction.


Sec.  38.708  Denial of charges and right to hearing.

    In every instance where a respondent has requested a hearing on a 
charge that is denied, or on a sanction set by the Hearing Panel 
pursuant to Sec.  38.707 of this part, the respondent must be given an 
opportunity for a hearing in accordance with the requirements of Sec.  
38.710 of this part. The designated contract market's rules may provide 
that, except for good cause, the hearing must be concerned only with 
those charges denied and/or sanctions set by the Hearing Panel under 
Sec.  38.707 of this part for which a hearing has been requested.


Sec.  38.709  Settlement offers.

    (a) The rules of a designated contract market may permit a 
respondent to submit a written offer of settlement at any time after 
the investigation report is completed. The disciplinary panel presiding 
over the matter may accept the offer of settlement, but may not alter 
the terms of a settlement offer unless the respondent agrees.
    (b) The rules of a designated contract market may provide that, in 
its discretion, a disciplinary panel may permit the respondent to 
accept a sanction without either admitting or denying the rule 
violations upon which the sanction is based.
    (c) If an offer of settlement is accepted, the panel accepting the 
offer must issue a written decision specifying the rule violations it 
has reason to believe were committed, including the basis or reasons 
for the panel's conclusions, and any sanction to be imposed, which must 
include full customer restitution where customer harm is demonstrated. 
If an offer of settlement is accepted without the agreement of the 
enforcement staff, the decision must adequately support the Hearing 
Panel's acceptance of the settlement. Where applicable, the decision 
must also include a statement that the respondent has accepted the 
sanctions imposed without either admitting or denying the rule 
violations.
    (d) The respondent may withdraw his or her offer of settlement at 
any time before final acceptance by a panel. If an offer is withdrawn 
after submission, or is rejected by a disciplinary panel, the 
respondent must not be deemed to have made any admissions by reason of 
the offer of settlement and must not be otherwise prejudiced by having 
submitted the offer of settlement.


Sec.  38.710  Hearings.

    (a) A designated contract market must adopt rules that provide for 
the following minimum requirements for any hearing conducted pursuant 
to a notice of charges:
    (1) The hearing must be fair, must be conducted before members of 
the Hearing Panel, and must be promptly convened after reasonable 
notice to the respondent. The formal rules of evidence need not apply; 
nevertheless, the procedures for the hearing may not be so informal as 
to deny a fair hearing. No member of the Hearing Panel for the matter 
may have a financial, personal, or other direct interest in the matter 
under consideration.
    (2) In advance of the hearing, the respondent must be entitled to 
examine all books, documents, or other evidence in the possession or 
under the control of the designated contract market that are to be 
relied upon by the enforcement staff in presenting the charges 
contained in the notice of charges or which are relevant to those 
charges.
    (3) The designated contract market's enforcement and compliance 
staffs must be parties to the hearing, and the enforcement staff must 
present their case on those charges and sanctions that are the subject 
of the hearing.
    (4) The respondent must be entitled to appear personally at the 
hearing, must be entitled to cross-examine any persons appearing as 
witnesses at the hearing, and must be entitled to call witnesses and to 
present such evidence as may be relevant to the charges.
    (5) The designated contract market must require persons within its 
jurisdiction who are called as witnesses to participate in the hearing 
and to produce evidence. It must make reasonable efforts to secure the 
presence of all other persons called as witnesses whose testimony would 
be relevant.
    (6) If the respondent has requested a hearing, a copy of the 
hearing must be

[[Page 80621]]

made and must become a part of the record of the proceeding. The record 
must be one that is capable of being accurately transcribed; however, 
it need not be transcribed unless the transcript is requested by 
Commission staff or the respondent, the decision is appealed pursuant 
to Sec.  38.712 of this part, or is reviewed by the Commission pursuant 
to Section 8c of the Act or part 9 of this chapter. In all other 
instances a summary record of a hearing is permitted.
    (7) The rules of a designated contract market may provide that the 
cost of transcribing the record of the hearing must be borne by a 
respondent who requests the transcript, appeals the decision pursuant 
to Sec.  38.712 of this part, or whose application for Commission 
review of the disciplinary action has been granted. In all other 
instances, the cost of transcribing the record must be borne by the 
designated contract market.
    (b) The rules of a designated contract market may provide that a 
sanction may be summarily imposed upon any person within its 
jurisdiction whose actions impede the progress of a hearing.


Sec.  38.711  Decisions.

    Promptly following a hearing conducted in accordance with Sec.  
38.710 of this part, the Hearing Panel must render a written decision 
based upon the weight of the evidence contained in the record of the 
proceeding and must provide a copy to the respondent.
    The decision must include:
    (a) The notice of charges or a summary of the charges;
    (b) The answer, if any, or a summary of the answer;
    (c) A summary of the evidence produced at the hearing or, where 
appropriate, incorporation by reference of the investigation report;
    (d) A statement of findings and conclusions with respect to each 
charge, and a complete explanation of the evidentiary and other basis 
for such findings and conclusions with respect to each charge;
    (e) An indication of each specific rule that the respondent was 
found to have violated; and
    (f) A declaration of all sanctions imposed against the respondent, 
including the basis for such sanctions and the effective date of such 
sanctions.


Sec.  38.712  Right to appeal.

    The rules of a designated contract market may permit the parties to 
a proceeding to appeal promptly an adverse decision of the Hearing 
Panel in all or in certain classes of cases. Such rules may require a 
party's notice of appeal to be in writing and to specify the findings, 
conclusions, or sanctions to which objection are taken. If the rules of 
a designated contract market permit appeals, then both the respondent 
and the enforcement staff must have the opportunity to appeal and the 
designated contract must provide for the following:
    (a) The designated contract market must establish an appellate 
panel that must be authorized to hear appeals of respondents. In 
addition, the rules of a designated contract market may provide that 
the appellate panel may, on its own initiative, order review of a 
decision by the Hearing Panel within a reasonable period of time after 
the decision has been rendered.
    (b) The composition of the appellate panel must be consistent with 
Sec.  40.9(c)(iv) of this chapter, and must not include any members of 
the designated contract market's compliance staff, or any person 
involved in adjudicating any other stage of the same proceeding. The 
rules of a designated contract market must provide for the appeal 
proceeding to be conducted before all of the members of the board of 
appeals or a panel thereof.
    (c) Except for good cause shown, the appeal or review must be 
conducted solely on the record before the Hearing Panel, the written 
exceptions filed by the parties, and the oral or written arguments of 
the parties.
    (d) Promptly following the appeal or review proceeding, the board 
of appeals must issue a written decision and must provide a copy to the 
respondent. The decision issued by the board of appeal must adhere to 
all the requirements of Sec.  38.711 of this part, to the extent that a 
different conclusion is reached from that issued by the Hearing Panel.


Sec.  38.713  Final decisions.

    Each designated contract market must establish rules setting forth 
when a decision rendered pursuant to this section will become the final 
decision of such designated contract market.


Sec.  38.714  Disciplinary sanctions.

    All disciplinary sanctions imposed by a designated contract market 
or its disciplinary panels must be commensurate with the violations 
committed and must be clearly sufficient to deter recidivism or similar 
violations by other market participants. All disciplinary sanctions 
must take into account the respondent's disciplinary history. In the 
event of demonstrated customer harm, any disciplinary sanction must 
also include full customer restitution.


Sec.  38.715  Summary fines for violations of rules regarding timely 
submission of records, decorum, or other similar activities.

    A designated contract market may adopt a summary fine schedule for 
violations of rules relating to the timely submission of accurate 
records required for clearing or verifying each day's transactions, 
decorum, attire, or other similar activities. A designated contract 
market may permit its compliance staff, or a designated panel of 
contract market officials, to summarily impose minor sanctions against 
persons within the designated contract market's jurisdiction for 
violating such rules. A designated contract market's summary fine 
schedule may allow for warning letters to be issued for first-time 
violations or violators, provided that no more than one warning letter 
may be issued per rolling 12-month period for the same violation. If 
adopted, a summary fine schedule must provide for progressively larger 
fines for recurring violations.


Sec.  38.716  Emergency disciplinary actions.

    (a) A designated contract market may impose a sanction, including 
suspension, or take other summary action against a person or entity 
subject to its jurisdiction upon a reasonable belief that such 
immediate action is necessary to protect the best interest of the 
marketplace.
    (b) Any emergency disciplinary action must be taken in accordance 
with a designated contract market's procedures that provide for the 
following:
    (1) If practicable, a respondent must be served with a notice 
before the action is taken, or otherwise at the earliest possible 
opportunity. The notice must state the action, briefly state the 
reasons for the action, and state the effective time and date, and the 
duration of the action.
    (2) The respondent must have the right to be represented by legal 
counsel or any other representative of its choosing in all proceedings 
subsequent to the emergency action taken. The respondent must be given 
the opportunity for a hearing as soon as reasonably practicable and the 
hearing must be conducted before the Hearing Panel pursuant to the 
requirements of Sec.  38.710 of this part.
    (3) Promptly following the hearing provided for in this rule, the 
designated contract market must render a written decision based upon 
the weight of the evidence contained in the record of the proceeding 
and must provide a copy to the respondent. The decision must include a 
description of the summary action taken; the reasons for the

[[Page 80622]]

summary action; a summary of the evidence produced at the hearing; a 
statement of findings and conclusions; a determination that the summary 
action should be affirmed, modified, or reversed; and a declaration of 
any action to be taken pursuant to the determination, and the effective 
date and duration of such action.

Subpart O--Dispute Resolution


Sec.  38.750  Core Principle 14.

    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.


Sec.  38.751  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and acceptable practices in Appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.750 of this part.

Subpart P--Governance Fitness Standards


Sec.  38.800  Core Principle 15.

    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 person with direct access to the 
facility (including any party affiliated with any person described in 
this paragraph).

Subpart Q--Conflicts of Interest


Sec.  38.850  Core Principle 16.

    The board of trade shall establish and enforce rules:
    (a) To minimize conflicts of interest in the decision-making 
process of the contract market; and
    (b) To establish a process for resolving conflicts of interest 
described in paragraph (a) of this section.

Subpart R--Composition of Governing Boards of Contract Markets


Sec.  38.900  Core Principle 17.

    The governance arrangements of the board of trade shall be designed 
to permit consideration of the views of market participants.

Subpart S--Recordkeeping


Sec.  38.950  Core Principle 18.

    The board of trade shall maintain records of all activities 
relating to the business of the contract market:
    (a) In a form and manner that is acceptable to the Commission; and
    (b) For a period of at least 5 years.


Sec.  38.951  Additional sources for compliance.

    A designated contract market must maintain such records, including 
trade records and investigatory and disciplinary files, in accordance 
with the requirements of Sec.  1.31 of this chapter, and in accordance 
with Sec.  45.1 of this chapter, if applicable.

Subpart T--Antitrust Considerations


Sec.  38.1000  Core Principle 19.

    Unless necessary or appropriate to achieve the purposes of this 
Act, the board of trade shall not:
    (a) Adopt any rule or taking any action that results in any 
unreasonable restraint of trade; or
    (b) Impose any material anticompetitive burden on trading on the 
contract market.


Sec.  38.1001  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.1000 of this part.

Subpart U--System Safeguards


Sec.  38.1050  Core Principle 20.

    Each designated contract market shall:
    (a) Establish and maintain a program of risk analysis and oversight 
to identify and minimize sources of operational risk, through the 
development of appropriate controls and procedures, and the development 
of automated systems, that are reliable, secure, and have adequate 
scalable capacity;
    (b) Establish and maintain emergency procedures, backup facilities, 
and a plan for disaster recovery that allow for the timely recovery and 
resumption of operations and the fulfillment of the responsibilities 
and obligations of the board of trade; and
    (c) Periodically conduct tests to verify that backup resources are 
sufficient to ensure continued order processing and trade matching, 
transmission of matched orders to a designated clearing organization 
for clearing, price reporting, market surveillance, and maintenance of 
a comprehensive and accurate audit trail.


Sec.  38.1051  General requirements.

    (a) A designated contract market's program of risk analysis and 
oversight with respect to its operations and automated systems must 
address each of the following categories of risk analysis and 
oversight:
    (1) Information security;
    (2) Business continuity-disaster recovery planning and resources;
    (3) Capacity and performance planning;
    (4) Systems operations;
    (5) Systems development and quality assurance; and
    (6) Physical security and environmental controls.
    (b) In addressing the categories of risk analysis and oversight 
required under paragraph (a) of this section, a designated contract 
market should follow generally accepted standards and best practices 
with respect to the development, operation, reliability, security, and 
capacity of automated systems.
    (c) A designated contract market must maintain a business 
continuity-disaster recovery plan and business continuity-disaster 
recovery resources, emergency procedures, and backup facilities 
sufficient to enable timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a designated contract market following any disruption of 
its operations. Such responsibilities and obligations include, without 
limitation, order processing and trade matching; transmission of 
matched orders to a designated clearing organization for clearing; 
price reporting; market surveillance; and maintenance of a 
comprehensive audit trail. The designated contract market's business 
continuity-disaster recovery plan and resources generally should enable 
resumption of trading and clearing of the designated contract market's 
products during the next business day following the disruption. 
Designated contract markets determined by the Commission to be critical 
financial markets are subject to more stringent requirements in this 
regard, set forth in Sec.  40.9 of this chapter. Electronic trading is 
an acceptable backup for open outcry trading in the event of a 
disruption.
    (d) A designated contract market that is not determined by the 
Commission to be a critical financial market satisfies the requirement 
to be able to resume trading and clearing during the next business day 
following a disruption by maintaining either:
    (1) Infrastructure and personnel resources of its own that are 
sufficient to ensure timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a designated contract market following any disruption of 
its operations; or
    (2) Contractual arrangements with other designated contract markets 
or

[[Page 80623]]

disaster recovery service providers, as appropriate, that are 
sufficient to ensure continued trading and clearing of the designated 
contract market's products, and ongoing fulfillment of all of the 
designated contract market's responsibilities and obligations with 
respect to those products, in the event that a disruption renders the 
designated contract market temporarily or permanently unable to satisfy 
this requirement on its own behalf.
    (e) A designated contract market must notify Commission staff 
promptly of all:
    (1) Electronic trading halts and systems malfunctions;
    (2) Cyber security incidents or targeted threats that actually or 
potentially jeopardize automated system operation, reliability, 
security, or capacity; and
    (3) Any activation of the designated contract market's business 
continuity-disaster recovery plan.
    (f) A designated contract market must give Commission staff timely 
advance notice of all:
    (1) Planned changes to automated systems that may impact the 
reliability, security, or adequate scalable capacity of such systems; 
and
    (2) Planned changes to the designated contract market's program of 
risk analysis and oversight.
    (g) A designated contract market must provide to the Commission 
upon request current copies of its business continuity-disaster 
recovery plan and other emergency procedures, its assessments of its 
operational risks, and other documents requested by Commission staff 
for the purpose of maintaining a current profile of the designated 
contract market's automated systems.
    (h) A designated contract market must conduct regular, periodic, 
objective testing and review of its automated systems to ensure that 
they are reliable, secure, and have adequate scalable capacity. It must 
also conduct regular, periodic testing and review of its business 
continuity-disaster recovery capabilities. Both types of testing should 
be conducted by qualified, independent professionals. Such qualified 
independent professionals may be independent contractors or employees 
of the designated contract market, but should not be persons 
responsible for development or operation of the systems or capabilities 
being tested. Pursuant to Core Principle 18 (Recordkeeping) and 
Sec. Sec.  38.950 and 38.951 of this part, the designated contract 
market must keep records of all such tests, and make all test results 
available to the Commission upon request.
    (i) To the extent practicable, a designated contract market should:
    (1) Coordinate its business continuity-disaster recovery plan with 
those of the members and other market participants upon whom it depends 
to provide liquidity, in a manner adequate to enable effective 
resumption of activity in its markets following a disruption causing 
activation of the designated contract market's business continuity-
disaster recovery plan;
    (2) Initiate and coordinate periodic, synchronized testing of its 
business continuity-disaster recovery plan and the business continuity-
disaster recovery plans of the members and other market participants 
upon whom it depends to provide liquidity; and
    (3) Ensure that its business continuity-disaster recovery plan 
takes into account the business continuity-disaster recovery plans of 
its telecommunications, power, water, and other essential service 
providers.
    (j) Part 46 of this chapter governs the obligations of those 
registered entities that the Commission has determined to be critical 
financial markets, with respect to maintenance and geographic dispersal 
of disaster recovery resources sufficient to meet a same-day recovery 
time objective in the event of a wide-scale disruption. Section 40.9 of 
this chapter establishes the requirements for core principle compliance 
in that respect.

Subpart V--Financial Resources


Sec.  38.1100  Core Principle 21.

    (a) In General. The board of trade shall have adequate financial, 
operational, and managerial resources to discharge each responsibility 
of the board of trade.
    (b) Determination of Adequacy. The financial resources of the board 
of trade shall be considered to be adequate if the value of the 
financial resources exceeds the total amount that would enable the 
contract market to cover the operating costs of the contract market for 
a 1-year period, as calculated on a rolling basis.


Sec.  38.1101  General requirements.

    (a) General rule. (1) A designated contract market must maintain 
financial resources sufficient to enable it to perform its functions in 
compliance with the core principles set forth in Section 5 of the Act 
and regulations thereunder.
    (2) An entity that operates as both a designated contract market 
and a derivatives clearing organization also shall comply with the 
financial resource requirements of Sec.  39.11 of this chapter.
    (3) Financial resources shall be considered sufficient if their 
value is at least equal to a total amount that would enable the 
designated contract market, or applicant for designation as such, to 
cover its operating costs for a period of at least one year, calculated 
on a rolling basis.
    (b) Types of financial resources. Financial resources available to 
satisfy the requirements of paragraph (a) of this section may include:
    (1) The designated contract market's own capital; and
    (2) Any other financial resource deemed acceptable by the 
Commission.
    (c) Computation of financial resource requirement. A designated 
contract market must, on a quarterly basis, based upon its fiscal year, 
make a reasonable calculation of its projected operating costs over a 
12-month period in order to determine the amount needed to meet the 
requirements of paragraph (a) of this section. The designated contract 
market shall have reasonable discretion in determining the methodology 
used to compute such projected operating costs. The Commission may 
review the methodology and require changes as appropriate.
    (d) Valuation of financial resources. At appropriate intervals, but 
not less than quarterly, a designated contract market must compute the 
current market value of each financial resource used to meet its 
obligations under paragraph (a) of this section. Reductions in value to 
reflect market and credit risk (``haircuts'') must be applied as 
appropriate.
    (e) Liquidity of financial resources. The financial resources 
allocated by the designated contract market to meet the requirements of 
paragraph (a) of this section must include unencumbered, liquid 
financial assets (i.e., cash and/or highly liquid securities) equal to 
at least six months' operating costs. If any portion of such financial 
resources is not sufficiently liquid, the designated contract market 
may take into account a committed line of credit or similar facility 
for the purpose of meeting this requirement.
    (f) Reporting requirements. (1) Each fiscal quarter, or at any time 
upon Commission request, a designated contract market must:
    (i) Report to the Commission:
    (A) The amount of financial resources necessary to meet the 
requirements of paragraph (a) of this section; and
    (B) The value of each financial resource available, computed in 
accordance with the requirements of paragraph (d) of this section; and
    (ii) Provide the Commission with a financial statement, including 
the balance sheet, income statement, and statement of cash flows of the

[[Page 80624]]

designated contract market or of its parent company.
    (2) The calculations required by this paragraph shall be made as of 
the last business day of the designated contract market's fiscal 
quarter.
    (3) The designated contract market must provide the Commission 
with:
    (i) Sufficient documentation explaining the methodology used to 
compute its financial requirements under paragraph (a) of this section,
    (ii) Sufficient documentation explaining the basis for its 
determinations regarding the valuation and liquidity requirements set 
forth in paragraphs (d) and (e) of this section, and
    (iii) Copies of any agreements establishing or amending a credit 
facility, insurance coverage, or other arrangement evidencing or 
otherwise supporting the designated contract market's conclusions.
    (4) The report shall be filed not later than 17 business days after 
the end of the designated contract market's fiscal quarter, or at such 
later time as the Commission may permit, in its discretion, upon 
request by the designated contract market.

Subpart W--Diversity of Board of Directors


Sec.  38.1150  Core Principle 22.

    The board of trade, if a publicly traded company, shall endeavor to 
recruit individuals to serve on the board of directors and the other 
decision-making bodies (as determined by the Commission) of the board 
of trade from among, and to have the composition of the bodies reflect, 
a broad and culturally diverse pool of qualified candidates.

Subpart X--Securities and Exchange Commission


Sec.  38.1200  Core Principle 23.

    The board of trade shall keep any such records relating to swaps 
defined in Section 1a(47)(A)(v) of the Act open to inspection and 
examination by the Securities and Exchange Commission.


Sec.  38.1201  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and/or acceptable practices in Appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.1200 of this part.
    19. Revise appendix A to part 38 to read as follows:

Appendix A--Form DCM[GPO: Follow lit]

COMMODITY FUTURES TRADING COMMISSION

FORM DCM

CONTRACT MARKET

APPLICATION OR AMENDMENT TO APPLICATION FOR DESIGNATION

DESIGNATION INSTRUCTIONS

    Intentional misstatements or material omissions of fact may 
constitute Federal criminal violations (7 U.S.C. 13 and 18 U.S.C. 
1001) or grounds for disqualification from designation.

DEFINITIONS

    Unless the context requires otherwise, all terms used in the 
Form DCM have the same meaning as in the Commodity Exchange Act, as 
amended (``CEA'' or ``Act''), and in the General Rules and 
Regulations of the Commodity Futures Trading Commission 
(``Commission'') thereunder.

GENERAL INSTRUCTIONS

    1. Application Form DCM and Exhibits thereto are to be filed 
with the Commission by applicants for designation as a contract 
market, or by a designated contract market amending such 
designation, pursuant to Section 5 of the CEA and the Commission's 
regulations thereunder. Applicants may prepare their own Form DCM 
but must follow the format prescribed herein. Upon the filing of an 
application for designation in accordance with the instructions 
provided herein, the Commission will publish notice of the filing 
and afford interested persons an opportunity to submit written data, 
views and arguments concerning such application. No application for 
designation shall be effective unless the Commission, by order, 
grants such designation.
    2. Individuals' names, except the executing signature in Item 
10, shall be given in full (Last Name, First Name, and Middle Name).
    3. Signatures on all copies of the Form DCM filed with the 
Commission can be executed electronically. If the Form DCM is filed 
by a limited liability company, it must be signed in the name of the 
limited liability company by a member duly authorized to sign on the 
limited liability company's behalf; if filed by a partnership, it 
shall be signed in the name of the partnership by a general partner 
duly authorized; if filed by an unincorporated organization or 
association which is not a partnership, it shall be signed in the 
name of such organization or association by the managing agent--
i.e., a duly authorized person who directs or manages or who 
participates in the directing or managing of its affairs; if filed 
by a corporation, it shall be signed in the name of the corporation 
by a principal officer duly authorized.
    4. If Form DCM is being filed as an application for designation, 
all applicable items must be answered in full. If any item is not 
applicable, indicate by ``none,'' ``not applicable,'' or ``N/A'' as 
appropriate.
    5. For the purposes of this Form DCM, the term ``Applicant'' 
shall include any applicant for designation as a contract market or 
any designated contract market that is amending Form DCM.
    6. Under Section 5 of the CEA and the Commission's regulations 
thereunder, the Commission is authorized to solicit the information 
required to be supplied by this Form DCM from Applicants seeking 
designation as a contract market and from a designated contract 
market. Disclosure of the information specified on this Form DCM is 
mandatory prior to the start of processing of an application for 
designation as a contract market. The information provided with this 
Form DCM will be used for the principal purpose of determining 
whether the Commission should grant or deny designation to an 
Applicant. The Commission further may determine that other and 
additional information is required from the Applicant in order to 
process its application. Except in cases where confidential 
treatment is requested by the Applicant and granted by the 
Commission, pursuant to the Freedom of Information Act and the rules 
of the Commission thereunder, information supplied on this Form DCM 
will be included routinely in the public files of the Commission and 
will be available for inspection by any interested person. A Form 
DCM which is not prepared and executed in compliance with applicable 
requirements and instructions may be returned as not acceptable for 
filing. Acceptance of this Form DCM, however, shall not constitute a 
finding that the Form DCM has been filed as required or that the 
information submitted is true, current or complete.

UPDATING INFORMATION ON THE FORM DCM

    1. Part 38 of the Commission's regulations requires that if any 
information contained in this application, or any supplement or 
amendment thereto, is or becomes inaccurate for any reason, an 
amendment to Form DCM, or a submission under part 40 of the 
Commission's regulations, in either case correcting such information 
must be filed promptly with the Commission.
    2. Designated Contract Markets filing Form DCM as an amendment 
need file only the facing page, the signature page (Item 10), and 
any pages on which an answer is being amended, together with any 
exhibits that are being amended. The submission of an amendment 
represents that the remaining items and exhibits remain true, 
current and complete as previously filed.

WHERE TO FILE

    The Application Form DCM and appropriate exhibits must be filed 
electronically with the Secretary of the Commission at its 
Washington DC headquarters at <a href="/cdn-cgi/l/email-protection#abd8dec9c6c2d8d8c2c4c5d8ebc8cddfc885ccc4dd"><span class="__cf_email__" data-cfemail="e4979186898d97978d8b8a97a487829087ca838b92">[email protected]</span></a> and the Division 
of Market Oversight at <a href="/cdn-cgi/l/email-protection#10545d5f4365727d796363797f7e6350737664733e777f66"><span class="__cf_email__" data-cfemail="e2a6afadb197808f8b91918b8d8c91a281849681cc858d94">[email protected]</span></a>.

BILLING CODE 6351-01-P

[[Page 80625]]

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[GRAPHIC] [TIFF OMITTED] TP22DE10.001


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[GRAPHIC] [TIFF OMITTED] TP22DE10.002

BILLING CODE 6351-01-C

EXHIBITS INSTRUCTIONS

    The following exhibits must be filed with the Commission by 
Applicants seeking designation as a contract market, or by a 
designated contract market amending its designation, pursuant to 
Section 5 of the CEA and the Commission's regulations thereunder. 
The exhibits should be labeled according to the items specified in 
this Form DCM. If any exhibit is not applicable, please specify the 
exhibit letter and indicate by ``none,'' ``not applicable,'' or ``N/
A'' as appropriate.

EXHIBITS--BUSINESS ORGANIZATION

    1. Attach as Exhibit A, the name of any person(s) who owns ten 
percent (10%) or more of the Applicant's stock or who, either 
directly or indirectly, through agreement or otherwise, in any other 
manner, may control or direct the management or policies of 
Applicant.
    Provide as part of Exhibit A the full name and address of each 
such person and attach a copy of the agreement or, if there is none 
written, describe the agreement or basis upon which such person 
exercises or may exercise such control or direction.
    2. Attach as Exhibit B, a list of the present officers, 
directors, governors (and, in the case of an Applicant that is not a 
corporation, the members of all standing committees grouped by 
committee), or persons performing functions similar to any of the 
foregoing, of the designated contract market or of any entity that 
performs the regulatory activities of the Applicant, indicating for 
each:
    a. Name
    b. Title
    c. Dates of commencement and termination of present term of 
office or position
    d. Length of time each present officer, director, or governor 
has held the same office or position
    e. Brief account of the business experience of each officer and 
director over the last five (5) years
    f. Any other business affiliations in the derivatives and 
securities industry
    g. For directors, list any committees on which they serve and 
any compensation received by virtue of their directorship
    h. A description of:
    (1) Any order of the Commission with respect to such person 
pursuant to Section 5e of the CEA;
    (2) Any conviction or injunction against such person within the 
past ten (10) years;
    (3) Any disciplinary actions with respect to such person within 
the last five (5) years;
    (4) Any disqualification under Sections 8b and 8d of the CEA;
    (5) Any disciplinary action under Section 8c of the CEA; and
    (6) Any violation pursuant to Section 9 of the CEA.
    3. Attach as Exhibit C, a narrative that sets forth the fitness 
standards for the Board of Directors and its composition including 
the number and percentage of public directors.
    4. Attach as Exhibit D, a narrative or graphic description of 
the organizational structure of the Applicant. Include a list of all 
affiliates of the Applicant and indicate the general nature of the 
affiliation. Note: If the designated contract market activities of 
the Applicant are or will be conducted primarily by a division, 
subdivision, or other separate entity within the Applicant, 
corporation or organization, describe the relationship of such 
entity within the overall organizational structure and attach as 
Exhibit D a description only as it applies to the division, 
subdivision or separate entity, as applicable. Additionally, provide 
any relevant jurisdictional information, including any and all 
jurisdictions in which you or any affiliated entity are doing 
business, and registration status, including pending applications 
(e.g., country, regulator, registration category, date of 
registration). Provide the address for legal service of process for 
each jurisdiction, which cannot be a post office box.
    5. Attach as Exhibit E, a description of the personnel 
qualifications for each category of professional employees employed 
by the Applicant or the division, subdivision, or other separate 
entity within the Applicant as described in Item 4.
    6. Attach as Exhibit F, an analysis of staffing requirements 
necessary to carry out operations of the Applicant as a designated 
contract market and the name and qualifications of each key staff 
person.
    7. Attach as Exhibit G, a copy of the constitution, articles of 
incorporation, formation or association with all amendments thereto, 
partnership or limited liability agreements, and existing by-laws, 
operating agreement, rules or instruments corresponding thereto, of 
the Applicant. Include any additional governance fitness information 
not included in Exhibit C. Provide a certificate of good standing 
dated

[[Page 80628]]

within one week of the date of the Form DCM.
    8. Attach as Exhibit H, a brief description of any pending legal 
proceeding(s), other than ordinary and routine litigation incidental 
to the business, to which the Applicant or any of its affiliates is 
a party or to which any of its or their property is the subject. 
Include the name of the court or agency where the proceeding(s) are 
pending, the date(s) instituted, the principal parties involved, a 
description of the factual basis alleged to underlie the 
proceeding(s), and the relief sought. Include similar information as 
to any proceeding(s) known to be contemplated by the governmental 
agencies.

EXHIBITS--FINANCIAL INFORMATION

    9. Attach as Exhibit I:
    a. (i) Balance sheet, (ii) Statement of income and expenses, 
(iii) Statement of cash flows, and (iv) Statement of sources and 
application of revenues and all notes or schedules thereto, as of 
the most recent fiscal year of the Applicant, or of its parent 
company, if applicable. If a balance sheet and any statements 
certified by an independent public accountant are available, such 
balance sheet and statement(s) should be submitted as Exhibit I.
    b. Provide a narrative of how the value of the financial 
resources of the Applicant is at least equal to a total amount that 
would enable the Applicant to cover its operating costs for a period 
of at least one year, calculated on a rolling basis, and whether 
such financial resources include unencumbered, liquid financial 
assets (i.e. cash and/or highly liquid securities) equal to at least 
six months' operating costs.
    c. Attach copies of any agreements establishing or amending a 
credit facility, insurance coverage, or other arrangement evidencing 
or otherwise supporting the Applicant's conclusions regarding the 
liquidity of its financial assets.
    d. Representations regarding sources and estimates for future 
ongoing operational resources.
    10. Attach as Exhibit J, a balance sheet and an income and 
expense statement for each affiliate of the designated contract 
market that also engages in designated contract market activities as 
of the end of the most recent fiscal year of each such affiliate, 
and each affiliate of the designated contract market that engages in 
swap execution facility activities.
    11. Attach as Exhibit K, the following:
    a. A complete list of all dues, fees and other charges imposed, 
or to be imposed, by or on behalf of Applicant for its designated 
contract market services that are provided on an exclusive basis and 
identify the service or services provided for each such due, fee, or 
other charge.
    b. A description of the basis and methods used in determining 
the level and structure of the dues, fees and other charges listed 
in paragraph (a.) of this item.
    c. If the Applicant differentiates, or proposes to 
differentiate, among its customers, or classes of customers in the 
amount of any dues, fees, or other charges imposed for the same or 
similar exclusive services, so state and indicate the amount of each 
differential. In addition, identify and describe any differences in 
the cost of providing such services, and any other factors, that 
account for such differentiations.

EXHIBITS--COMPLIANCE

    12. Attach as Exhibit L, a narrative and supporting documents 
that may be provided under other Exhibits herein, that describe the 
manner in which the Applicant is able to comply with each core 
principle. The Applicant should include an explanation, and any 
other forms of documentation the Applicant thinks will be helpful to 
its explanation, demonstrating how the designated contract market 
will be able to comply with each core principle. To the extent that 
the application raises issues that are novel, or for which 
compliance with a core principle is not self-evident, include an 
explanation of how that item and the application satisfy the core 
principles.
    13. Attach as Exhibit M, a copy of the Applicant's rules (as 
defined in Sec.  40.1 of the Commission's regulations) and any 
technical manuals, other guides or instructions for users of, or 
participants in, the market, including minimum financial standards 
for members or market participants. Include rules citing applicable 
Federal position limits and aggregation standards in part 151 of the 
Commission's regulations and any exchange set position limit rules. 
Include rules on publication of daily trading information with 
regards to the requirements of part 16 of the Commission's 
regulations. The Applicant should include an explanation, and other 
forms of documentation the Applicant thinks will be helpful to its 
explanation, demonstrating how the designated contract market will 
be able to comply with each core principle and how its rules, 
technical manuals, other guides or instructions for users of, or 
participants in, the market, or minimum financial standards for 
members of market participants as provided in this Exhibit M help 
support the designated contract market's compliance with the core 
principles.
    14. Attach as Exhibit N, executed or executable copies of any 
agreements or contracts entered into or to be entered into by the 
Applicant, including third party regulatory service provider or 
member or user agreements that enable or empower the Applicant to 
comply with applicable core principles. Identify: (1) The services 
that will be provided; and (2) The core principles addressed by such 
agreement.
    15. Attach as Exhibit O, a copy of any compliance manual and any 
other documents that describe with specificity, the manner in which 
the Applicant will conduct trade practice, market and financial 
surveillance.
    16. Attach as Exhibit P, a description of the Applicant's 
disciplinary and enforcement protocols, tools, and procedures and 
the arrangements for alternative dispute resolution.
    17. Attach as Exhibit Q, a description of the Applicant's trade 
matching algorithm and examples of how that algorithm works in 
various trading scenarios involving various types of orders.
    18. Attach as Exhibit R, a list of rules prohibiting specific 
trade practice violations.
    19. Attach as Exhibit S, a discussion of how trading data will 
be maintained by the designated contract market.
    20. Attach as Exhibit T, a list of the name of the clearing 
organization(s) that will be clearing the Applicant's trades, and a 
representation that clearing members of that organization will be 
guaranteeing such trades.
    21. Attach as Exhibit U, any information (described with 
particularity) included in the application that will be subject to a 
request for confidential treatment pursuant to Sec.  145.9 of the 
Commission's regulations.

EXHIBITS--OPERATIONAL CAPABILITY

    22. Attach as Exhibit V, information responsive to the 
Technology Questionnaire (hyperlink to Web site). This questionnaire 
focuses on information pertaining to the Applicant's program of risk 
analysis and oversight. Main topic areas include: information 
security; business continuity-disaster recovery (``BC-DR'') planning 
and resources; capacity and performance planning; systems 
operations; systems development and quality assurance; and physical 
security and environmental controls.

    20. Revise Appendix B to part 38 to read as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

    1. This appendix provides guidance on complying with core 
principles, both initially and on an ongoing basis, to obtain and 
maintain designation under Section 5(d) of the Act and this part 38. 
Where provided, guidance is set forth in paragraph (a) following the 
relevant heading and can be used to demonstrate to the Commission 
compliance with the selected requirements of a core principle, under 
Sec. Sec.  38.3 and 38.5 of this part. The guidance for the core 
principle is illustrative only of the types of matters a designated 
contract market may address, as applicable, and is not intended to 
be used as a mandatory checklist. Addressing the issues set forth in 
this appendix would help the Commission in its consideration of 
whether the designated contract market is in compliance with the 
selected requirements of a core principle; provided however, that 
the guidance is not intended to diminish or replace, in any event, 
the obligations and requirements of applicants and designated 
contract markets to comply with the regulations provided under this 
part.
    2. Where provided, acceptable practices meeting selected 
requirements of core principles are set forth in paragraph (b) 
following guidance. Designated contract markets that follow specific 
practices outlined in the acceptable practices for a core principle 
in this appendix will meet the selected requirements of the 
applicable core principle; provided however, that the acceptable 
practice is not intended to diminish or replace, in any event, the 
obligations and requirements of applicants and designated contract 
markets to comply with the regulations provided under this part 38. 
The acceptable practices are for

[[Page 80629]]

illustrative purposes only and do not state the exclusive means for 
satisfying a core principle.
    Core Principle 1 of section 5(d) of the Act: DESIGNATION AS 
CONTRACT MARKET.--(A) IN GENERAL--To be designated, and maintain a 
designation, as a contract market, a board of trade shall comply 
with--
    (i) any core principle described in this subsection; and
    (ii) any requirement that the Commission may impose by rule or 
regulation pursuant to section 8a(5).
    (B) REASONABLE DISCRETION OF CONTRACT MARKET--Unless otherwise 
determined by the Commission by rule or regulation, a board of trade 
described in subparagraph (A) shall have reasonable discretion in 
establishing the manner in which the board of trade complies with 
the core principles described in this subsection.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH 
RULES--(A) IN GENERAL.--The board of trade shall establish, monitor, 
and enforce compliance with the rules of the contract market, 
including--
    (i) access requirements;
    (ii) the terms and conditions of any contracts to be traded on 
the contract market; and
    (iii) rules prohibiting abusive trade practices on the contract 
market.
    (B) CAPACITY OF CONTRACT MARKET.--The board of trade shall have 
the capacity to detect, investigate, and apply appropriate sanctions 
to any person that violates any rule of the contract market.
    (C) REQUIREMENT OF RULES.--The rules of the contract market 
shall provide the board of trade with the ability and authority to 
obtain any necessary information to perform any function described 
in this subsection, including the capacity to carry out such 
international information-sharing agreements as the Commission may 
require.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    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) Guidance. (1) Designated 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 of this chapter.
    (2) Guidance in appendix C to this part may be used as guidance 
in meeting this core principle for both new products listings and 
existing listed contracts.
    (b) Acceptable Practices. [Reserved.]
    Core Principle 4 of section 5(d) of the Act: PREVENTION OF 
MARKET DISRUPTION.--The board of trade shall have the capacity and 
responsibility to prevent manipulation, price distortion, and 
disruptions of the delivery or cash-settlement process through 
market surveillance, compliance, and enforcement practices and 
procedures, including--
    (A) methods for conducting real-time monitoring of trading; and
    (B) comprehensive and accurate trade reconstructions.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 5 of section 5(d) of the Act: POSITION 
LIMITATIONS OR ACCOUNTABILITY--(A) IN GENERAL.--To reduce the 
potential threat of market manipulation or congestion (especially 
during trading in the delivery month), the board of trade shall 
adopt for each contract of the board of trade, as is necessary and 
appropriate, position limitations or position accountability for 
speculators.
    (B) MAXIMUM ALLOWABLE POSITION LIMITATION.--For any contract 
that is subject to a position limitation established by the 
Commission pursuant to section 4a(a), the board of trade shall set 
the position limitation of the board of trade at a level not higher 
than the position limitation established by the Commission.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 6 of section 5(d) of the Act: EMERGENCY 
AUTHORITY--The board of trade, in consultation or cooperation with 
the Commission, shall adopt rules to provide for the exercise of 
emergency authority, as is necessary and appropriate, including the 
authority--
    (A) to liquidate or transfer open positions in any contract;
    (B) to suspend or curtail trading in any contract; and
    (C) to require market participants in any contract to meet 
special margin requirements.
    (a) Guidance. In consultation and cooperation with the 
Commission, a designated contract market should have the authority 
to intervene as necessary to maintain markets with fair and orderly 
trading and to prevent or address manipulation or disruptive trading 
practices, whether the need for intervention arises exclusively from 
the DCM's market or as part of a coordinated, cross-market 
intervention. DCM rules should include procedures and guidelines to 
avoid conflicts of interest in accordance with the provisions of 
Sec.  40.9 of this chapter, and include alternate lines of 
communication and approval procedures to address emergencies 
associated with real time events. To address perceived market 
threats, the designated contract market should have rules that allow 
it to take certain actions in the event of an emergency, as defined 
in Sec.  40.1(h) of this chapter, including: imposing or modifying 
position limits, price limits, and intraday market restrictions; 
imposing special margin requirements; ordering the liquidation or 
transfer of open positions in any contract; ordering the fixing of a 
settlement price; extending or shortening the expiration date or the 
trading hours; suspending or curtailing trading in any contract; 
transferring customer contracts and the margin or altering any 
contract's settlement terms or conditions; and, where applicable, 
providing for the carrying out of such actions through its 
agreements with its third-party provider of clearing or regulatory 
services. In situations where a swap is traded on more than one 
platform, emergency action to liquidate or transfer open interest 
must be as directed, or agreed to, by the Commission or the 
Commission's staff. The Commission should be notified promptly of 
the DCM's exercise of emergency action, explaining how conflicts of 
interest were minimized, including the extent to which the DCM 
considered the effect of its emergency action on the underlying 
markets and on markets that are linked or referenced to the contract 
market and similar markets on other trading venues. Information on 
all regulatory actions carried out pursuant to a DCM's emergency 
authority should be included in a timely submission of a certified 
rule pursuant to part 40 of this chapter.
    (b) Acceptable Practices. A designated contract market must have 
procedures and guidelines for decision-making and implementation of 
emergency intervention in the market. At a minimum, the DCM must 
have the authority to liquidate or transfer open positions in the 
market, suspend or curtail trading in any contract, and require 
market participants in any contract to meet special margin 
requirements. In situations where a swap is traded on more than one 
platform, emergency action to liquidate or transfer open interest 
must be directed, or agreed to, by the Commission or the 
Commission's staff. The DCM must promptly notify the Commission of 
the exercise of its emergency authority, documenting its decision-
making process, including how conflicts of interest were minimized, 
and the reasons for using its emergency authority. The DCM must also 
have rules that allow it to take such market actions as may be 
directed by the Commission.
    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 accurate 
information concerning--
    (A) the terms and conditions of the contracts of the contract 
market; and
    (B)(i) the rules, regulations, and mechanisms for executing 
transactions on or through the facilities of the contract market; 
and
    (ii) the rules and specifications describing the operation of 
the contract market's--
    (I) electronic matching platform; or
    (II) trade execution facility.
    (a) Guidance. [Reserved.]
    (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) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 9 of section 5(d) of the Act: EXECUTION OF 
TRANSACTIONS.--``(A) IN GENERAL.--The board of trade shall provide a 
competitive, open, and efficient market and mechanism for executing 
transactions that protects the price discovery process of trading in 
the centralized market of the board of trade.
    (B) RULES.--The rules of the board of trade may authorize, for 
bona fide business purposes--

[[Page 80630]]

    (i) transfer trades or office trades;
    (ii) an exchange of--
    (I) futures in connection with a cash commodity transaction;
    (II) futures for cash commodities; or
    (III) futures for swaps; or
    (iii) 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) Guidance. [Reserved.]
    (b) Acceptable Practices. (1) Block size determination for 
existing contracts. For any futures contract that has been trading 
for one calendar quarter or longer, the acceptable minimum block 
trade size should be a number larger than the size at which a single 
buy or sell order is customarily able to be filled in its entirety 
in that product's centralized market without incurring a substantial 
price concession. In specifying the minimum block, the designated 
contract market should consider, and the Commission will review, 
data related to factors including: the trading volume, open 
interest, liquidity and depth of the order book, typical trade and 
order sizes in the market, any input the designated contract market 
receives from brokers, floor traders and/or market users related to 
these factors, and the block sizes on comparable swap products.
    (2) Block size determination for new contracts. For any futures 
contract that has been listed for trading for less than one calendar 
quarter, an acceptable minimum block trade size should be a number 
equal to the size of a trade that the exchange reasonably 
anticipates will not be able to be filled in its entirety in that 
product's centralized market without incurring a substantial price 
concession. In reviewing the block size for these products, the 
designated contract market should consider, and the Commission will 
review: centralized market data in a related futures contract, the 
same contract traded on another exchange, trading activity in the 
underlying cash market, and the block sizes on comparable swap 
products. For both existing and new contracts, the designated 
contract market may consider other relevant factors, but must 
present those factors to the Commission when it certifies or seeks 
approval of the block trade size.
    (3) Pricing of block trades. (i) Block trades must be at a price 
that is fair and reasonable. In determining whether a block trade 
price is fair and reasonable, the DCM should consider: (A) the size 
of the block; (B) the price and size of other block trades in any 
relevant markets at the applicable time; and/or (C) the circumstance 
of the market or the parties to the block trade. Relevant markets 
include the designated contract market itself, the underlying cash 
markets, and/or related futures or options markets. (ii) Block 
trades between affiliated parties are subject to the pricing 
requirements set forth in Sec.  38.503(d) of this part.
    (4) Recordkeeping for block trades. Records kept in accordance 
with the requirements of FASB Statement No. 133 (``Accounting for 
Derivative Instruments and Hedging Activities''), as amended by FASB 
Statement No. 161 (``Disclosures about Derivative Instruments and 
Hedging Activities--an amendment of FASB Statement No. 133'') are 
acceptable records.
    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--
    (A) to assist in the prevention of customer and market abuses; 
and
    (B) to provide evidence of any violations of the rules of the 
contract market.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 11 of section 5(d) of the Act: FINANCIAL 
INTEGRITY OF TRANSACTIONS.--The board of trade shall establish and 
enforce--
    (A) rules and procedures for ensuring the financial integrity of 
transactions entered into on or through the facilities of the 
contract market (including the clearance and settlement of the 
transactions with a derivatives clearing organization); and
    (B) rules to ensure--
    (i) the financial integrity of any--
    (I) futures commission merchant; and
    (II) introducing broker; and
    (ii) the protection of customer funds.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 12 of section 5(d) of the Act: PROTECTION OF 
MARKETS AND MARKET PARTICIPANTS-- The board of trade shall establish 
and enforce rules--
    (A) to protect markets and market participants from abusive 
practices committed by any party, including abusive practices 
committed by a party acting as an agent for a participant; and
    (B) to promote fair and equitable trading on the contract 
market.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 13 of section 5(d) 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.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 14 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) Guidance. A designated contract market should provide 
customer dispute resolution procedures that are: appropriate to the 
nature of the market; fair and equitable; and 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) Fair and equitable procedure. Every contract market shall 
provide customer dispute resolution procedures that are fair and 
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 commencement of the procedure, at the party's own 
expense;
    (iii) Provide each party with adequate notice of the claims 
presented against such party, 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 designated contract market; and
    (v) Notify the parties of the fees and costs that may be 
assessed.
    (2) Voluntary Procedures. The use of dispute settlement 
procedures shall be voluntary for customers other than eligible 
contract participants as defined in section 1a(18) of the Act, and 
may permit counterclaims as provided in Sec.  166.5 of this chapter.
    (3) Member-to-Member Procedures. If the designated contract 
market also provides procedures for the resolution of disputes that 
do not involve customers (i.e., member-to-member disputes), the 
procedures for resolving such disputes must be independent of and 
shall not interfere with or delay the resolution of customers' 
claims or grievances.
    (4) Delegation. 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 in the event of such 
delegation, the designated contract market shall in all respects 
treat any decision issued by such other organization or association 
with respect to such dispute as if the decision were its own, 
including providing for the appropriate enforcement of any award 
issued against a delinquent member.
    Core Principle 15 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 person with direct access to the facility (including any party 
affiliated with any person described in this paragraph).
    (a) Guidance. [Reserved.]
    (b) Applicable Practices. [Reserved.]
    Core Principle 16 of section 5(d) of the Act: CONFLICTS OF 
INTEREST.--The board of trade shall establish and enforce rules--
    (A) to minimize conflicts of interest in the decision making 
process of the contract market; and
    (B) to establish a process for resolving conflicts of interest 
described in subparagraph (A).
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 17 of section 5(d) of the Act: COMPOSITION OF 
GOVERNING BOARDS OF CONTRACT MARKETS.--The governance arrangements 
of the board of

[[Page 80631]]

trade shall be designed to permit consideration of the views of 
market participants.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 18 of section 5(d) of the Act: RECORDKEEPING.--
The board of trade shall maintain records of all activities relating 
to the business of the contract market--
    (A) in a form and manner that is acceptable to the Commission; 
and
    (B) for a period of at least 5 years.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 19 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 not--
    (A) adopt any rule or taking any action that results in any 
unreasonable restraint of trade; or
    (B) impose any material anticompetitive burden on trading on the 
contract market.
    (a) 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.]
    Core Principle 20 of section 5(d) of the Act: SYSTEM 
SAFEGUARDS.--The board of trade shall--
    (A) establish and maintain a program of risk analysis and 
oversight to identify and minimize sources of operational risk, 
through the development of appropriate controls and procedures, and 
the development of automated systems, that are reliable, secure, and 
have adequate scalable capacity;
    (B) establish and maintain emergency procedures, backup 
facilities, and a plan for disaster recovery that allow for the 
timely recovery and resumption of operations and the fulfillment of 
the responsibilities and obligations of the board of trade; and
    (C) periodically conduct tests to verify that backup resources 
are sufficient to ensure continued order processing and trade 
matching, price reporting, market surveillance, and maintenance of a 
comprehensive and accurate audit trail.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 21 of section 5(d) of the Act: FINANCIAL 
RESOURCES.--
    (A) IN GENERAL.--The board of trade shall have adequate 
financial, operational, and managerial resources to discharge each 
responsibility of the board of trade.
    (B) DETERMINATION OF ADEQUACY.--The financial resources of the 
board of trade shall be considered to be adequate if the value of 
the financial resources exceeds the total amount that would enable 
the contract market to cover the operating costs of the contract 
market for a 1-year period, as calculated on a rolling basis.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 22 of section 5(d) of the Act: DIVERSITY OF BOARD 
OF DIRECTORS.--The board of trade, if a publicly traded company, 
shall endeavor to recruit individuals to serve on the board of 
directors and the other decision-making bodies (as determined by the 
Commission) of the board of trade from among, and to have the 
composition of the bodies reflect, a broad and culturally diverse 
pool of qualified candidates.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 23 of section 5(d) of the Act: SECURITIES AND 
EXCHANGE COMMISSION.--The board of trade shall keep any such records 
relating to swaps defined in section 1a(47)(A)(v) open to inspection 
and examination by the Securities and Exchange Commission.
    (a) Guidance. A designated contract market should have 
arrangements and resources for collecting and maintaining accurate 
records pertaining to any swaps agreements defined in section 
1a(47)(A)(v) of the Act.
    (b) Acceptable Practices. [Reserved.]

    21. Add appendix C to part 38 to read as follows:

Appendix C--Demonstration of Compliance That a Contract is not Readily 
Susceptible to Manipulation

    (a) Futures Contracts--General Information. When a designated 
contract market certifies or submits for approval contract terms and 
conditions for a new futures contract, that submission must include 
the following information:
    (1) A narrative describing the contract, including data and 
information to support the contract's terms and conditions, as set 
by the designated contract market. When designing a futures 
contract, the designated contract market should conduct market 
research so that the contract design meets the risk management needs 
of prospective users and promotes price discovery of the underlying 
commodity. The designated contract market should consult with market 
users to obtain their views and opinions during the contract design 
process to ensure the contract's term and conditions reflect the 
underlying cash market and that the futures contract will perform 
the intended risk management and/or price discovery functions. A 
designated contract market should provide a statement indicating 
that it took such steps to ensure the usefulness of the submitted 
contract.
    (2) A detailed cash market description for physical and cash-
settled contracts should be included. Such descriptions must be 
based on government and/or other publically-available data whenever 
possible and be formulated for both the national and regional/local 
market relevant to the underlying commodity. For tangible 
commodities, the cash market descriptions for the relevant market 
(i.e., national and regional/local) must incorporate at least five 
full years of data that may include, among other factors, 
production, consumption, stocks, imports, exports, and prices. Each 
of those cash market variables must be fully defined and the data 
sources must be fully specified and documented to permit Commission 
staff to replicate the estimates of deliverable supply (defined in 
paragraph (b)(1)(A) of this appendix C). Whenever possible, the 
Commission requests that monthly or daily prices (depending on the 
contract) underlying the cash settlement index be submitted for the 
most recent five full calendar years and for as many of the current 
year's months for which data are available. For contracts that are 
cash settled to an index, the index's methodology must be provided 
along with supporting information showing how the index is 
reflective of the underlying cash market, is not readily subject to 
manipulation or distortion, and is based on a cash price series that 
is reliable, acceptable, publicly available and timely (defined in 
paragraphs (c)(2) and (c)(3) of this appendix C). The Commission 
recognizes that the data necessary for accurate and cogent cash 
market analyses for an underlying commodity vary with the nature of 
the underlying commodity. The Commission may require that the 
designated contract market submit a detailed report on commodity 
definitions and uses.
    (b) Futures Contracts Settled by Physical Delivery. (1) For 
listed contracts that are settled by physical delivery, the terms 
and conditions of the contract should conform to the most common 
commercial practices and conditions in the cash market for the 
commodity underlying the futures contract. The terms and conditions 
should be designed to avoid any impediments to the delivery of the 
commodity so as to promote convergence between the price of the 
futures contract and the cash market value of the commodity at the 
expiration of a futures contract.
    (i) Estimating Deliverable Supplies.
    (A) General definition. The specified terms and conditions, 
considered as a whole, must result in a ``deliverable supply'' that 
is sufficient to ensure that the contract is not susceptible to 
price manipulation or distortion. In general, the term ``deliverable 
supply'' means the quantity of the commodity meeting the contract's 
delivery specifications that reasonably can be expected to be 
readily available to short traders and salable by long traders at 
its market value in normal cash marketing channels at the contract's 
delivery points during the specified delivery period, barring 
abnormal movement in interstate commerce. Typically, deliverable 
supply reflects the quantity of the commodity that potentially could 
be made available for sale on a spot basis at current prices at the 
contract's delivery points. For a non-financial physical-delivery 
commodity contract, this estimate might represent product which is 
in storage at the delivery point(s) specified in the futures 
contract or can be moved economically into or through such points 
consistent with the delivery procedures set forth in the contract 
and which is available for sale on a spot basis within the marketing 
channels that normally are tributary to the delivery point(s). 
Furthermore, an appropriate estimate of deliverable supply excludes 
commodity supplies that are committed to some commercial use. The 
size of commodity supplies that are committed to

[[Page 80632]]

some commercial use may be estimated by consulting with market 
participants. An adequate measure of deliverable supply would be an 
amount of the commodity that would meet the normal or expected range 
of delivery demand without causing futures prices to become 
distorted relative to cash market prices. Given the availability of 
acceptable data, deliverable supply should be estimated on a monthly 
basis for at least the most recent five years for which data are 
available. To the extent possible and that data resources permit, 
deliverable supply estimates should be constructed such that the 
data reflect, as close as possible, the market defined by the 
contract's terms and conditions, and should be formulated, whenever 
possible, with government or publically available data. All 
deliverable supply estimates must be fully defined, have all 
underlying assumptions explicitly stated, and have documentation of 
all data/information sources in order to permit estimate replication 
by Commission staff.
    (B) Accounting for variations in deliverable supplies. To assure 
the availability of adequate deliverable supplies and acceptable 
levels of commercial risk management utility, contract terms and 
conditions should account for variations in the patterns of 
production, consumption and supply over a period of years of 
sufficient length to assess adequately the potential range of 
deliverable supplies. This assessment also should consider 
seasonality, growth, and market concentration in the production/
consumption of the underlying cash commodity. Deliverable supply 
implications of seasonal effects are more straightforwardly 
delineated when deliverable supply estimates are calculated on a 
monthly basis and when such monthly estimates are provided for at 
least the most recent five years for which data resources permit. In 
addition, consideration should be given to the relative roles of 
producers, merchants, and consumers in the production, distribution, 
and consumption of the cash commodity and whether the underlying 
commodity exhibits a domestic or international export focus. Careful 
consideration also should be given to the quality of the cash 
commodity and to the movement or flow of the cash commodity in 
normal commercial channels and whether there exist external factors 
or regulatory controls that could affect the price or supply of the 
cash commodity.
    (C) Calculation of deliverable supplies. Designated contract 
markets should derive a quantitative estimate of the deliverable 
supplies for the delivery period specified in the proposed contract. 
For commodities with seasonal supply or demand characteristics, the 
deliverable supply analysis should include that period when 
potential supplies typically are at their lowest levels. The 
estimate should be based on statistical data, when reasonably 
available, covering a period of time that is representative of the 
underlying commodity's actual patterns of production, patterns of 
consumption, and patterns of seasonal effects (if relevant). Often, 
such a relevant time period should include at least five years of 
monthly deliverable supply estimates permitted by available data 
resources. Deliverable supply estimates should also exclude the 
amount of the commodity that would not be otherwise deliverable on 
the futures contract. For example, deliverable supplies should 
exclude quantities that at current price levels are not economically 
obtainable or deliverable or were previously dedicated under 
contract for commercial use.
    (2) Contract Terms and Conditions Requirements for Futures 
Contracts Settled by Physical Delivery.
    (i) For physical delivery contracts, an acceptable specification 
of terms and conditions would include, but may not be limited to, 
rules that address, as appropriate, the following criteria and 
comply with the associated standards:
    (A) Quality Standards: The terms and conditions of a commodity 
contract should describe or define all of the economically 
significant characteristics or attributes of the commodity 
underlying the contract. In particular, the quality standards should 
be described or defined so that such standards reflect those used in 
transactions in the commodity in normal cash marketing channels. 
Documentation establishing that the quality standards of the 
contract's underlying commodity comply with those accepted/
established by the industry, by Government regulations, and/or by 
relevant laws should also be submitted. For any particular commodity 
contract, the specific attributes that must be enumerated depend 
upon the individual characteristics of the underlying commodity. 
These may include, for example, the following items: grade, quality, 
purity, weight, class, origin, growth, issuer, originator, maturity 
window, coupon rate, source, hours of trading, etc. If the terms of 
the contract provide for the delivery of multiple qualities of a 
specific attribute of the commodity having different cash market 
values, then a ``par'' quality should be specified with price 
differentials applicable to the ``non-par'' qualities that reflect 
discounts or premiums commonly observed or expected to occur in the 
cash market for that commodity.
    (B) Delivery Points and Facilities: Delivery point/area 
specifications should provide for futures delivery at a single 
location or at multiple locations where the underlying cash 
commodity is normally transacted or stored and where there exists a 
viable cash market(s). If multiple delivery points are specified and 
the value of the commodity differs between these locations, contract 
terms should include price differentials that reflect usual 
differences in value between the different delivery locations. If 
the price relationships among the delivery points are unstable and a 
designated contract market chooses to adopt fixed locational price 
differentials, such differentials should fall within the range of 
commonly observed or expected commercial price differences. In this 
regard, any price differentials must be supported with cash price 
data for the delivery location(s). The terms and conditions of the 
contracts also should specify, as appropriate, any conditions the 
delivery facilities and/or delivery facility operators must meet in 
order to be eligible for delivery. Specification of any requirements 
for delivery facilities also should consider the extent to which 
ownership of such facilities is concentrated and whether the level 
of concentration would be susceptible to manipulation of the futures 
contract's prices. Commodity contracts also should specify 
appropriately detailed delivery procedures that describe the 
responsibilities of deliverers, receivers and any required third 
parties in carrying out the delivery process. Such responsibilities 
could include allocation between buyer and seller of all associated 
costs such as load-out, document preparation, sampling, grading, 
weighing, storage, taxes, duties, fees, drayage, stevedoring, 
demurrage, dispatch, etc. Required accreditation for third-parties 
also should be detailed. These procedures should seek to minimize or 
eliminate any impediments to making or taking delivery by both 
deliverers and takers of delivery to help ensure convergence of cash 
and futures at the expiration of a futures delivery month.
    (C) Delivery Period and Last Trading Day: An acceptable 
specification of the delivery period would allow for sufficient time 
for deliverers to acquire the deliverable commodity and make it 
available for delivery, considering any restrictions or requirements 
imposed by the designated contract market. Specification of the last 
trading day for expiring contracts should consider whether adequate 
time remains after the last trading day to allow for delivery on the 
contract.
    (D) Contract Size and Trading Unit: An acceptable specification 
of the delivery unit and/or trading unit would be a contract size 
that is consistent with customary transactions, transportation or 
storage amounts in the cash market (e.g., the contract size may be 
reflective of the amount of the commodity that represents a 
pipeline, truckload or railcar shipment). For purposes of increasing 
market liquidity, a designated contract market may elect to specify 
a contract size that is smaller than the typical commercial 
transaction size, storage unit or transportation size. In such 
cases, the commodity contract should include procedures that allow 
futures traders to easily take or make delivery on such a contract 
with a smaller size, or, alternatively, the designated contract 
market may adopt special provisions requiring that delivery be made 
only in multiple contracts to accommodate reselling the commodity in 
the cash market. If the latter provision is adopted, contract terms 
should be adopted to minimize the potential for default in the 
delivery process by ensuring that all contracts remaining open at 
the close of trading in expiring delivery months can be combined to 
meet the required delivery unit size. Generally, contract sizes and 
trading units must be determined after a careful analysis of 
relevant cash market trading practices, conditions and deliverable 
supply estimates, so as to ensure that the underlying market 
commodity market and available supply sources are able to support 
the contract sizes and trading units at all times.
    (E) Delivery Pack: The term ``delivery pack'' refers to the 
packaging standards (e.g., product may be delivered in burlap or 
polyethylene bags stacked on wooden

[[Page 80633]]

pallets) or non-quality related standards regarding the composition 
of commodity within a delivery unit (e.g., product must all be 
imported from the same country or origin). An acceptable 
specification of the delivery pack or composition of a contract's 
delivery unit should reflect, to the extent possible, specifications 
commonly applied to the commodity traded or transacted in the cash 
market.
    (F) Delivery Instrument: An acceptable specification of the 
delivery instrument (e.g., warehouse receipt, depository certificate 
or receipt, shipping certificate, bill of lading, in-line transfer, 
book transfer of securities, etc.) would provide for its conversion 
into the cash commodity at a commercially-reasonable cost. 
Transportation terms (e.g., FOB, CIF, freight prepaid to 
destination) as well as any limits on storage or certificate daily 
premium fees should be specified. These terms should reflect cash 
market practices and the customary provision for allocating delivery 
costs between buyer and seller.
    (G) Inspection Provisions: Any inspection/certification 
procedures for verifying compliance with quality requirements or any 
other related delivery requirements (e.g., discounts relating to the 
age of the commodity, etc.) should be specified in the contract 
rules. An acceptable specification of inspection procedures would 
include the establishment of formal procedures that are consistent 
with procedures used in the cash market. To the extent that formal 
inspection procedures are not used in the cash market, an acceptable 
specification would contain provisions that assure accuracy in 
assessing the commodity, that are available at a low cost, that do 
not pose an obstacle to delivery on the contract and that are 
performed by a reputable, disinterested third party or by qualified 
designated contract market employees. Inspection terms also should 
detail which party pays for the service, particularly in light of 
the possibility of varying inspection results.
    (H) Delivery (Trading) Months: Delivery months should be 
established based on the risk management needs of commercial 
entities as well as the availability of deliverable supplies in the 
specified months.
    (I) Minimum Price Fluctuation (Minimum Tick): The minimum price 
increment (tick) should be set at a level that is equal to, or less 
than, the minimum price increment commonly observed in cash market 
transactions for the underlying commodity. Specifying a futures' 
minimum tick that is greater than the minimum price increment in the 
cash market can undermine the risk management utility of the futures 
contract by preventing hedgers from efficiently establishing and 
liquidating futures positions that are used to hedge anticipated 
cash market transactions or cash market positions.
    (J) Maximum Price Fluctuation Limits: Designated contract 
markets may adopt price limits to: (1) Reduce or constrain price 
movements in a trading day that may not be reflective of true market 
conditions but might be caused by traders overreacting to news; (2) 
Allow additional time for the collection of margins in times of 
large price movements; and (3) Provide a ``cooling-off'' period for 
futures market participants to respond to bona fide changes in 
market supply and demand fundamentals that would lead to large cash 
and futures price changes. If price limit provisions are adopted, 
the limits should be set at levels that are not overly restrictive 
in relation to price movements in the cash market for the commodity 
underlying the futures contract.
    (K) Speculative Limits: Specific information regarding the 
establishment of speculative position limits are set forth in part 
151 of the Commission's regulations.
    (L) Reportable Levels: Refer to Sec.  15.03 of the Commission's 
regulations.
    (M) Trading Hours: Should be set by the designated contract 
market to delineate each trading day.
    (c) Futures Contracts Settled by Cash Settlement. (1) Cash 
settlement is a method of settling certain futures or option 
contracts whereby, at contract expiration, the contract is settled 
by cash payment in lieu of physical delivery of the commodity or 
instrument underlying the contract. An acceptable specification of 
the cash settlement price for commodity futures and option contracts 
would include rules that fully describe the essential economic 
characteristics of the underlying commodity (e.g., grade, quality, 
weight, class, growth, issuer, maturity, source, rating, description 
of the underlying index and index's calculation methodology, etc.), 
as well as how the final settlement price is calculated. In 
addition, the rules should clearly specify the trading months and 
hours of trading, the last trading day, contract size, minimum price 
change (tick size) and any limitations on price movements (e.g., 
price limits or trading halts).
    (2) Cash settled contracts may be susceptible to manipulation or 
price distortion. In evaluating the susceptibility of a cash-settled 
contract to manipulation, a designated contract market must consider 
the size and liquidity of the cash market that underlies the listed 
contract. In particular, situations susceptible to manipulation 
include those in which the volume of cash market transactions and/or 
the number of participants contacted in determining the cash-
settlement price are very low. Cash-settled contracts may create an 
incentive to manipulate or artificially influence the data from 
which the cash-settlement price is derived or to exert undue 
influence on the cash-settlement price's computation in order to 
profit on a futures position in that commodity. The utility of a 
cash-settled contract for risk management and price discovery would 
be significantly impaired if the cash settlement price is not a 
reliable or robust indicator of the value of the underlying 
commodity or instrument. Accordingly, careful consideration should 
be given to the potential for manipulation or distortion of the cash 
settlement price, as well as the reliability of that price as an 
indicator of cash market values. Appropriate consideration also 
should be given to the commercial acceptability, public 
availability, and timeliness of the price series that is used to 
calculate the cash settlement price. Documentation demonstrating 
that the settlement price index is a reliable indicator of market 
values and conditions and is commonly used as a reference index by 
industry/market agents should be provided. Such documentation may 
take on various forms, including carefully documented interview 
results with knowledgeable agents.
    (3) Where an independent, private-sector third party calculates 
the cash settlement price series, a designated contract market must 
consider the need for a licensing agreement that will ensure the 
designated contract market's rights to the use of the price series 
to settle the listed contract.
    (i) Where an independent, private-sector third party calculates 
the cash settlement price series, the designated contract market 
should verify that the third party utilizes business practices that 
minimize the opportunity or incentive to manipulate the cash-
settlement price series. Such safeguards may include lock-downs, 
prohibitions against derivatives trading by employees, or public 
dissemination of the names of sources and the price quotes they 
provide. Because a cash-settled contract may create an incentive to 
manipulate or artificially influence the underlying market from 
which the cash-settlement price is derived or to exert undue 
influence on the cash-settlement computation in order to profit on a 
futures position in that commodity, a designated contract market 
should, whenever practicable, enter into an information-sharing 
agreement with the third-party provider which would enable the 
designated contract market to better detect and prevent manipulative 
behavior.
    (ii) Where a designated contract market itself generates the 
cash settlement price series, the designated contract market should 
establish calculation procedures that safeguard against potential 
attempts to artificially influence the price. For example, if the 
cash settlement price is derived by the designated contract market 
based on a survey of cash market sources, the designated contract 
market should maintain a list of such entities which all should be 
reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in 
the cash market is active. The cash-settlement survey should include 
a minimum of four independent entities if such sources do not take 
positions in the commodity (e.g., if the survey list is comprised 
exclusively of brokers) or at least eight independent entities if 
such sources trade for their own accounts (e.g., if the survey list 
is comprised of dealers or merchants).
    (iii) The cash-settlement calculation should involve 
computational procedures that eliminate or reduce the impact of 
potentially unrepresentative data.
    (iv) The cash settlement price should be an accurate and 
reliable indicator of prices in the underlying cash market. The cash 
settlement price also should be acceptable to commercial users of 
the commodity contract. The registered entity should fully document 
that the settlement price is accurate, reliable, highly regarded by 
industry/market agents, and fully reflects the economic and 
commercial conditions of the relevant designated contract market.

[[Page 80634]]

    (v) To the extent possible, the cash settlement price should be 
based on cash price series that are publicly available and available 
on a timely basis for purposes of calculating the cash settlement 
price at the expiration of a commodity contract. A designated 
contract market should make the final cash settlement price and any 
other supporting information that is appropriate for release to the 
public, available to the public when cash settlement is accomplished 
by the derivatives clearing organization. If the cash settlement 
price is based on cash prices that are obtained from non-public 
sources (e.g., cash market surveys conducted by the designated 
contract market or by third parties on behalf of the designated 
contract market), a designated contract market should make available 
to the public as soon as possible after a contract month's 
expiration the final cash settlement price as well as any other 
supporting information that is appropriate or feasible to make 
available to the public.
    (4) Contract Terms and Conditions Requirements for Futures 
Contracts Settled by Cash Settlement
    (i) An acceptable specification of the terms and conditions of a 
cash-settled commodity contract will also set forth the trading 
months, last trading day, contract size, minimum price change (tick 
size) and daily price limits, if any.
    (A) Commodity Characteristics: The terms and conditions of a 
commodity contract should describe the commodity underlying the 
contract.
    (B) Contract Size and Trading Unit: An acceptable specification 
of the trading unit would be a contract size that is consistent with 
customary transactions in the cash market. A designated contract 
market may opt to set the contract size smaller than that of 
standard cash market transactions.
    (C) Cash Settlement Procedure: The cash settlement price should 
be reliable, acceptable, publicly available, and reported in a 
timely manner as described in paragraphs (c)(3)(iv) and (c)(3)(v) of 
this appendix C.
    (D) Pricing Basis and Minimum Price Fluctuation (Minimum Tick): 
The minimum price increment (tick) should be set a level that is 
equal to, or less than, the minimum price increment commonly 
observed in cash market transactions for the underlying commodity. 
Specifying a futures' minimum tick that is greater than the minimum 
price increment in the cash market can undermine the risk management 
utility of the futures contract by preventing hedgers from 
efficiently establishing and liquidating futures positions that are 
used to hedge anticipated cash market transactions or cash market 
positions.
    (E) Maximum Price Fluctuation Limits: Designated contract 
markets may adopt price limits to: (1) Reduce or constrain price 
movements in a trading day that may not be reflective of true market 
conditions but might be caused by traders overreacting to news; (2) 
Allow additional time for the collection of margins in times of 
large price movements; and (3) Provide a ``cooling-off'' period for 
futures market participants to respond to bona fide changes in 
market supply and demand fundamentals that would lead to large cash 
and futures price changes. If price-limit provisions are adopted, 
the limits should be set at levels that are not overly restrictive 
in relation to price movements in the cash market for the commodity 
underlying the futures contract. For broad-based stock index futures 
contracts, rules should be adopted that coordinate with New York 
Stock Exchange (``NYSE'') declared Circuit Breaker Trading Halts and 
would recommence trading in the futures contract only after trading 
in the majority of the stocks underlying the index has recommenced.
    (F) Last Trading Day: Specification of the last trading day for 
expiring contracts should be established such that it occurs before 
publication of the underlying third-party price index or 
determination of the final settlement price. If the designated 
contract market chooses to allow trading to occur through the 
determination of the final settlement price, then the designated 
contract market should show that futures trading would not distort 
the final settlement price calculation.
    (G) Trading Months: Trading months should be established based 
on the risk management needs of commercial entities as well as the 
availability of price and other data needed to calculate the cash 
settlement price in the specified months. Specification of the last 
trading day should take into consideration whether the volume of 
transactions underlying the cash settlement price would be unduly 
limited by occurrence of holidays or traditional holiday periods in 
the cash market. Moreover, a contract should not be listed past the 
date for which the designated contract market has access to use a 
proprietary price index for cash settlement.
    (H) Speculative Limits: Specific rules and policies for 
speculative position limits are set forth in the part 151 of the 
Commission's regulations.
    (I) Reportable Levels: Refer to Sec.  15.03 of the Commission's 
regulations.
    (J) Trading Hours: Should be set by the designated contract 
market to delineate each trading day.
    (d) Options on a Futures Contract. (1) The Commission's 
experience with the oversight of trading in futures option contracts 
indicates that most of the terms and conditions associated with such 
trading do not raise any regulatory concerns or issues. The 
Commission has found that the following terms do not affect an 
option contract's susceptible to manipulation or its utility for 
risk management. Thus, the Commission believes that, in most cases, 
any specification of the following terms would be acceptable; the 
only requirement is that such terms be specified in an automatic and 
objective manner in the option contract's rules:
    [cir] Exercise method;
    [cir] Exercise procedure (if positions in the underlying futures 
contract are established via book entry);
    [cir] Strike price listing provisions, including provisions for 
listing strike prices on a discretionary basis;
    [cir] Strike price intervals;
    [cir] Automatic exercise provisions;
    [cir] Contract size (unless not set equal to the size of the 
underlying futures contract); and
    [cir] Option minimum tick should be equal to or smaller than 
that of the underlying futures contract.
    (2) Option Expiration & Last Trading Day. For options on futures 
contracts, specification of expiration dates should consider the 
relationship of the option expiration date to the delivery period 
for the underlying futures contract. In particular, an assessment 
should be made of liquidity in the underlying futures market to 
assure that any futures contracts acquired through exercise can be 
liquidated without adversely affecting the orderly liquidation of 
futures positions or increasing the underlying futures contract's 
susceptibility to manipulation. When the underlying futures contract 
exhibits a very low trading activity during an expiring delivery 
month's final trading days or has a greater risk of price 
manipulation than other contracts, the last trading day and 
expiration day of the option should occur prior to the delivery 
period or the settlement date of the underlying future. For example, 
the last trading day and option expiration day might appropriately 
be established prior to first delivery notice day for option 
contracts with underlying futures contracts that have very limited 
deliverable supplies. Similarly, if the futures contract underlying 
an option contract is cash settled using cash prices from a very 
limited number of underlying cash market transactions, the last 
trading and option expiration days for the option contract might 
appropriately be established prior to the last trading day for the 
futures contract.
    (3) Speculative Limits. In cases where the terms of an 
underlying futures contract specify a spot-month speculative 
position limit and the option contract expires during, or at the 
close of, the futures contract's delivery period, the option 
contract should include a spot-month speculative position limit 
provision that requires traders to combine their futures and option 
position and be subject to the limit established for the futures 
contract. Specific rules and policies for speculative position 
limits are set forth in part 151 of the Commission's regulations.
    (4) Options on Physicals Contracts.
    (i) Under the Commission's regulations, the term ``option on 
physicals'' refers to option contracts that do not provide for 
exercise into an underlying futures contract. Upon exercise, options 
on physicals can be settled via physical delivery of the underlying 
commodity or by a cash payment. Thus, options on physicals raise 
many of the same issues associated with trading in futures contracts 
regarding adequacy of deliverable supplies or acceptability of the 
cash settlement price series. In this regard, an option that is cash 
settled based on the settlement price of a futures contract would be 
considered an ``option on physicals'' and the futures settlement 
price would be considered the cash price series.
    (ii) In view of the above, acceptable practices for the terms 
and conditions of options on physicals contracts include, as 
appropriate, those practices set forth above for physical-delivery 
or cash-settled futures contracts plus the practices set forth for 
options on futures contracts.
    (e) Security Futures Products. (1) The listing of security 
futures products are

[[Page 80635]]

governed by the special requirements of part 41 of the Commission's 
regulations. A designated contract market should follow the 
appropriate guidance regarding physically delivered security futures 
products that are settled through physical delivery or cash 
settlement.
    (f) Non-Price Based Futures Contracts. (1) Non-price based 
contracts are typically construed as binary options, but also may be 
designed to function similar to traditional futures or option 
contracts.
    (2) Where the contract is settled to a third party cash-
settlement series, the designated contract market should consider 
the nature and sources of the data comprising the cash-settlement 
calculation, the computational procedures, and the mechanisms in 
place to ensure the accuracy and reliability of the index value. The 
evaluation also considers the extent to which the third party has, 
or will adopt, safeguards against unauthorized or premature release 
of the index value itself or any key data used in deriving the index 
value.
    (3) The designated contract market should follow the guidance in 
paragraph (c)(4) (Contract Terms and Conditions Requirements for 
Futures Contracts Settled by Cash Settlement) of this appendix C to 
meet compliance.
    (g) Swap Contracts. (1) In general, swap contracts are an 
agreement to exchange a series of cash flows over a period of time 
based on reference price indices. When listing a swap for trading, a 
swap execution facility or designated contract market must determine 
that the reference price indices used for its contracts are not 
readily susceptible to manipulation. Accordingly, careful 
consideration should be given to the potential for manipulation or 
distortion of the cash settlement price, as well as the reliability 
of that price as an indicator of cash market values. Appropriate 
consideration also should be given to the commercial acceptability, 
public availability, and timeliness of the price series that is used 
to calculate the cash settlement price. Documentation demonstrating 
that the settlement price index is a reliable indicator of market 
values and conditions and is highly regarded by industry/market 
agents should be provided. Such documentation may take on various 
forms, including carefully documented interviews with principal 
market trading agents, pricing experts, marketing agents, etc. 
Appropriate consideration also should be given to the commercial 
acceptability, public availability, and timeliness of the price 
series that is used to calculate the cash flows of the swap.
    (i) Where an independent, private-sector third party calculates 
the referenced price index, the designated contract market should 
verify that the third party utilizes business practices that 
minimize the opportunity or incentive to manipulate the cash-
settlement price series. Such safeguards may include lock-downs, 
prohibitions against derivatives trading by employees, or public 
dissemination of the names of sources and the price quotes they 
provide. Because a cash-settled contract may create an incentive to 
manipulate or artificially influence the underlying market from 
which the cash-settlement price is derived or to exert undue 
influence on the cash-settlement computation in order to profit on a 
futures position in that commodity, a designated contract market 
should, whenever practicable, enter into an information-sharing 
agreement with the third-party provider which would enable the 
designated contract market to better detect and prevent manipulative 
behavior.
    (ii) Where a designated contract market itself generates the 
cash settlement price series, the designated contract market should 
establish calculation procedures that safeguard against potential 
attempts to artificially influence the price. For example, if the 
cash settlement price is derived by the designated contract market 
based on a survey of cash market sources, the designated contract 
market should maintain a list of such entities which all should be 
reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in 
the cash market is active. The cash-settlement survey should include 
a minimum of four independent entities if such sources do not take 
positions in the commodity (e.g., if the survey list is comprised 
exclusively of brokers) or eight independent entities if such 
sources trade for their own accounts (e.g., if the survey list is 
comprised of dealers or merchants).
    (iii) The cash-settlement calculation should involve appropriate 
computational procedures that eliminate or reduce the impact of 
potentially unrepresentative data.
    (2) Speculative Limits: Specific rules and policies for 
speculative position limits are set forth in part 151 of the 
Commission's regulations.
    (3) Intraday Market Restrictions: Designated contract markets or 
swap execution facilities must have in place intraday market 
restrictions that pause or halt trading in the event of 
extraordinary price moves that may result in distorted prices. Such 
restrictions need to be coordinated with other markets that may be a 
proxy or a substitute for the contracts traded on their facility. 
For example, coordination with NYSE rule 80.B Circuit Breaker 
Trading Halts. The designated contract market or swap execution 
facility must adopt rules to specifically address who is authorized 
to declare an emergency; how the designated contract market or swap 
execution facility will notify the Commission of its decision that 
an emergency exists; how it will address conflicts of interest in 
the exercise of emergency authority; and how it will coordinate 
trading halts with markets that trade the underlying price reference 
index or product.
    (4) Settlement Method. The designated contract market or swap 
execution facility should follow the guidance in paragraph (c)(4) 
(Contract Terms and Conditions Requirements for Futures Contracts 
Settled by Cash Settlement) of this appendix C to meet compliance, 
or paragraph (b)(2) (Contract Terms and Conditions Requirements for 
Futures Contracts Settled by Physical Delivery) of this appendix C, 
as appropriate.

    By the Commission.

    Dated: December 1, 2010.
David A. Stawick,
Secretary.

Appendices to Core Principles and Other Requirements for Designated 
Contract Markets--Commission Voting Summary and Statements of 
Commissioners

    Note:  The following appendices will not appear in the Code of 
Federal Regulations

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn and 
Chilton voted in the affirmative; Commissioners Sommers and O'Malia 
voted in the negative.

Appendix 2--Statements of Commissioners

Statement of Chairman Gary Gensler

    I support the proposed rulemaking to update our rules and 
guidance with regard to designated contract markets (DCMs). The 
Dodd-Frank Act updated the statutory language for core principles 
for contract markets, increasing the number to 23 and modifying 
existing core principles. Thus, it is important to update our rules 
and guidance to reflect those changes. Further, the Dodd-Frank Act 
allows DCMs to--for the first time--offer swaps in addition to 
futures and commodity options, and this proposal addresses that 
broader scope. I believe it is also important to update the rules 
and guidance for DCMs in light of the fact that we will be 
promulgating rules and guidance for swap execution facilities, and 
many of the core principles are similar. This rule will help to 
promote transparency and market integrity.

Dissent of Commissioner Jill E. Sommers and Commissioner Scott D. 
O'Malia

    We respectfully dissent from the action taken today by the 
Commission to issue proposed regulations relating to ``Core 
Principle and Other Requirements for Designated Contract Markets'' 
(DCMs). While we each dissent for a number of reasons, we join in 
writing to express our disagreement with the Commission's narrow 
interpretation of Core Principle 9--Execution of Transactions, and 
request comment on the implications of such a narrow interpretation 
of Core Principle 9 for markets and market participants.
    In relevant part, Core Principle 9 states: ``The board of trade 
shall provide a competitive, open, and efficient market and 
mechanism for executing transactions that protects the price 
discovery process of trading in the centralized market of the board 
of trade.'' Core Principle 9 does not say that every contract listed 
for trading on the board of trade must trade in the centralized 
market. Nor does it require that every contract listed for trading 
serve a price discovery function. Rather, it requires a mechanism 
for protecting the price discovery function for those contracts that 
do trade in the centralized market. With these proposed regulations, 
the Commission is interpreting

[[Page 80636]]

Core Principle 9 in a way that does not comport with the plain 
language of the statute.
    Over the past decade, a long list of non-standardized, illiquid 
contracts in the energy sphere have been executed off-exchange and 
cleared on-exchange through the exchange of futures for swaps (EFS) 
mechanism. The availability of clearing for these contracts added a 
level of safety, soundness and transparency to the marketplace that 
did not exist before. If the Commission had not permitted these 
contracts to be listed for clearing through the EFS process it is 
highly doubtful that the level of clearing that exists today for 
these contracts would have been achieved, and highly likely that 
this activity would have remained opaque to market participants and 
regulators. Congress was aware of this specialized marketplace when 
it amended Core Principle 9. If Congress had intended to outlaw this 
activity it could have done so by explicitly requiring all DCM 
contracts to trade in the centralized market. It did not do so. In 
fact, Core Principle 9 explicitly allows boards of trade to 
authorize certain types of contracts that have traditionally been 
traded off the centralized market, including EFS.
    Finally, the full ramifications of the Commission's overly-
restrictive reading of Core Principle 9 are not yet known, but are 
likely to be of great consequence to many market participants. 
Clearing helps mitigate risk, and the movement of illiquid contracts 
into a cleared environment was a positive development for our 
markets and market participants. Clearing contracts listed on a DCM 
also permits market participants to take advantage of certain 
efficiencies, like portfolio margining. Now, hundreds of contracts 
that are listed for trading on DCMs and cleared likely will no 
longer enjoy that status. The assumption appears to be that these 
contracts will simply be listed for trading on a swap execution 
facility (SEF) and cleared, without any disruption to markets or 
market participants. We are not willing to make such a bold 
assumption, especially when the Commission has not yet proposed 
regulations relating to listing and trading requirements for SEFs.
    We would have preferred that the proposed regulations preserve 
the functioning of this specialized marketplace; a marketplace that 
has not adversely affected price discovery for any contract 
currently traded in the centralized market.

[FR Doc. 2010-31458 Filed 12-21-10; 8:45 am]
BILLING CODE 6351-01-P


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