80572 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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. 

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 (‘‘DoddFrank 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: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• 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 § 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, 

nmarkowitz@cftc.gov, or Nadia Zakir, 

Attorney-Advisor, 202–418–5720, 

nzakir@cftc.gov, 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 § 38.1—Scope 

2. Proposed § 38.2—Applicable Provisions 

3. Proposed § 38.3—Procedures for 

Designation 

4. Proposed § 38.4—Procedures for Listing 

Products and Implementing Designated 

Contract Market Rules 

5. Proposed § 38.5—Information Relating to 

Contract Market Compliance 

6. Proposed § 38.7—Prohibited Use of Data 

Collected for Regulatory Purposes 

7. Proposed § 38.8—Listing of Swaps on a 

Designated Contract Market 

8. Proposed § 38.9—Designated Contract 

Markets Operating as Swap Execution 

Facilities 

9. Proposed § 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 § 38.151—Access Requirements 

ii. Proposed § 38.152—Abusive Trading 

Practices Prohibited 

iii. Proposed § 38.153—Capacity To Detect 

and Investigate Rule Violations 

iv. Proposed § 38.154—Regulatory Services 

Provided by a Third Party 

v. Proposed § 38.155—Compliance Staff 

and Resources 

vi. Proposed § 38.156—Automated Trade 

Surveillance System 

vii. Proposed § 38.157—Real-Time Market 

Monitoring 

viii. Proposed § 38.158—Investigations and 

Investigation Reports 

ix. Proposed § 38.159—Ability To Obtain 

Information 

x. Proposed § 38.160—Additional Rules 

Required 

3. Subpart D–Contracts Not Readily 

Susceptible to Manipulation 

4. Subpart E–Prevention of Market 

Disruption 

i. Proposed § 38.251—General 

Requirements 

ii. Proposed § 38.252—Additional 

Requirements for Physical Delivery 

Contracts 

iii. Proposed § 38.253—Additional 

Requirements for Cash-Settled Contracts 

iv. Proposed § 38.254—Ability to Obtain 

Information 

v. Proposed § 38.255—Risk Controls for 

Trading 

vi. Proposed § 38.256—Trade 

Reconstruction 

vii. Proposed § 38.257—Regulatory Service 

Provider 

viii. Proposed § 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 § 38.401(a)—General 

ii. Proposed § 38.401(b)—Accuracy 

Requirement 

iii. Proposed § 38.401(c)—Notice of 

Regulatory Submissions 

iv. Proposed § 38.401(d)—Rulebook 

8. Subpart I—Daily Publication of Trading 

Information 

9. Subpart J—Execution of Transactions 

i. Proposed § 38.501—General 

Requirements 

ii. Proposed § 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 § 38.501—Block Trades on 

Futures Contracts 

iv. Proposed § 38.504—Block Trades on 

Swap Contracts 

v. Proposed § 38.505—Exchange of 

Derivatives For Related Positions 

vi. Proposed § 38.506—Office Trades and 

Transfer Trades 

10. Subpart K—Trade Information 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80573 

1See 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. 

2Pursuant 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). 

4The 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). 

5See Section 754 of the Dodd-Frank Act. 

6 7 U.S.C. 7; see also, Section 5 of the CEA, as 

amended by the Dodd-Frank Act. 

7Commodity Futures Modernization Act of 2000, 

Public Law 106–554, 114 Stat. 2763 (2000) 

(‘‘CFMA’’). 

8The 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 

§ 36.3 of the Commission’s regulations. Section 723 

of the Dodd-Frank Act repealed the ECM SPDC 

provisions. 

i. Proposed § 38.551—Audit Trail Required 

ii. Proposed § 38.552—Elements of an 

Acceptable Audit Trail Program 

iii. Proposed § 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 § 38.701—Enforcement Staff 

ii. Proposed § 38.702—Disciplinary Panels 

iii. Proposed § 38.703—Review of 

Investigation Report 

iv. Proposed § 38.704—Notice of Charges 

v. Proposed § 38.705—Right to 

Representation 

vi. Proposed § 38.706—Answer to Charges 

vii. Proposed § 38.707—Admission or 

Failure to Deny Charges 

viii. Proposed § 38.708—Denial of Charges 

and Right to Hearing 

ix. Proposed § 38.709—Settlement Offers 

x. Proposed § 38.710—Hearings 

xi. Proposed § 38.711—Decisions 

xii. Proposed § 38.712—Right to Appeal 

xiii. Proposed § 38.13—Final Decisions 

xiv. Proposed § 38.714—Disciplinary 

Sanctions 

xv. Proposed § 38.715—Summary of Fines 

for Violations of Rules Regarding Timely 

Submission of Records, Decorum or 

Other Similar Activities 

xvi. Proposed § 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 § 38.1101(a)—General 

Requirements 

ii. Proposed § 38.1101(b)—Types of 

Financial Resources 

iii. Proposed § 38.1101(c)—Computation of 

Financial Resource Requirement 

iv. Proposed § 38.1101(d)—Valuation of 

Financial Resources 

v. Proposed § 38.1101(e)—Liquidity of 

Financial Resources 

vi. Proposed § 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. 

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 DoddFrank 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. 

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. 

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

The CEA, as amended by the CFMA, 

requires a DCM applicant to 

demonstrate that it satisfies each of 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80574 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

9The 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’’). 

11New Core Principle 13 is verbatim of current 

Designation Criterion 6. 

12See Section 723 of the Dodd-Frank Act. 

13Section 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. 

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. 

15Current 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. 

16The 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. 

17Staff 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. 

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

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

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. 

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. 

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. 

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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80575 

18This release does not propose any revisions to 

§ 38.6 of the Commission’s regulations. 

19Each of these subparts begins with a regulation 

containing the language of the core principle. 

20The Commission notes that because some of the 

proposed rulemakings are either ongoing or 

forthcoming, this proposed list of reserved sections 

under § 38.2 may be subject to further revisions 

pending the final rules for each respective 

rulemaking. 

21 In addition to these substantive revisions, many 

of the proposed revisions to § 38.3 are nonsubstantive and are intended to clarify the rule. 

22This 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. 

23 7 U.S.C. 8(a); see also, Section 6(a) of the CEA, 

as amended by the Dodd-Frank Act. 

24This 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. 

25Appendix A currently contains the stand alone 

designation criteria now eliminated under the 

Dodd-Frank Act. 

26The Commission also is requiring tailored 

application forms for the registration of Designated 

Clearing Organizations, Swap Execution Facilities 

and Swap Data Repositories. 

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. 

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 

§§ 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

1. Proposed § 38.1—Scope 

The proposed revisions to § 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 § 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 

§ 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

3. Proposed § 38.3—Procedures for 

Designation 

Current § 38.3 sets forth the 

application and approval procedures for 

new DCM applications.21 The 

Commission is proposing in § 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

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

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 § 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 


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27The 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. 

28 In addition, proposed §§ 38.3(e) and 38.3(f) 

restate existing requirements with certain nonsubstantive, clarifying changes. 29Compare 7 U.S.C. 7(d) with section 5(d) of the 

CEA, as amended by the Dodd-Frank Act. 

30Proposed § 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 

§ 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. 

32The 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. 

initiate the 180-day designation review 

process. 

The Commission is proposing new 

§ 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 § 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. 

Proposed § 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 § 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 § 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 DoddFrank 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 § 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. 

4. Proposed § 38.4—Procedures for 

Listing Products and Implementing 

Designated Contract Market Rules 

The proposed amendments to § 38.4 

are largely intended to conform this rule 

to the proposed changes to existing 

§§ 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

5. Proposed § 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 

§ 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 § 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 § 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; 


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33The Commission also maintains the existing 

provisions of § 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. 34The Commission is proposing to redesignate 

§ 38.5(d) as § 38.5(c). 35The 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. 

36Current § 38.6 (Enforceability) remains 

unchanged. 

37The 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. 

38See Section 21 of the CEA, as amended by the 

Dodd-Frank Act. 

39See ‘‘Swap Data Recordkeeping and Reporting 

Requirements,’’ Proposed Rule, 75 FR 76574 (Dec. 

8, 2010). 

40See 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). 

41Section 5h(c) of the CEA, as amended by the 

Dodd-Frank Act, provides: 

Continued 

(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 § 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

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 § 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 § 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. 

6. Proposed § 38.7 36—Prohibited Use of 

Data Collected for Regulatory Purposes 

To fulfill their regulatory and 

compliance obligations, DCMs often 

require market participants to provide 

proprietary data or personal 

information. Proposed § 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. 

7. Proposed § 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 § 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 § 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 § 38.8(b) codifies the 

obligations of DCMs to comply with the 

provisions of proposed part 45. 

8. Proposed § 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 DoddFrank 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 § 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 DoddFrank Act, and part 37 of the 

Commission’s regulations. 

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 § 38.9(b) codifies 

this statutory requirement. 


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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. 

42See Sections 2(a)(13)–(14) of the CEA, as 

amended by the Dodd-Frank Act. 

43See ‘‘Real Time Public Reporting of Swap 

Transaction Data,’’ Proposed Rule, 75 FR 76140 

(Dec. 7, 2010). 

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 §§ 38.100 and 38.1200. 

45 7 U.S.C. 7; see also Section 5(d)(1) of the CEA, 

as amended by the Dodd-Frank Act. 

46As 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. 

47Commission 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. 

48Section 38.2 of the Commission’s regulations 

exempts DCMs from all Commission rules not 

specifically reserved. The part 8 rules were not 

reserved. 

49 Generally, § 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). 

9. Proposed § 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 § 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. 

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

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 § 38.100. 

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 

§ 38.150 implements these 

requirements. 

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. 

i. Proposed § 38.151—Access 

Requirements 

Proposed § 38.151 is an example of a 

rule in which the Commission proposes 

a new requirement for DCMs.49

Proposed § 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. 

DCMs generally require through rule 

and/or clearing firm connection 


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50The 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 bestdisplayed 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. 

51The 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. 

52Section 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). 

53 17 CFR part 38, App. B, Core Principle 2, 

Application Guidance at ¶ 1. 

54The language in the current application 

guidance requires that a DCM ‘‘have arrangements 

and resources for effective trade practice 

surveillance programs[.]’’ Id. 

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 § 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 § 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. 

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 § 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 § 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 § 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 § 38.152—Abusive Trading 

Practices Prohibited 

Proposed § 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

iii. Proposed § 38.153—Capacity To 

Detect and Investigate Rule Violations 

Proposed § 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 


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55 7 U.S.C. 7a–2(b); see also, section 5c(b)(1) of 

the CEA, as amended by the Dodd-Frank Act. 

56See 66 FR 42256, 42266, Aug. 10, 2001. 

57See 7 U.S.C. 7a–2(b)(2); see also, Section 

5c(b)(2) of the CEA, as amended by the Dodd-Frank 

Act. 

58See 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). 

59These systems typically differ from those 

systems used for real-time market monitoring. The 

requirements for real-time market monitoring can 

be found in proposed § 38.157. 

programs, appropriate resources to 

enforce all of its rules. 

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 § 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 thirdparty 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. 

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 § 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 § 38.154, the applicable selfregulatory 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 § 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

Those recommendations have formed 

the basis for proposed § 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 § 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 


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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. 

61See 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. 

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. 

63See 2000 Rule Enforcement Review of the New 

York Mercantile Exchange. 

64As noted below in the discussion of proposed 

§ 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. 

process that data in various ways for 

analysis. 

Proposed § 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 

§ 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. 

vii. Proposed § 38.157—Real-time 

Market Monitoring 

Proposed § 38.157 codifies existing 

practices at DCMs for real-time 

monitoring of electronic trading. The 

practices codified in proposed § 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 § 38.158—Investigations 

and Investigation Reports 

Proposed § 38.158 is largely a 

compilation of requirements found in 

§§ 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 § 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 indepth 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

Paragraphs (c) and (d) of proposed 

§ 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 

§§ 8.07(a) and (b) of the Commission’s 

regulations, there are two notable 

differences. 

First, proposed § 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 § 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. 

Proposed § 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 § 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 


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65For 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. 66See 1998 Rule Enforcement Review of Kansas 

City Board of Trade; and, Rule Enforcement Review 

of the Minneapolis Grain Exchange (Aug. 27, 2009). 67 17 CFR Part 38, App. A, Designation Criterion 

8, Guidance. 68See 47 FR 49832, 49838, Nov. 3, 1982. 

69See 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). 

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

ix. Proposed § 38.159—Ability To 

Obtain Information 

Proposed § 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

x. Proposed § 38.160—Additional Rules 

Required 

Proposed § 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) retitling 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 

§ 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 § 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 §§ 40.2 or 40.3, or 

(2) amendments to terms and conditions 

under §§ 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 cashsettlement 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 

Communique ́ (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). 

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 


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70See Section 735 of the Dodd-Frank Act. 

71The 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. 

72For 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. 

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 § 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 § 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. 

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 § 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 § 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

Therefore, for physical delivery 

contracts, proposed § 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 § 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 § 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, § 38.253 provides that the 

DCM may have an information sharing 

agreement with the other venue or 

designated contract market. 

iv. Proposed § 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 


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80584 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

73Option contracts on futures may have different 

daily price limits than the underlying futures. 

74For 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. 

75The 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. 

76Under 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. 

77Price 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. 

78Maximum order size limitations prevent entry 

into the trading system of an order that exceeds a 

maximum quantity established by the DCM. 

79Stop 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. 

80The 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). 

the potential for price manipulation, 

price distortions, and the disruption of 

the delivery or cash-settlement process, 

proposed § 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 § 18.05 for futures and options 

and proposed § 20.6 for swaps), has 

found that access to such information is 

vital to an effective surveillance 

program. 

v. Proposed § 38.255—Risk Controls for 

Trading 

Proposed § 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. 

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. 

In order to prevent market disruptions 

due to sudden volatile price 

movements, proposed § 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: 

• What other DCM risk controls are 

appropriate or necessary to reduce the 

risk of market disruptions? 

• Which risk controls should be 

mandated and how? 

vi. Proposed § 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 § 38.256 codifies 

these requirements. 

vii. Proposed § 38.257—Regulatory 

Service Provider 

Proposed § 38.257 provides that a 

designated contract market must comply 

with the regulations in this section 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80585 

81See 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). 

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. 

83This requirement, while new to the text of Core 

Principle 7, was previously required as part of 

former Designation Criteria 4. 

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 § 38.258—Additional 

Rules Required 

Proposed § 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 DoddFrank 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 § 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. 

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 

§ 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 § 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. 

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 § 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. 

i. Proposed § 38.401(a)—General 

Proposed § 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 § 38.401. 

As described in § 38.401(a) of the 

regulation, DCMs must provide the 

required information to market 


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80586 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

84This 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. 

85As 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. 

participants and the public by posting 

such information on their Web site, as 

set forth in proposed § 38.401(c). 

ii. Proposed § 38.401(b)—Accuracy 

Requirement 

Proposed § 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 § 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 

§ 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 delistings) and rule certifications in 

advance of their taking effect.84

Accordingly, proposed § 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. 

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 § 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 § 38.401(d) merely 

codifies these existing practices.85

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 

§ 38.451, the Commission reiterates the 

current acceptable practice that requires 

mandatory compliance with § 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 § 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 § 16.01(d) to require 

reporting markets to report information 

in paragraphs (a)(1) through (6) of 

§ 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 

§ 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 § 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, § 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: 

• 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 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80587 

86 7 U.S.C. 7; see also Section 5(d)(9) of the CEA, 

as amended by the Dodd-Frank Act. 

87This language was taken from former 

Designation Criterion 3. 

88The Commission notes that the CFMA, which 

was enacted after promulgation of § 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). 

89The 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. 

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. 

to display end-of-day prices for each 

interest rate swap? 

• 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? 

• 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

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 § 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

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

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: 

• New § 38.501 proposes to codify in 

part 38 the requirements that are 

currently contained in § 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. 

• New § 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. 

• New §§ 38.503 and 38.504 propose 

to codify certain requirements for block 

trades for futures and swaps and 

§ 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 § 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 

§ 38.504 addresses certain block trading 

requirements specifically for swaps 

traded on the DCM, and proposed 

§ 38.506 addresses transfer and office 

trades. 

• 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 


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80588 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

92 17 CFR 1.38 (2009). 

93The proposed language for § 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. 

94 7 U.S.C. 7; see also section 5(d)(9) of the CEA, 

as amended by the Dodd-Frank Act. 

95Under 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. 

recognizes the need for flexibility as the 

appropriate minimum size and pricing 

of block trades vary among contracts 

and across DCMs. 

i. Proposed § 38.501—General 

Requirements 

Current § 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 § 1.38. Specifically, in 

addition to simplifying the language, the 

2008 Core Principle 9 Proposed 

Rulemaking proposed to update the 

language of § 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 § 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 

§ 1.38 to incorporate updates made to 

the CEA in 2000 by the CFMA. 

As noted above, the existing 

provisions of current § 1.38 will be 

incorporated in proposed § 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 § 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. 

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. 

A DCM that trades contracts that have 

a disproportionate percentage of their 

trading volume attributable to offexchange 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 offexchange 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 offexchange 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 onexchange 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 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80589 

96Commission 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. 

97A third category, consisting of a small number 

of contracts with trading volume between 15–60%, 

is discussed further below. 

98As 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). 

99The 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.’’ 

100The 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 

Continued 

contracts.96 Those contracts represented 

actively traded futures products on eight 

DCMs and included a wide crosssection 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 threemonth 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 offexchange trading in order to protect the 

price discovery process of trading on the 

centralized market. 

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 onexchange 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 § 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. 

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 § 38.502 below, 

proposed § 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, 


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80590 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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. 

101CEA 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. 

102The 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. 

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. 

104See generally, section 2(h) of the CEA, as 

amended by the Dodd-Frank Act. 

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. 

d. Treatment of Contracts Listed as of 

the Effective Date of This Section 

Proposed § 38.502(d) provides relief 

from the provisions of § 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 § 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

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 § 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

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 § 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 

§ 38.502(e)(2) to allow a DCM in this 

situation to petition the Commission to 

exempt a contract from the requirements 

of proposed § 38.502(d) for a maximum 

period of 12 months. Under proposed 

§ 38.502(e)(3) petitions seeking an 

exemption from the mandatory delisting 

requirement in § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80591 

105The 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. 

106All 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. 

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 § 38.502. 

iii. Proposed § 38.503—Block Trades on 

Futures Contracts 

As noted above, in addition to 

updates to § 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. 

Consistent with the requirements set 

forth in current § 1.38 and amended 

Core Principle 9, proposed § 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 § 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 § 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

Proposed § 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 

§ 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 § 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 § 38.503(f) and (g) set forth 

the requirements for recordkeeping and 

reporting of block trades for futures and 

options. As to recordkeeping, proposed 

§ 38.502(f) reflects the provisions 

contained in § 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. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80592 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

107An 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. 

108The Commission notes that for a few contracts 

with lower liquidity, such as weather and housing, 

CME allows for a 15 minute reporting time. 

109See 73 FR 54,097, at note 18, Sep. 18, 2008 

(noting CBOT Rule 331.05(d), CMD Rule 526(F); 

NYMEX Rule 6.21C). 

Proposed § 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. 

Proposed § 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 

§ 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. 

In addition, proposed § 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 § 16.01. 

Proposed § 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: 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80593 

110See supra note 43. 

111See 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’’). 

112The Commission is codifying the EDRP 

pricing methodology based on its experience over 

the past years in determining the reasonability of 

EDRP pricing. 

(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 § 38.503(d). 

iv. Proposed § 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 § 38.504 

provides that DCMs must have rules 

that require compliance with these rules 

for swaps traded on their markets. 

v. Proposed § 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 § 38.505 

codifies the practices that the 

Commission historically has required 

from DCMs with respect to these types 

of transactions. 

As an initial matter, proposed 

§ 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 § 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 § 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. 

Further, proposed § 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 § 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 § 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 § 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 § 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 § 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 § 16.01 as required 

for blocks and EDRPs. Instead, proposed 

§ 38.506 requires that records of such 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80594 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

113The 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. 

114This figure is based on fiscal year 2000, as 

reported in the Commission’s FY 2009 Performance 

and Accountability Report, p. 14. 

115See Rule Enforcement Review of the 

Minneapolis Grain Exchange (August 27, 2009), and 

Rule Enforcement Review of ICE Futures U.S. (Feb. 

2, 2010). 

116 17 CFR Part 38, App. B, Core Principle 10, 

Application Guidance and Acceptable Practices. 

transactions be kept in accordance with 

the recordkeeping regulation § 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

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 §§ 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 longstanding 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

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 § 38.553, also 

summarized below. 

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 § 38.551—Audit Trail 

Required 

Proposed § 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 § 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 § 38.551 applies 

equally to open-outcry and electronic 

trading. 

ii. Proposed § 38.552—Elements of an 

Acceptable Audit Trail Program 

Proposed § 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 § 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 

§ 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 § 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 § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80595 

117There 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. 

118Former 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. 

119Among 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 Commissionregistered DCO; and (ii) a DCO must have open 

access rules, including rules providing for the nondiscriminatory clearing of a swap executed 

bilaterally on or through the rules of an unaffiliated 

DCM or SEF. 

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 § 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 § 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 § 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 § 38.553—Enforcement of 

Audit Trail Requirements 

Proposed § 38.553 prescribes the 

elements of an effective audit trail 

enforcement program. The proposed 

rule is organized in two parts. First, 

proposed § 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 § 38.553(a) is further 

divided into two paragraphs. Paragraph 

(a)(2) of proposed § 38.553 establishes 

minimum review criteria for openoutcry 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 frontend 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 § 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 § 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 §§ 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. 

Proposed § 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. 

Proposed §§ 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 

§ 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 


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120An FCM that is a clearing member will also 

have additional obligations to the DCO as a result 

of its clearing membership. 

121See 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). 

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. 

124The 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. 

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. 

Proposed § 38.605 requires DCMs as 

self-regulatory organizations (‘‘SRO’’) to 

comply with the standards of amended 

§ 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 § 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

Proposed § 38.606 would provide that 

DCMs may satisfy their financial 

surveillance responsibilities under 

proposed §§ 38.604 and 38.605 by 

outsourcing such responsibilities to a 

registered futures association or other 

regulated entity. Proposed § 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 

§ 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: 

• 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? 

• 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. 

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 

§ 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 


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125See § 735(a) of the Dodd-Frank Act. 

126Compare current CEA § 5(b)(6) and § 5(d)(2) 

with CEA § 5(d)(13) as amended by the Dodd-Frank 

Act. 

127Prior 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 § 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. 

128See supra note 47. 

129See 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. 

130See 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 § 38.702, 

below. 

131See 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). 

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

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. 

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 

§ 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

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 § 38.703 (Review of 

Investigation Report), proposed § 38.709 

(Settlement Offers), and proposed 

§ 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. 

Proposed § 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 § 38.715 (Summary Fines for 

Violations of Rules Regarding Timely 


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132Section 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 § 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. 

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. 

i. Proposed § 38.701—Enforcement Staff 

Proposed § 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 § 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 § 38.702—Disciplinary 

Panels 

Proposed § 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 § 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 § 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. 

iii. Proposed § 38.703—Review of 

Investigation Report 

Proposed § 38.703 requires a Review 

Panel to promptly review an 

investigation report received pursuant 

to proposed § 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 § 38.704—Notice of 

Charges 

Proposed § 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 § 38.705—Right to 

Representation 

Proposed § 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 

§§ 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. 


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vi. Proposed § 38.706—Answer to 

Charges 

Proposed § 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 § 38.707—Admission or 

Failure to Deny Charges 

Proposed § 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 § 38.708—Denial of 

Charges and Right to Hearing 

Proposed § 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 

§ 38.707, the respondent must be given 

the opportunity for a hearing in 

accordance with the requirements of 

proposed § 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 

§ 38.707 for which a hearing has been 

requested. 

ix. Proposed § 38.709—Settlement 

Offers 

Proposed § 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 § 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 § 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 § 38.710—Hearings 

Proposed § 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 crossexamine 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 § 38.711—Decisions 

Proposed § 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 § 38.712—Right to Appeal 

Proposed § 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 § 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 


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80600 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

133Proposed § 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. 134 17 CFR part 38, App. B. 

135See 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). 

136 75 FR 63732, Oct. 18, 2010. 

137Former 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. 

138See supra note 131. 

§ 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 § 38.713—Final Decisions 

Proposed § 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 § 38.714—Disciplinary 

Sanctions 

Proposed § 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

xv. Proposed § 38.715—Summary Fines 

for Violations of Rules Regarding 

Timely Submission of Records, 

Decorum, or Other Similar Activities 

Proposed § 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 § 38.716—Emergency 

Disciplinary Actions 

Proposed § 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. 

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 § 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

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 § 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

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 § 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

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 


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139See 7 U.S.C. 7(d)(17). 

140 17 CFR 1.31(a)(1). 

141Compare 7 USC 7(d)(17) with Section 5(d)(18) 

of the CEA as amended by the Dodd-Frank Act 

(emphasis added). 

142Among other criteria, § 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 

* * *.’’ 

143Part 38 contains guidance governing 

compliance with Core Principle 18. 17 CFR part 38, 

App. B. 

144These 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. 

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 § 1.31 of the 

Commission’s regulations (‘‘§ 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 § 1.31 as a primary 

component of compliance with this core 

principle, and proposes to incorporate 

the requirements in § 1.31 into proposed 

§ 38.951. 

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 § 38.951 permits 

the Commission to extend DCMs’ 

recordkeeping requirements beyond the 

five years otherwise required of all 

entities by § 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 

§ 1.31 [of the Commission’s 

regulations].’’ 

By incorporating § 1.31, and more 

specifically, by incorporating § 1.31(a), 

proposed § 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 § 38.951 also effectively 

incorporates current § 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 

§ 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 Commissionrequired 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. 

Finally, proposed § 38.951 also 

incorporates §§ 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 

§ 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 hardcopy for the requisite time period. The 

proposed rule also requires a DCM to 

comply with the requirements of 

proposed § 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 

§ 38.1000, the Commission at this time 

is not proposing any amendments to the 

relevant guidance under part 38. 

Proposed § 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 § 38.1000.20. 

20. Subpart U—System Safeguards 

Proposed § 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 § 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 


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80602 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

145Commission regulation § 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. 

146Some 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. 

147See 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. 

part of the Commission’s mission, and 

will be crucial to the robust and 

transparent systemic risk management 

framework established by the DoddFrank 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. 

Based on the aforementioned, the 

rules proposed under § 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 § 38.1101 sets out financial 

resource requirements for DCMs, to 

implement new Core Principle 21. 

Under proposed § 38.1101, DCMs that 

also operate as DCOs are also subject to 

the financial resource requirements for 

DCOs in proposed § 39.11.145

i. Proposed § 38.1101 (a)—General 

Requirements 

Proposed § 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 § 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

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

ii. Proposed § 38. 1101(b)—Types of 

Financial Resources 

Under proposed § 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 § 38.1101(c)—Computation 

of Financial Resource Requirement 

Proposed § 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 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80603 

148A ‘‘haircut’’ is a deduction taken from the 

value of an asset to reserve for potential future 

adverse price movements in such asset. 

149This filing deadline is consistent with the 

deadline imposed on FCMs for the filing of monthly 

financial reports. See 17 CFR 1.10(b). 

150 7 U.S.C. 7; see also Section 5(d)(23) of the 

CEA, as amended by the Dodd-Frank Act. 

151 5 U.S.C. 601 et seq. 

152 47 FR 18618–21, Apr. 30, 1982. 

153 Id. 

154 44 U.S.C. 3501 et seq. 

requirements of proposed § 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 § 38.1101(d)—Valuation of 

Financial Resources 

Proposed § 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 § 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. 

v. Proposed § 38.1101(e)—Liquidity of 

Financial Resources 

Proposed § 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 

§ 38.1101(b) as a financial resource 

available to a DCM to satisfy the 

requirements of proposed § 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 § 38.1101(e). 

vi. Proposed § 38.1101(f)—Reporting 

Requirements 

Under proposed § 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 § 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. 

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 § 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. 

Proposed § 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 § 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. 

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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80604 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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. 

158See Section 735(b) of the Dodd-Frank Act. 

159Public Law 106–554, 114 Stat. 2763 (2000). 

160The number of designated contract markets 

increased from 13 to 17 since the last amendment 

to Collection 3038–0052. 

161See section 735(b) of the Dodd-Frank Act. 162 7 U.S.C. 19(a). 

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

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

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. 

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. 

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 × $52) to comply with the 

proposed rules. This would result in an 

aggregated additional cost of $61,880 

per annum (17 respondents × $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 

OIRAsubmission@omb.eop.gov. 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80605 

163See section 723 of Dodd-Frank Act. 

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. 

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. 

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. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80606 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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. 

§ 1.38 [Removed and Reserved] 

2. Remove and reserve § 1.38. 

3. Revise § 1.52 to read as follows: 

§ 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 §§ 1.10 and 

1.17 of this chapter, for futures 

commission merchants and introducing 

brokers, and §§ 5.7 and 5.12 of this 

chapter for retail foreign exchange 

dealers; Provided, however, a selfregulatory 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 

§ 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 § 1.17(c) of this chapter for 

futures commission merchants and 

introducing brokers, and § 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 selfregulatory 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 selfregulatory 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 onsite 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 selfregulatory 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 selfregulatory 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 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 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 selfregulatory organization among the selfregulatory 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 selfregulatory 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 selfregulatory 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 

§ 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 selfregulatory 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 selfregulatory 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 selfregulatory 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 § 16.01 to read as follows: 

§ 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
80608 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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 §§ 38.1 through 

38.6 as subpart A under the following 

subpart heading: 

Subpart A—General Provisions 

* * * * * 

§ 38.1 [Amended] 

9. Amend § 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 § 38.2 to read as follows: 

§ 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, §§ 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 § 38.3 to read as follows: 

§ 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 

submissions@cftc.gov and the Division 

of Market Oversight at 

DMOSubmissions@cftc.gov. 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 


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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 § 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 

§ 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 

§ 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 submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov. 

(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 selfregulatory responsibilities except if 

otherwise indicated in the request, and 

will maintain and enforce all selfregulatory 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 


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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 § 38.4, revise paragraphs (a) and 

(b) to read as follows: 

§ 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 

§§ 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 §§ 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 § 38.3(b) of this part 

to reinstate the designation of a dormant 

designated contract market, as defined 

in § 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 § 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 § 40.4 of 

this chapter. 

* * * * * 

13. Revise § 38.5 to read as follows: 

§ 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 submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov, no later 

than the business day, as defined in 

§ 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 

submissions@cftc.gov, and the Division 

of Market Oversight, at 

DMOSubmissions@cftc.gov, 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 

§ 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 


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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 § 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 § 38.7 to subpart A to read as 

follows: 

§ 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 § 38.8 to subpart A to read as 

follows: 

§ 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 § 38.9 to subpart A to read as 

follows: 

§ 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 § 38.10 to subpart A to read 

as follows: 

§ 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 cashsettled 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 


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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 

§ 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 

§ 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. 

§ 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 nondiscriminatory 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. 

§ 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, prearranged 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. 

§ 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 nonroutine 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. 

§ 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 


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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. 

§ 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 

§ 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. 

§ 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 futuresequivalent 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. 

§ 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. 

§ 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 


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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. 

§ 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 informationsharing agreements as the Commission 

may require. Appropriate informationsharing 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. 

§ 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 

§ 38.200 Core Principle 3. 

The board of trade shall list on the 

contract market only contracts that are 

not readily susceptible to manipulation. 

§ 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 § 38.200 of this part. 

Subpart E—Prevention of Market 

Disruption 

§ 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 cashsettlement 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. 

§ 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 realtime 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. 

§ 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. 

§ 38.253 Additional requirements for cashsettled 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. 

§ 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. 

§ 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. 

§ 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 


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to the Commission in a form, manner, 

and time as determined by the 

Commission. 

§ 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. 

§ 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 

§ 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. 

§ 38.301 Position limitations and 

accountability. 

A designated contract market must 

meet the requirements of part 151 of this 

chapter. 

Subpart G—Emergency Authority 

§ 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. 

§ 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 § 38.350. 

Subpart H—Availability of General 

Information 

§ 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. 

§ 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 

§ 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. 

§ 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 

§ 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 


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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. 

§ 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. 

§ 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 § 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 § 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 

§ 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 § 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. 

§ 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 


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capacity and registered pursuant to 

Section 4n of the Act, or a principal 

thereof, including any investment 

advisor who satisfies the criteria of 

§ 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 § 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 

§ 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. 

§ 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. 

§ 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 § 16.01 

of this chapter. 

§ 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 

§ 1.31 of this chapter. 

Subpart K—Trade Information 

§ 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. 

§ 38.551 Audit trail required. 

A designated contract market must 

capture and retain all audit trail data 


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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. 

§ 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. 

§ 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 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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 


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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. 

§ 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 § 1.52 of this 

chapter to assess the compliance of such 

entities with applicable contract market 

rules and Commission regulations. 

§ 38.606 Financial regulatory services 

provided by a third party. 

A designated contract market may 

comply with the requirements of 

§ 38.604 (Financial Surveillance) and 

§ 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. 

§ 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 

§ 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. 

§ 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 

§ 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. 

§ 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. 

§ 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 

§ 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. 

§ 38.703 Review of investigation report. 

Promptly after receiving a completed 

investigation report pursuant to 

§ 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 


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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. 

§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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 § 38.707 of 

this part, the respondent must be given 

an opportunity for a hearing in 

accordance with the requirements of 

§ 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 § 38.707 of this 

part for which a hearing has been 

requested. 

§ 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. 

§ 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 


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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 § 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 § 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. 

§ 38.711 Decisions. 

Promptly following a hearing 

conducted in accordance with § 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. 

§ 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 

§ 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 

§ 38.711 of this part, to the extent that 

a different conclusion is reached from 

that issued by the Hearing Panel. 

§ 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. 

§ 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. 

§ 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. 

§ 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 

§ 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 


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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 

§ 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. 

§ 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 § 38.750 of this part. 

Subpart P—Governance Fitness 

Standards 

§ 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 

§ 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 

§ 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 

§ 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. 

§ 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 § 1.31 of this 

chapter, and in accordance with § 45.1 

of this chapter, if applicable. 

Subpart T—Antitrust Considerations 

§ 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. 

§ 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 § 38.1000 of this part. 

Subpart U—System Safeguards 

§ 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. 

§ 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 continuitydisaster 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 § 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 


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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 continuitydisaster 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 

§§ 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 continuitydisaster 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 continuitydisaster 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 continuitydisaster 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 widescale disruption. Section 40.9 of this 

chapter establishes the requirements for 

core principle compliance in that 

respect. 

Subpart V—Financial Resources 

§ 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. 

§ 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 § 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 


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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 

§ 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 decisionmaking 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 

§ 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. 

§ 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 § 38.1200 of this part. 

19. Revise appendix A to part 38 to 

read as follows: 

Appendix A—Form DCM 

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 submissions@cftc.gov and 

the Division of Market Oversight at 

DMOSubmissions@cftc.gov. 

BILLING CODE 6351–01–P 


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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 


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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 § 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 § 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 continuitydisaster 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 §§ 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 


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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 § 40.2 of this chapter 

or may submit products for Commission 

approval under § 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 § 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 § 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— 


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(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 § 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 noneligible 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 § 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-tomember 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 selfregulatory 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 


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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 publicallyavailable 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 


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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 


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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, inline transfer, book transfer of securities, etc.) 

would provide for its conversion into the 

cash commodity at a commerciallyreasonable 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 § 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. Cashsettled 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. 


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(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 pricelimit 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 broadbased 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 § 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: 

Æ Exercise method; 

Æ Exercise procedure (if positions in the 

underlying futures contract are established 

via book entry); 

Æ Strike price listing provisions, including 

provisions for listing strike prices on a 

discretionary basis; 

Æ Strike price intervals; 

Æ Automatic exercise provisions; 

Æ Contract size (unless not set equal to the 

size of the underlying futures contract); and 

Æ 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 


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


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80636 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 

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 nonstandardized, 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS2