[Federal Register Volume 65, Number 121 (Thursday, June 22, 2000)]
[Proposed Rules]
[Pages 38986-39008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14914]



[[Page 38985]]

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Part III





Commodity Futures Trading Commission





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17 CFR Part 1, et al.



A New Regulatory Framework for Multilateral Transaction Execution 
Facilities, Imtermediaries and Clearing Organizations; Exemption for 
Bilateral Transactions; Proposed Rules

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / 
Proposed Rules

[[Page 38986]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 5, 15, 20, 36, 37, 38, 100, 170 and 180

RIN 3038-AB55


A New Regulatory Framework for Multilateral Transaction Execution 
Facilities, Intermediaries and Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing a new regulatory framework to apply to multilateral 
transaction execution facilities, to market intermediaries and to 
clearing organizations. This new framework constitutes a broad 
exemption under the authority of section 4(c) of the Commodity Exchange 
Act from many of the current rules applicable to designated contract 
markets. In addition, the proposed framework to a large degree relies 
more heavily on disclosure rather than merit regulation. It establishes 
three new market categories, including the category of exempt 
multilateral transaction execution facility and two categories of 
Commission-recognized and regulated multilateral transaction execution 
facilities. In companion releases published in this edition of the 
Federal Register, the Commission also is proposing new rules for 
intermediaries and regulations applicable to entities that clear 
derivative transactions. These notices propose far-reaching and 
fundamental changes to modernize Federal regulation of commodity 
futures and option markets. The Commission also is proposing in a 
companion release published in this edition of the Federal Register to 
expand and to clarify the operation of the current swaps exemption. 
Nothing in these releases, however, would affect the continued vitality 
of the Commission's exemption for swaps transactions under Part 35 of 
its rules, or any of its other existing exemptions, policy statements 
or interpretations. Moreover, nothing in the proposed rules would 
affect the application of any statutory exclusion, including in 
particular, the applicability of the exclusion under section 
2(a)(1)(A)(ii), popularly known as ``the Treasury Amendment.''

DATES: Comments must be received by August 7, 2000.

ADDRESSES: Comments should be sent to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1125 21st Street, NW., Washington, 
DC 20581, attention: Office of the Secretariat. Comments may be sent by 
facsimile transmission to (202) 418-5521 or, by e-mail to 
<a href="/cdn-cgi/l/email-protection#5023353322352431222910333624337e373f26"><span class="__cf_email__" data-cfemail="0c7f696f7e69786d7e754c6f6a786f226b637a">[email protected]</span></a>. Reference should be made to ``Regulatory 
Reinvention.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, or Alan L. Seifert, Deputy Director or 
Riva Spear Adriance, Attorney-Advisor, Division of Trading and Markets, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1125 21st 
Street, NW., Washington, DC 20581. Telephone: (202) 418-5260. E-mail: 
(<a href="/cdn-cgi/l/email-protection#4818093a2b20213c322d24082b2e3c2b662f273e"><span class="__cf_email__" data-cfemail="da8a9ba8b9b2b3aea0bfb69ab9bcaeb9f4bdb5ac">[email protected]</span></a>), (<a href="/cdn-cgi/l/email-protection#bafbe9dfd3dcdfc8cefad9dcced994ddd5cc"><span class="__cf_email__" data-cfemail="571604323e31322523173431233479303821">[email protected]</span></a>) or (<a href="/cdn-cgi/l/email-protection#510310352338303f323411323725327f363e27"><span class="__cf_email__" data-cfemail="02504366706b636c616742616476612c656d74">[email protected]</span></a>).

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

    The Commission is proposing a new regulatory framework to apply to 
multilateral transaction execution facilities that trade contracts for 
the purchase or sale of a contract for future delivery or commodity 
options. The Commission believes that this new structure will promote 
innovation, maintain U.S. competitiveness, and at the same time reduce 
systemic risk and protect customers. The proposed framework does not 
require that U.S. futures exchanges change their method of operation in 
any way. However, the markets are poised to undergo rapid change as 
they continue to meet the competitive challenges posed by technological 
advances. The new framework provides U.S. futures exchanges the 
flexibility to respond to these challenges by offering a level of 
regulation tailored to three alternative types of markets.
    Specifically, the Commission is proposing to replace the current 
``one-size-fits-all'' regulation for futures markets with broad, 
flexible ``Core Principles,'' and to establish three regulatory tiers 
for markets: Recognized futures exchanges (RFEs), derivatives 
transaction facilities (DTFs) and exempt multilateral transaction 
execution facilities (exempt MTEFs). \1\ The Core Principles are 
tailored to match the degree and manner of regulation to the varying 
nature of the products traded thereon, and to the sophistication of 
customers.
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    \1\ Products subject to the special procedural provisions of 
section 2(a)(1)(B) of the Act would continue to be designated and 
regulated by the Commission as contract markets.
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    Under the proposed framework, current U.S. futures exchanges would 
be included automatically in the RFE category. These exchanges would 
receive the immediate benefits associated with complying with core 
principles rather than the prescriptive regulations now in place. In 
addition to achieving greater flexibility in their current operations, 
the exchanges also could choose to operate as a DTF or as an exempt 
MTEF, where appropriate, and be subject to a lesser degree of 
regulation for many of the commodities that they trade. Or they could 
operate a combination of the three. The business choice would be 
theirs.
    The Commission is proposing that a category of multilateral 
transaction execution facilities known as ``Derivatives Transaction 
Facilities,'' which is geared toward institutional or commercial 
traders, be subject to an intermediate level of regulation. DTFs, like 
RFEs, would be Commission-recognized markets. Futures exchanges, if 
they choose, also may operate as a DTF for those commodities with 
deliverable supplies sufficiently large to render them eligible for 
such an intermediate level of regulation.
    Although DTFs are intended primarily for institutional traders, the 
proposed rules provide the individual DTF the flexibility to decide 
whether or not to include non-institutional traders. The Commission is 
proposing, therefore, to permit access to a DTF by non-institutional 
traders only through a registered futures commission merchant (FCM) 
that is a member of a recognized clearing organization and that has $20 
million of adjusted net capital. Those FCMs would be required to 
provide their non-institutional customers trading on a DTF with 
additional disclosures and other protections.
    In addition, certain commercial markets may operate as DTFs for any 
commodity, other than the agricultural commodities enumerated in 
section 1a(3) of the Act. Such commercial traders generally would have 
both the financial ability and the physical means to deliver tangible 
commodities or otherwise be involved in trading that commodity in 
connection with their line of commerce. A market that is eligible to be 
an exempt MTEF, which is discussed below, may voluntarily become a DTF 
in order to become a ``recognized'' market.
    The Commission also is proposing an exemption for facilities on 
which transactions are entered into among institutional traders in 
contracts based upon a debt obligation, a foreign

[[Page 38987]]

currency, an interest rate, an exempt security, a measure of credit 
risk or quality, or cash-settled based upon an economic or commercial 
index or based upon an occurrence or contingency. These commodities are 
highly unlikely to be susceptible to manipulation. These facilities 
(exempt MTEFs) would be exempt from all of the requirements of the 
Commodity Exchange Act (Act or CEA) and Commission rules, except for 
anti-fraud and anti-manipulation provisions and a requirement that if 
performing a price discovery function they provide pricing information 
to the public. The proposed rules also include a provision that a 
violation of the terms of the exemption would not render the 
transactions void. These exempt markets could not hold themselves out 
as being regulated by the Commission. As noted above, existing futures 
markets, where appropriate, would have the opportunity to operate under 
the terms of this exemption, if they so choose. The following chart 
summarizes the proposed framework:

                        Summary of Framework for Multilateral Trade Execution Facilities
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              Market                           Characteristics                          Requirements
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Recognized Futures Exchange (RFE)  1. Any commodity;                       Fifteen Core Principles.
                                   2. Any trader
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Recognized Derivatives             1. Only commodities:                    Seven Core Principles.
 Transaction Facility (DTF) \2\.   (a) included in box below; or
                                   (b) individual contracts on a case-by-
                                    case basis; or
                                   2. Only commercial traders
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Exempt Multilateral Transaction    1. Only for the following commodities:  1. Anti-fraud section of the CEA;
 Facility (Exempt MTEF).           (a) a debt obligation;                  2. Anti-manipulation section of the
                                   (b) a foreign currency;                  CEA; and
                                   (c) an interest rate;                   3. May not hold self out as
                                   (d) an exempt security                   regulated.
                                   (e) a measure of credit quality;
                                   (f) an occurrence or contingency
                                    beyond the control of the
                                    counterparties; or
                                   (g) cash-settled based upon an
                                    economic or commercial index or
                                    measure; and
                                   2. Only institutional traders
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    These proposed rules, along with those proposed in the companion 
releases on intermediaries and clearing organizations, comprise a new 
regulatory framework which is intended to provide greater flexibility 
in meeting technological and competitive challenges. At the same time, 
the Commission will retain its oversight authority to ensure the 
integrity of markets and prices, to deter manipulation, to protect the 
markets' financial integrity, and to protect customers.
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    \2\ As noted above, although DTFs are geared toward 
sophisticated or institutional traders, the framework would permit a 
facility eligible to be a DTF based upon the nature of the 
commodities traded to choose to include non-institutional traders.
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    To ensure that the Commission's regulations address regulatory 
goals in the least costly and burdensome manner consistent with 
achieving the Commission's mission, the Commission has reviewed its 
proposed regulatory framework in relation to the four primary 
objectives of the Act: Ensuring market and price integrity; protecting 
against market manipulation; protecting the financial integrity of the 
markets; and protecting customers from abusive trading and sales 
practices. The proposed amendments would move the Commission from a 
direct to an oversight regulator, replacing prescriptive rules with 
broad performance standards in the form of core principles. The core 
principles are proposed to be supplemented with statements of guidance 
on practices that comply with the standards and, only as necessary, 
implementing rules. The proposed framework reflects differences in 
regulation of individual markets due to the nature of the commodity 
traded and the sophistication of market participants. Moreover, the 
proposed framework adheres to internationally-accepted guidance 
regarding appropriate regulatory measures for exchange-traded 
derivatives markets.
    The Commission was encouraged in this undertaking by the other 
Federal financial regulators that comprise the President's Working 
Group on Financial Markets \3\ and by the chairmen of the Commission's 
Congressional oversight committees. Specifically, by letter dated 
November 30, 1999, the Chairmen of the Senate and House Agriculture 
Committees, joined by additional senior Senators and Members of the 
House of Representatives, ``encourag[ed] the Commission to use the 
exemptive authority granted it by the Commodity Exchange Act to lessen 
regulatory burdens on United States' futures markets so that they may 
compete more effectively.''
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    \3\ Recognizing the importance of the OTC derivatives markets, 
the Chairmen of the Senate and House Agriculture Committees 
requested that the President's Working Group on Financial Markets 
(PWG) conduct a study of OTC derivatives markets. After studying the 
existing regulatory framework for OTC derivatives, recent 
innovations, and the potential for future developments, the PWG on 
November 9, 1999, reported to Congress its recommendations. See 
Over-the-Counter Derivatives Markets and the Commodity Exchange Act, 
Report of the President's Working Group. The PWG report focused on 
promoting innovation, competition, efficiency, and transparency in 
OTC derivatives markets and in reducing systemic risk.
    Although specific recommendations about the regulatory structure 
applicable to exchange-traded futures were beyond the scope of its 
report, the PWG suggested that the Commission review existing 
regulatory structures (particularly those applicable to markets for 
financial futures) to determine whether they were appropriately 
tailored to serve valid regulatory goals.
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B. Changing Nature of Exchange-Traded Markets

    The proposed new regulatory framework responds to changes that have 
occurred in markets operating under the CEA. Exchange-traded 
derivatives markets have changed dramatically over the last twenty-five 
years. Since the last major revision of the regulatory scheme in 1974, 
the majority of futures trading volume has shifted from agricultural 
commodities to financial commodities. Moreover, in

[[Page 38988]]

1974, no contracts were cash-settled. Today, many are. Over the past 
twenty-five years the markets also have become increasingly 
institutional. In addition, the exchanges themselves have matured. 
During the last twenty-five years they have developed better audit 
trails, have markedly improved their self-regulatory and surveillance 
programs and have placed in effect greater safeguards against conflicts 
of interest in decision-making. They have entered into arrangements 
with both domestic and foreign exchanges to share surveillance 
information in order better to carry out their functions. They also 
have introduced for trading a remarkable range of new commodities.
    The competitive environment for United States futures exchanges 
also has changed dramatically during the last twenty-five years. 
Although futures trading was always global in nature, aggregate trading 
volume on non-U.S. futures and option exchanges has surpassed aggregate 
trading volume on U.S. exchanges. In addition, exchange-traded 
derivative markets face increased competition from the over-the-counter 
markets.

II. Framework for Multilateral Transaction Execution Facilities

    The Commission is proposing a multifaceted framework which includes 
three broad categories of trading facilities: Recognized Futures 
Exchanges, Derivatives Transaction Facilities and Exempt MTEFs. The 
level of oversight applied to exchanges or trading facilities would be 
based on the nature of participants allowed to trade on the facility 
and certain characteristics of the commodities being traded. In 
general, where access to an exchange or facility is restricted to more 
sophisticated traders or commercial participants, or where the nature 
of the commodity being traded poses a relatively low susceptibility to 
manipulation, regulatory oversight would be set at a lower level, 
reflecting the reduced need to monitor closely such markets. One 
constant requirement at all levels of oversight, however, is the need 
for markets serving a price discovery function to provide a degree of 
price transparency. This multifaceted approach to oversight is intended 
to balance the public interests of market and price integrity, 
protection against manipulation and customer protection with the need 
to permit exchanges and other trading facilities to operate more 
flexibly in today's competitive environment.

A. Exempt Multilateral Transaction Execution Facilities (Exempt MTEFs)

    The Commission is proposing a new, self-effectuating exemption for 
those multilateral transaction facilities (MTEFs) meeting the 
conditions specified in the rule. As proposed, these facilities would 
be exempt from regulation by the Commission. The exemption would apply 
to transactions traded on MTEFs that are open for trading only to 
eligible participants, either trading for their own account or through 
another eligible participant, and only for contracts based upon: (1) A 
debt obligation; (2) a foreign currency; (3) an interest rate; (4) an 
exempt security or index thereof, as provided in Sec. 2a(1)(B)(v) of 
the Act; (5) a measure of credit risk or quality, including instruments 
known as ``total return swaps,'' ``credit swaps'' or ``spread swaps;'' 
(6) an occurrence or contingency beyond the control of the 
counterparties to the transaction; or (7) cash-settled, based upon an 
economic or commercial index or measure beyond the control of the 
counterparties to the transaction and not based upon prices derived 
from trading in a directly corresponding underlying cash market.
    The Commission is of the view that these commodities, when traded 
between or among eligible participants need not be subject to the 
regulatory scheme of the Act. Accord PWG Report at 17. In this regard, 
transactions by eligible participants in these commodities would be 
exempt from Commission regulation under either the Part 35 exemption 
for bilateral transactions or under the Part 36 exemption for MTEFs.
    It should be noted that the instruments eligible for exemption are 
limited by operation of section 2(a)(1)(B) of the Act, which is 
reserved in proposed Sec. 36.3(a). The reservation, and application, of 
this provision is consistent with the language of section 4(c) of the 
Act which limits the Commission's authority to exempt transactions from 
the application of section 2(a)(1)(B) of the Act.
    Examples of existing non-dormant, designated contract markets that 
are based on an eligible debt obligation include CBT U.S. Treasury 
bonds, CBT Long term U.S. Treasury notes and CME Treasury Bills. The 
Commission particularly requests comment with respect to inclusion of 
government securities in the list of commodities that are eligible for 
the exemption under part 36. In light of the significant regulation of 
government securities markets under the Government Securities Act of 
1986 (as amended) \4\ and other securities laws, would granting a broad 
exemption to contract markets for futures on government securities give 
rise to significant and undesirable opportunities for regulatory 
arbitrage?
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    \4\ Government Securities Act of 1986, Pub. L. 99-571, 100 Stat. 
3208; Government Securities Act Amendments of 1993, Pub. L. 103-202, 
107 Stat. 2344.
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    Examples of eligible foreign currencies include currency contract 
and currency cross rates. Contracts on an interest rate typically 
represent interest on time deposits. Because these time deposits 
generally are non-negotiable, the contracts overlying them are usually 
cash-settled. Such rates are derived from activity in the interbank 
market, which is very liquid and deep. A major component of the 
interbank market is the market for deposits of U.S. dollars held in 
foreign markets. This market sets the interest rates for dollars held 
as deposits in these banks. Much of the activity is centered in London 
and is reflected by the London Interbank Offer Rate (LIBOR). LIBOR is 
the rate at which the most credit-worthy banks offer to lend to one 
another. Variable rate loans, deposits, and interest rate swaps are 
often quoted as a spread over LIBOR. Other active trading centers exist 
throughout Europe and in other countries in Asia and elsewhere, and the 
interest rates reported for those markets share similar monikers such 
as PIBOR (Paris Interbank Offer Rate), FIBOR (Frankfurt Interbank Offer 
Rate), and TIBOR (Tokyo Offer Rate). Commodities on existing non-
dormant designated contract markets eligible for this exemption include 
CME three month Eurodollars, CME one month LIBOR, CME three month 
Euroyen, CME three month TIBOR, CME three month Euro Canada and CBT 
yield curve spreads.
    The commodities eligible for exemption include measures of credit 
risk or quality. This category specifically includes various types of 
instruments denominated as ``total return swaps,'' ``credit swaps,'' or 
``credit spread swaps.'' As noted in a companion release in this issue 
of the Federal Register proposing amendments to the Commission's part 
35 exemption, nothing in the rules that the Commission is proposing 
would affect the continued applicability of any existing Commission 
exemptions, policy statements or interpretations to such total return 
swaps or to any other instrument. An example of an existing designated 
contract market included in this category is the CBT bankruptcy index.

[[Page 38989]]

    The final two categories of eligible commodity are for contracts 
based upon an occurrence or a contingency beyond the control of any 
trader, or any economic or commercial index or measure not based upon 
prices derived from trading in a directly corresponding underlying cash 
market. These instruments must be cash settled, because there is no 
underlying tangible commodity, financial asset or instrument which 
could be delivered to settle the contracts at maturity, i.e., there is 
no direct cash market counterpart. For these types of derivatives, 
concerns about the potential for manipulation of cash market prices are 
obviated, since individual traders typically have no ability to 
influence the value of the cash settlement, and, since the settlement 
value is not based on the prices of any asset or product traded in a 
directly corresponding cash market.
    Exempt derivative instruments included in this category are 
contracts that are cash settled based upon an objective measurement of 
an economic or commercial index, a natural occurrence or a contingency. 
In this regard, the cash settlement measure could be based on an 
objective process, such as a count or measurement of a physical 
property or natural occurrence, or could be calculated by an 
independent third party that is widely accepted as a reputable provider 
of data regarding the commodity. Also included in this category are 
contracts that are settled in cash based upon the outcome of a 
contingency, such as a recurring or nonrecurring event, a specific 
incident, a natural phenomenon or the unambiguous results of some other 
condition that gives rise to a hedgeable risk. It is not intended to 
include contracts based upon a cash-settlement price determined through 
cash-market trading of any physical commodity or financial instrument, 
but rather contracts based on the objectively determined results of an 
outcome, occurrence, or event that is beyond the control of the parties 
involved in the contract or the entity where trading occurs. 
Derivatives traders have no ability to influence the final settlement 
value to profit on a derivatives position, and in many cases, the data 
used to compile the indexes are publicly available and are generated by 
reputable sources. Finally, included in this category are contracts 
based on an objectively determined index value or measure of an 
economic or commercial index reflecting broad characteristics of the 
economy as a whole, or portions thereof, or material segments of 
commercial activity.
    Examples include contracts based on: Weather (such as contracts 
based on temperatures or precipitation data); the Consumer Price index 
or the Gross Domestic Product; insurance data, bankruptcy rates, real 
estate rental indexes or occupancy (vacancy) rates for individual 
localities; or measures of physical production or sales amounts such as 
housing starts or auto sales; or crop yields.
    The Commission is proposing to define MTEF as ``an electronic or 
non-electronic market or similar facility through which persons, for 
their own accounts or for the accounts of others, enter into, agree to 
enter into or execute binding transactions by accepting bids or offers 
made by one person that are open to multiple persons conducting 
business through such market or similar facility.'' The definition as 
proposed does not, and is not intended to, ``preclude participants from 
engaging in privately negotiated bilateral transactions, even where 
these participants use computer or other electronic facilities, such as 
`broker screens,' to communicate simultaneously with other participants 
so long as they do not use such systems to enter orders to execute 
transactions.'' See, 58 FR 5587, 5591 (Jan. 22, 1993). Accordingly, the 
definition makes clear that it does not include facilities merely used 
as a means of communicating bids or offers nor does it include markets 
in which a single market maker offers to enter into bilateral 
transactions with multiple counterparties who may not transact with 
each other.
    It should be noted that the definition of MTEF in proposed 
Sec. 36.1(b) applies only to those rules in which it is cited. It is 
not intended to modify, alter, amend or interpret any other provision 
of the Act or the Commission's rules. For example, the proposed 
Sec. 36.1(b) definition of MTEF does not affect the meaning or 
application of the statutory term, ``board of trade.'' 7 U.S.C. 1a(a). 
Thus, the scope and application of the statutory exclusion in section 
2(a)(1)(A)(ii) of the Act, popularly known as the ``Treasury 
Amendment,'' which depends in part on the meaning of ``board of 
trade,'' is in no way affected by the Commission's proposed adoption of 
a definition of MTEF under Sec. 36.1(b) for purposes of the exemptions 
in part 35 and part 36 of its rules. Accordingly, a facility that fits 
within the definition of ``multilateral transaction execution 
facility'' in part 36 may not be a ``board of trade'' for purposes of 
the Treasury Amendment.
    As proposed, in exercising its authority under these exemptive 
rules, the Commission would not make any determination that the 
exempted transactions are or are not subject to its jurisdiction. When 
it adopted section 4(c) in 1992, the Conferees of the Congress stated:

    The Conferees do not intend that the exercise of exemptive 
authority by the Commission (under Section 4(c)) would require any 
determination beforehand that the agreement, instrument, or 
transaction for which an exemption is sought is subject to the Act. 
Rather, this provision provides flexibility for the Commission to 
provide legal certainty to novel instruments where the determination 
as to jurisdiction is not straightforward.\5\
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    \5\ 5 H.R. Rep. No. 978, 102d Cong., 2d Sess. 82-83 (1992).

    In exercising this exemptive authority to date, the Commission has 
not made a determination that the transactions being exempted were, or 
were not, subject to the Commission's jurisdiction under the CEA.\6\ 
Accordingly, the Commission is not making a determination that any 
market that is eligible to be an exempt MTEF under the proposed 
exemption is or is not subject to the Commission's jurisdiction under 
the CEA. Moreover, the fact that one market may operate as an exempt 
MTEF in reliance upon the proposed exemption, or that a similar market 
voluntarily submits to CFTC oversight as a recognized DTF or RFE, does 
not imply that the Commission has made a determination that any firm or 
entity that operates in a similar manner is subject to the Commission's 
jurisdiction under the CEA. However, the proposed exemptive rules for 
DTFs and RFEs provide that a market that is eligible to operate as an 
exempt MTEF but which chooses to become recognized by the Commission as 
a DTF or RFE, is bound to comply with applicable provisions of the Act 
and Commission rules as a condition of those exemptions.
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    \6\ For instance, when the Commission exempted certain swap 
agreements in 1993, pursuant to section 4(c) of the Act, it stated:
    The issuance of this rule (Rule 35.2) should not be construed as 
reflecting any determination that the swap agreements covered by the 
terms hereof are subject to the Act, as the Commission has not made 
and is not obligated to make any such determination.
    58 FR 5587, 5588 (Jan. 22, 1993). See also Order Granting the 
London Clearing House's Petition for an Exemption Pursuant to 
Section 4(c) of the Commodity Exchange Act, 64 FR. 53346 (October 1, 
1999); Exemption for Certain Contracts Involving Energy Products, 58 
FR. 21286, 21288 (Apr. 20, 1993); Regulation of Hybrid Instruments, 
58 FR 5580, 55821 n. 2 (Jan. 22, 1993).
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B. Derivatives Transaction Facilities

    The Commission also is proposing a new exemptive category for 
Derivatives Transaction Facilities. A market or similar facility, 
including a board of

[[Page 38990]]

trade, would be eligible to become a DTF under proposed part 37, 
regardless of its method of transmitting bids and offers or its 
matching system, if the contracts traded on the DTF meet specified 
commodity eligibility requirements. These are identical to the 
commodity eligibility requirements for the exempt MTEF.\7\ Such DTFs 
would have the choice of whether or not to permit access to the market 
by non-eligible traders, but if they did permit such access, it would 
be allowed only through registered FCMs meeting a number of additional 
requirements. The intermediary firm and its associated person would be 
required to meet a number of requirements, including providing their 
non-institutional customers with enhanced disclosure and additional 
protections.\8\ The DTF, however, may limit access solely to eligible 
participants if it so chooses.\9\
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    \7\ The Commission also expects, however, on a case-by-case 
basis, that the surveillance history and the self-regulatory 
undertakings of a particular exchange or facility could make it 
possible to include a specific contract traded on that facility 
within the DTF category even if the underlying commodity does not 
meet the general eligibility criteria. An exchange or facility 
seeking a case-by-case determination would be recognized as a DTF 
for that contract or contracts only upon CFTC approval.
    \8\ Proposed amendments to the Commission's rules governing 
intermediaries are published today in a separate release in this 
edition of the Federal Register. Although those amendments apply to 
all categories of intermediaries irrespective of where they choose 
to transact business, certain proposals differentiate between 
intermediation on various types of markets and for different types 
of customers.
    \9\ Facilities that meet the commodity eligibility requirement 
and permit access only to institutional traders are thereby eligible 
to be exempt MTEFs. However, such facilities may choose to seek 
recognition as a DTF. By choosing to comply with the additional DTF 
requirements outlined in this framework and thereby becoming 
recognized, the facility would be acknowledged to have met a higher 
regulatory standard.
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    In addition, under proposed part 37, a facility that restricted 
participation to ``eligible commercial participants'' would be eligible 
to become a DTF to trade contracts based on all commodities other than 
those domestic agricultural commodities enumerated in section 1(a)(3) 
of the Act \10\ and those commodities subject to the provisions of 
section 2(a)(1)(B) of the Act. This type of eligible commercials-only 
market structure lessens many of the regulatory concerns regarding 
manipulation ordinarily present with contracts for tangible 
commodities.\11\
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    \10\ They are wheat, cotton, rice, corn, oats, barley, rye, 
flaxseed, grain sorghums, mill feeds, butter, eggs, potatoes, wool, 
wool tops, fats and oils, cottonseed meal, cottonseed, peanuts, 
soybeans, soybean meal, livestock, livestock products, and frozen 
concentrated orange juice.
    \11\ Many of these trading facilities are expected to replicate 
electronically various aspects of today's commercial markets, 
including trading exclusively between principals, and direct 
negotiation and documentation of trades. In addition, these 
facilities often do not provide clearing arrangements for contracts.
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    The Commission is proposing that the agricultural commodities 
listed in section 1a(3) of the Act not be eligible for trading on a 
DTF. Because the current futures markets in these commodities tend to 
be the primary, if not the only, centralized source of price discovery 
and price basing for these commodities, they have not been included by 
the Commission in certain regulatory programs, particularly at the time 
of their initiation.\12\ However, members of the agricultural community 
have at times argued that they should not be prohibited from benefiting 
from innovative trading practices that are available for non-
agricultural commodities. In light of the unique considerations that 
these commodities present, the Commission is seeking comment from the 
agricultural community on the advisability of allowing the enumerated 
agricultural commodities to be traded on a DTF at this time.
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    \12\ For example, options on agricultural futures contracts were 
introduced subsequent to options trading on non-agricultural 
commodities and the enumerated agricultural commodities are not 
included in the existing Part 36 exemption.
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    Although contracts, agreements or transactions traded on a DTF 
would be exempt from many of the Act's provisions and Commission 
regulations,\13\ the exemption is contingent upon compliance with the 
conditions set forth in part 37.\14\ Transactions carried out in 
reliance upon the proposed part 37 exemption would not be voidable as a 
matter of law due to a violation of the part 37 exemption.
---------------------------------------------------------------------------

    \13\ Certain sections of the Act, including the fraud and 
manipulation provisions of the Act and the Commission's regulations 
are reserved in proposed rule 37.5 and would continue to apply.
    \14\ Although exempt from many statutory and regulatory 
requirements, DTFs as a condition of the Part 37 rules, generally 
would be considered under proposed rule 37.1(a) to be subject to the 
Act's provisions as though the DTF were a ``board of trade,'' or a 
``designated contract market'' under the Act. Therefore, the Act 
would apply to a DTF (and an RFE) as would any other statutory or 
regulatory provision which refers to ``boards of trade'' or 
``designated contract markets.'' Accordingly, transactions on a DTF 
would be accorded the same treatment for bankruptcy or tax purposes 
as transactions on formally designated contract markets.
---------------------------------------------------------------------------

    To be recognized as a DTF under proposed part 37 an entity either 
must have been designated under sections 4c, 5, 5a(a) or 6 of the Act 
as a contract market in at least one commodity which is not dormant 
within the meaning of Sec. 5.2 of the Commission's regulations, or must 
apply to the Commission for recognition as a DTF under part 37. Under 
proposed Sec. 37.3, a DTF must meet certain conditions for recognition. 
An application should address how the facility has provided for rules 
relating to trading on its facility, including: (1) Depending on the 
nature of the trading mechanism, (i) rules to deter trading abuses, and 
adequate power and capacity to detect, investigate and take action 
against violation of its trading rules, or (ii) use of technology that 
provides participants with impartial access to transactions and 
captures information that is available for use in determining whether 
violations of its rules have occurred; (2) rules or terms and 
conditions defining, or specifications detailing, the operation of the 
trading mechanism or electronic matching platform; and (3) rules or 
terms and conditions detailing the financial framework applying to the 
transactions or ensuring the financial integrity of transactions 
entered into by, or through, its facilities. The application also 
should address how the facility would initially, and on a continuing 
basis, meet and adhere to seven core principles: enforcement, market 
oversight, operational information, transparency, fitness, 
recordkeeping and competition.\15\
---------------------------------------------------------------------------

    \15\ A board of trade, facility, or entity recognized as a DTF 
that also maintained a designated contract market or a recognized 
futures exchange would be required either to clearly identify 
trading products by market on any electronic system or to provide 
for separate physical trading locations, depending upon the trading 
mechanism.
---------------------------------------------------------------------------

    Guidance on meeting the conditions for recognition is provided in 
the appendix to part 37. Including information not self-evident from 
the DTF's rules or trading terms addressing the issues set forth in the 
appendix to part 37 in an application for recognition would assist the 
Commission in understanding how the applicant meets and adheres to the 
conditions for recognition. The guidance in the appendix to part 37, 
however, is intended to be a safe harbor and not the exclusive method 
of meeting the part 37 conditions for recognition. A DTF could meet a 
condition for recognition or support its application through 
procedures, materials, descriptions or documents other than those 
described in the part 37 appendix.
    A board of trade, facility, or entity seeking recognition as a 
derivatives transaction facility would be deemed to be recognized 
thirty days after the Commission received the application if the 
application met the conditions for recognition pursuant to Sec. 37.3 
and the applicant and/or its rules or procedures do not violate the Act 
or the

[[Page 38991]]

Commission's regulations. An entity seeking recognition as a DTF may 
request that the Commission approve its initial set of rules under 
section 5a(a)(12)(A) of the Act and Commission regulations thereunder. 
Subsequently, the DTF would notify the Commission of additional rules 
and rule amendments in the same manner that it notifies market 
participants. A DTF could request that the Commission approve new rules 
or rule amendments under section 5a(a)(12)(A) of the Act and Commission 
regulations thereunder. A DTF also could request the Commission to 
issue an order determining whether the DTF, in adopting and 
implementing a rule, endeavored to take the least anticompetitive means 
of achieving the objective, purposes, and policies of the Act.\16\
---------------------------------------------------------------------------

    \16\ The Commission is proposing a new part 20 to require 
traders on DTFs to provide information to the Commission concerning 
their trading on a DTF in response to a Commission special call for 
such information. This authority is critical to the Commission's 
ability to oversee the market. In addition, the Commission is 
proposing to amend Rule 15.05 by adding paragraphs (e), (f) and (g). 
The new paragraphs will permit the Commission to obtain information 
from foreign brokers, any of their customers or a foreign trader 
trading on a DTF or an RFE regarding their futures or options 
transactions on the facility or exchange. The amendments extend to 
foreign persons trading on DTFs or RFEs the requirements of rule 
15.05 relative to foreign brokers, their customers and foreign 
traders whose accounts are maintained by a futures commission 
merchant or introducing broker.
---------------------------------------------------------------------------

C. Recognized Futures Exchanges

    The Commission also is proposing significant regulatory relief to 
futures exchanges from current requirements that are applicable to 
designated contract markets. All currently designated contract markets, 
except for those designated as contract markets in section 2(a)(1)(B) 
commodities, will be afforded this relief. Under proposed part 38, 
currently designated contract markets will become recognized futures 
exchanges. Proposed part 38 replaces many prescriptive rules with 
performance-based rules. These performance-based rules, or Core 
Principles, will provide recognized futures exchanges with greater 
operational flexibility. Prescriptive rules relating to audit trail and 
conflict of interest procedures, for example, will be replaced by more 
flexible Core Principles. Moreover, the Commission would not require 
that it approve an RFE's new contracts prior to listing. In addition, 
except for the terms and conditions of agricultural commodities 
enumerated in section 1a(3) of the Act, the Commission would not 
require its approval of an RFE's rules and rule amendments prior to 
implementation, although an RFE voluntarily could submit such contracts 
or rule amendments to the Commission for review and approval. 
Furthermore, the exchanges would no longer be responsible for auditing 
intermediaries' sales practices. Instead, enforcement would be the 
responsibility of a registered futures association. The National 
Futures Association (NFA) currently is the only such registered 
organization.
    In addition to currently designated contract markets, other 
multilateral transaction execution facilities could apply for 
recognition as an RFE. Eligibility for recognition is not limited by 
the nature of the trader having access to the facility or the nature of 
the commodities to be traded. Because RFEs may permit unconditioned 
access to any type of trader, including both institutional and non-
institutional customers or participants, and may list contracts on any 
type of commodity, including those based on commodities that have 
finite deliverable supplies or cash markets with limited liquidity, RFE 
markets potentially have a greater susceptibility to price manipulation 
and raise greater concerns regarding customer protection than those of 
DTFs. Therefore, the proposed rules in part 38 preserve a higher level 
of market surveillance, position reporting obligations, customer 
protections and financial safeguards than do the rules for DTFs.
    In order to be recognized as an RFE, an applicant must meet all of 
the conditions for recognition specified by proposed rule 38.3. 
Applicants are to demonstrate how the board of trade, facility or 
entity has provided for: (1) A clear framework for conducting programs 
of market surveillance, compliance, and enforcement, including having 
procedures in place to make use of collected data for real-time 
monitoring and for post-event audit and compliance purposes to prevent 
market manipulation; (2) rules relating to trading on its exchange, 
including rules to deter trading abuses, and adequate authority and 
capacity to detect, investigate and take action against violations of 
its trading rules, and a dedicated regulatory department or delegation 
of that function to an appropriate entity; (3) rules defining, or 
specifications detailing, the manner of operation of the trading 
mechanism or electronic matching platform and a trading mechanism or 
electronic matching platform that performs as defined in the 
operational rules or specifications; (4) a clear framework for ensuring 
the financial integrity of transactions entered into by or through its 
exchange; (5) established procedures for impartial disciplinary 
committee(s) or other similar mechanisms empowered to discipline, 
suspend, or expel members, or to deny access to participants or, if 
provided for, discipline participants; and (6) arrangements to obtain 
necessary information to perform the above functions, including the 
capacity and arrangements to carry out the International Information 
Sharing Agreement and Memorandum of Understanding developed by the 
Futures Industry Association (FIA) Global Task Force on Financial 
Integrity and a mechanism to provide to the public ready access to its 
rules and regulations.
    The application is to address how the exchange initially, and on a 
continuing basis, meets and adheres to each of part 38's fifteen Core 
Principles: rule enforcement, products, position monitoring and 
reporting, position limits, emergency authority, public information, 
transparency, trading system, audit trail, financial standards, 
customer protection, dispute resolution, governance, recordkeeping and 
competition. Guidance on meeting the Core Principles is provided in the 
appendix to part 38. Information addressing these issues should be 
included in an application for recognition and should explain to the 
Commission how the applicant meets and adheres to the conditions for 
recognition.
    Appendix A to part 38 offers general guidance for applicants 
seeking recognition and also includes a number of proposed statements 
of acceptable practices for compliance with several Core Principles. 
These acceptable practices are intended to indicate a manner in which 
an applicant can meet a Core Principle, but are not meant to be the 
exclusive means for meeting that Core Principle. Rather, these 
acceptable practices should be viewed as safe harbors. If an RFE 
follows an acceptable practice included in the appendix to part 38, it 
is assured of meeting the relevant Core Principle.
    A board of trade, facility, or entity seeking recognition as a 
recognized futures exchanges would be deemed to be recognized sixty 
days after the Commission received the application unless it appeared 
that the applicant and/or its rules or procedures might violate a 
specific provision of the Act or Commission rule that has been reserved 
under the proposed exemptive rule, or fails to meet one or more of the 
conditions for recognition in proposed

[[Page 38992]]

rule 38.3. In that case, the Commission could notify the applicant that 
the Commission would review the proposal under section 6 of the Act.
    The Commission is proposing amendments to part 5 of its rules to 
permit RFEs to list new products based only on their certification that 
the contract and its rules do not violate any applicable provision of 
the Act or Commission rules. As an aid to exchanges listing new 
products through this certification procedure, the Commission also is 
proposing a new statement of guidance relating to Core Principle #2, 
that contracts listed for trading not be readily susceptible to 
manipulation. New products listed under this procedure must be labeled 
as listed pursuant to exchange certification. Alternatively, an RFE 
could submit a new product for prior Commission review and approval 
under fast-track procedures. RFEs choosing to submit new contracts for 
prior approval under fast-track procedures should submit an application 
which conforms to the requirements of Guideline No. 1, 17 CFR part 5, 
appendix A.\17\ The Commission will approve the terms and conditions of 
contracts submitted for review. Such contracts may be listed as 
``approved by the Commission.''
---------------------------------------------------------------------------

    \17\ Guideline No. 1 was itself recently amended to reduce 
unnecessary burdens. By and large it merely requires an applicant to 
file with the Commission the proposed contract's terms and 
conditions and a completed checklist. This checklist replaces a 
previously required narrative explanation and justification of the 
proposed contract's terms and conditions.
---------------------------------------------------------------------------

    Similarly, an RFE may request that the Commission approve 
amendments to its rules under section 5a(a)(12)(A) of the Act and 
Commission regulations thereunder. The Commission is proposing a 
voluntary procedure for the review and approval of exchange rules. 
Under these procedures, all exchange rule amendments could be submitted 
for forty-five day fast track review and certain rule amendments could 
be submitted for expedited review as provided previously by the 
Commission in approving a general authorizing rule. Alternatively, an 
RFE could amend its rules (other than the terms or conditions of 
contracts on the agricultural commodities enumerated in section 1a(3) 
of the Act) by certification to the Commission that a rule does not 
violate the Act or Commission rules on the day preceding the rule's 
implementation.
    The certification procedure proposed under the changes to rule 1.41 
is similar to a certification procedure published by the Commission as 
proposed rule 1.41(z) in November of 1999.\18\ The Commission points 
out, however, that the currently proposed certification procedure 
includes a stay provision that was not included in the 1.41(z) 
proposal. That provision is limited to use during any proceeding to 
disapprove, alter or amend a rule.\19\ The decision to impose a stay 
would not be delegable to any employee of the Commission. The 
Commission requests comments on this provision.
---------------------------------------------------------------------------

    \18\ 64 FR 66428 (November 26, 1999).
    \19\ Proposed rule 1.41(c)(1)(iv).
---------------------------------------------------------------------------

    The Commission is also proposing that it merely be notified on a 
weekly basis following the implementation of certain specified exchange 
rule amendments. The Commission need not be notified, even as part of a 
weekly update, however, of rule changes relating to exchange 
administration, including those relating to decorum.

D. Deletion of Part 180 and Amendment of Commission Regulation 170.8

    Contract markets are required, under section 5a(a)(11) of the Act, 
to provide fair and equitable procedures for the settlement of customer 
claims and grievances against any of its members or such members' 
employees, whether through arbitration or other dispute resolution 
programs. The Commission promulgated part 180 (Arbitration or other 
Dispute Resolution Procedures) to give the contract markets a blueprint 
for developing the required ``fair and equitable'' procedures. As part 
of the regulatory reform process discussed earlier the Commission is 
proposing to delete part 180. Instead of following the detailed 
requirements of part 180, the Commission is proposing that RFEs be 
required to meet the Core Principle for dispute resolution. For 
contracts in section 2(a)(1)(B) commodities which will continue to be 
designated contract markets, section 5a(a)(11) of the Act would still 
require the contract market to provide fair and equitable procedures 
for the settlement of customer claims and grievances.
    The Commission has included an appendix to part 38, as explained 
above, to provide guidance on meeting the conditions for approval under 
part 38, including acceptable practices for some of the Core 
Principles. These acceptable practices, as previously explained, are 
ways to meet a Core Principle but are not meant to be the only method 
for meeting that Core Principle. Instead, these acceptable practices 
should be viewed as safe harbors. Therefore, the guidance on Core 
Principle 12, dispute resolution, includes acceptable practices for 
exchange dispute resolution programs as one, but not the only, means 
for meeting the dispute resolution Core Principle. The acceptable 
practices provided in the appendix were based on the principles for 
arbitration and other dispute resolution settlement procedures under 
part 180. The guidance on customer dispute resolution found in the 
appendix to part 38 would also be applicable to derivative transaction 
facilities that allowed access to non-institutional participants.\20\
---------------------------------------------------------------------------

    \20\ In light of the deletion of part 180, a new rule 166.5 
replacing former rule 180.3 relating to the use of pre-dispute 
arbitration agreements is being proposed in the companion release on 
intermediaries in today's edition of the Federal Register. The 
substance of the rule as proposed is unchanged from the current 
requirement.
---------------------------------------------------------------------------

    The Commission is also proposing to amend Sec. 170.8 of the 
Commission's regulations as that provision currently requires that the 
procedures for settlement of customer disputes promulgated by futures 
associations be consistent with part 180. Under the proposed amendments 
to Sec. 170.8, programs for resolution of customer claims and 
grievances promulgated by futures associations would be required to be 
consistent with the guidelines and acceptable practices found in the 
appendix to part 38.

III. Section 4(c) Findings

    These rule amendments are being proposed under section 4(c) of the 
Act, which grants the Commission broad exemptive authority. Section 
4(c) of the Act provides that, in order to promote responsible economic 
or financial innovation and fair competition, the Commission may by 
rule, regulation or order exempt any class of agreements, contracts or 
transactions, either unconditionally or on stated terms or conditions. 
To grant such an exemption, the Commission must find that the exemption 
would be consistent with the public interest, that the agreement, 
contract, or transaction to be exempted would be entered into solely 
between appropriate persons and that the exemption would not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory duties 
under the Act.\21\
---------------------------------------------------------------------------

    \21\ See, 7 U.S.C. 6(c).
---------------------------------------------------------------------------

    As explained above, these proposed rules would establish a new 
regulatory framework. The proposed framework is intended to promote 
innovation and competition in the trading of derivatives and to permit 
the markets the flexibility to respond to technological and structural 
changes in the markets. Specifically, the proposed framework would 
establish three regulatory tiers with regulations tailored to the 
nature of

[[Page 38993]]

the commodities traded and the nature of the market participant. As the 
Commission explained above, access to each of the tiers is dependent 
upon the appropriateness of the participant. Accordingly, and for the 
reasons detailed above, the Commission finds that each class of 
participant eligible to participate in a specific tier is appropriate 
for that exemptive relief. Moreover, the exemptions for parts 37 and 38 
are upon stated terms. As detailed above, these terms include 
application of regulatory and self-regulatory requirements tailored to 
the nature of the market. The Commission believes that, in light of 
these conditions, the exemptive relief would have no adverse effect on 
any of the regulatory or self-regulatory responsibilities imposed by 
the Act. The Commission specifically requests the public to comment on 
these issues.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that agencies, in promulgating rules, consider the impact of 
these rules on small entities. Information of the type that would be 
required under the proposed rule does not involve any small 
organizations.

B. Paperwork Reduction Act of 1995

    This proposed rulemaking contains information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Commission has submitted a copy of this section to 
the Office of Management and Budget (OMB) for its review.
    Collection of Information: Rules Relating to part 37, Establishing 
Procedures for Entities to be Recognized as Derivatives Transaction 
Facilities (DTFs), OMB Control Number 3038-XXXX.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 10.
    Annual responses by each respondent: 1.
    Total annual responses: 10.
    Estimated average hours per response: 200.
    Annual reporting burden: 2,000.
    Collection of Information: Rules Relating to part 38, Establishing 
Procedures for Entities to become a Recognized Futures Exchange (RFE), 
OMB Control Number 3038-XXXX.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 10.
    Annual responses by each respondent: 1.
    Total annual responses: 10.
    Estimated average hours per response: 300.
    Annual reporting burden: 3,000.
    Collection of Information: Rules Pertaining to Large Trader 
Reports, OMB Control Number 3038-0009
    The estimated burden associated with the elimination of large 
trader reporting requirements for futures exchanges that operate exempt 
multilateral trade execution facilities was calculated as follows:
    Estimated number of respondents: 4,731.
    Annual responses by each respondent: 14.67.
    Total annual responses: 69,392.
    Estimated average hours per response: .35213.
    Annual reporting burden: 24,435.
    This annual reporting burden of 24,435 hours represents a decrease 
of 394 hours as a result of the proposed revision.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Room 10202, New Executive Office Building, 725 17th Street, NW, 
Washington, DC 20503; Attention: Desk Officer for the Commodity Futures 
Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in:
    Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    Evaluating the accuracy of the Commission's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
    Enhancing the quality, usefulness, and clarity of the information 
to be collected; and
    Minimizing the burden of collection of information on those who are 
to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; e.g., permitting electronic 
submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Commission on the 
proposed regulations.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street, NW., 
Washington DC 20581, (202) 418-5160.

List of Subjects

17 CFR Part 1

    Commodity futures, Contract markets, Designation application, 
Reporting and recordkeeping requirements.

17 CFR Part 5

    Commodity futures, Contract markets, Designation application, 
Reporting and recordkeeping requirements.

17 CFR Part 15

    Commodity futures, Contract markets, Reporting and recordkeeping 
requirements.

17 CFR Part 20

    Commodity futures, Contract markets, Reporting and recordkeeping 
requirements.

17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 37

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 38

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 100

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 170

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 180

    Claims, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

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

[[Page 38994]]

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.

    2. Section 1.37 is proposed to be amended by adding paragraphs (c) 
and (d) to read as follows:


Sec. 1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

* * * * *
    (c) Each derivatives transactions facility and each recognized 
futures exchange shall keep a record in permanent form which shall show 
the true name; address; and principal occupation or business of any 
foreign trader executing transactions on the facility or exchange, as 
well as the name of any person guaranteeing such transactions or 
exercising any control over the trading of such foreign trader.
    (d) Paragraph (c) of this section shall not apply to a derivatives 
transactions facility or recognized futures exchange on which 
transactions in futures contracts or options contracts of foreign 
traders are executed through and the resulting transactions are 
maintained in accounts carried by a registered futures commission 
merchant or introducing broker subject to the provisions of paragraph 
(a) of this section.
    3. Section 1.41 is proposed to be amended as follows:
    a. By removing and reserving paragraph (b),
    b. By redesignating paragraph (e) as paragraph (i) and revising it,
    c. By revising paragraphs (c) through (e),
    d. By amending paragraphs (f) and (g) by adding the words ``or 
recognized futures exchange'' after the words ``contract market'' each 
time they appear, and
    e. By removing and reserving paragraphs (j) through (t), to read as 
follows:


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

* * * * *
    (b) [Reserved]
    (c) Exemption from the rule review procedure requirements of 
Section 5a(a)(12)(A) of the Act and related regulations.
    (1) Rules of designated contract markets, recognized futures 
exchanges and recognized clearing organizations. Notwithstanding the 
rule approval and filing requirements of Section 5a(a)(12) of the Act, 
designated contract markets, recognized futures exchanges and 
recognized clearing organizations may place a rule into effect without 
prior Commission review or approval if:
    (i) The rule is not a term or condition of a contract for future 
delivery of an agricultural commodity listed in section 1(a)(3) of the 
Act;
    (ii) The entity has filed a submission for the rule, and the 
Commission has received the submission at its Washington, D.C. 
headquarters and at the regional office having jurisdiction over the 
entity by close of business on the business day preceding 
implementation of the rule; and
    (iii) The rule submission includes:
    (A) The label, ``Submission of rule by self-certification;''
    (B) The text of the rule (in the case of a rule amendment, brackets 
must indicate words deleted and underscoring must indicate words 
added);
    (C) A brief explanation of the rule including any substantive 
opposing views not incorporated into the rule; and
    (D) A certification by the eligible entity that the rule does not 
violate any provision of the Act and regulations thereunder.
    (iv) The Commission retains the authority to stay the effectiveness 
of a rule implemented pursuant to paragraph (c)(1) of this section 
during the pendency of Commission proceedings to disapprove, alter or 
amend the rule. The decision to stay the effectiveness of a rule in 
such circumstances may not be delegable to any employee of the 
Commission.
    (2) Rules of derivatives transaction facilities. Notwithstanding 
the rule approval and filing requirements of section 5a(a)(12)(A) of 
the Act, derivatives transaction facilities may place a rule into 
effect without prior Commission review or approval if the derivatives 
transaction facility files with the Commission at its Washington, D.C. 
headquarters a submission labeled, ``DTF Rule Notice'' which includes 
the text of the rule or rule amendment (brackets must indicate words 
deleted and underscoring must indicate words added) at the time traders 
or participants in the market are notified, but in no event later than 
the close of business on the business day preceding implementation of 
the rule.
    (d)(1) Voluntary submission of rules for fast-track approval. A 
designated contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization may submit any 
rule or proposed rule, except those submitted to the Commission under 
paragraph (f) of this section, for approval by the Commission pursuant 
to section 5a(a)(12)(A) of the Act, whether or not so required by 
section 5a(a)(12) of the Act under the following procedures:
    (i) One copy of each rule submitted under this section shall be 
furnished in hard copy or electronically in a format specified by the 
Secretary of the Commission to the Commission at its Washington, DC 
headquarters. If a hard copy is furnished for submissions under 
appendix A to part 5 of this chapter, two additional hard copies shall 
be furnished to the Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Each 
submission under this paragraph (d)(1) shall be in the following order:
    (A) Label the submission as ``Submission for Commission rule 
approval:''
    (B) Set forth the text of the rule or proposed rule (in the case of 
a rule amendment, brackets must indicate words deleted and underscoring 
must indicate words added);
    (C) Describe the proposed effective date of a proposed rule and any 
action taken or anticipated to be taken to adopt the proposed rule by 
the contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization or by its 
governing board or by any committee thereof, and cite the rules of the 
entity that authorize the adoption of the proposed rule;
    (D) Explain the operation, purpose, and effect of the proposed 
rule, including, as applicable, a description of the anticipated 
benefits to market participants or others, any potential 
anticompetitive effects on market participants or others, how the rule 
fits into the contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization's framework of 
self-regulation, and any other information which may be beneficial to 
the Commission in analyzing the proposed rule. If a proposed rule 
affects, directly or indirectly, the application of any other rule of 
the submitting entity, set forth the pertinent text of any such rule 
and describe the anticipated effect;
    (E) Note and briefly describe any substantive opposing views 
expressed with respect to the proposed rule which were not incorporated 
into the proposed rule prior to its submission to the Commission; and
    (F) Identify any Commission regulation that the Commission may

[[Page 38995]]

need to amend, or sections of the Act or Commission regulations that 
the Commission may need to interpret in order to approve or allow into 
effect the proposed rule. To the extent that such an amendment or 
interpretation is necessary to accommodate a proposed rule, the 
submission should include a reasoned analysis supporting the change.
    (ii) All rules submitted for Commission approval under paragraph 
(d)(1)(i) of this section shall be deemed approved by the Commission 
under section 5a(a)(12)(A) of the Act, forty-five days after receipt by 
the Commission, unless notified otherwise within that period, if:
    (A) The submission complies with the requirements of paragraphs 
(d)(1)(i) (A) through (F) of this section or, for dormant contracts, 
the requirements of Sec. 5.3 of this chapter;
    (B) The submitting entity does not amend the proposed rule or 
supplement the submission, except as requested by the Commission, 
during the pendency of the review period; and
    (C) The submitting entity has not instructed the Commission in 
writing during the review period to review the proposed rule under the 
180 day review period under section 5a(a)(12)(A) of the Act.
    (iii) The Commission, within forty-five days after receipt of a 
submission filed pursuant to paragraph (d)(1)(i) of this section, may 
notify the entity making the submission that the review period has been 
extended for a period of thirty days where the proposed rule raises 
novel or complex issues which require additional time for review or is 
of major economic significance. This notification shall briefly 
describe the nature of the specific issues for which additional time 
for review is required. Upon such notification, the period for review 
shall be extended for a period of thirty days, and, unless the entity 
is notified otherwise during that period, the rule shall be deemed 
approved at the end of the enlarged review time.
    (iv) During the forty-five day period for fast-track review, or the 
thirty-day extension when the period has been enlarged under paragraph 
(d)(1)(iii) of this section, the Commission shall notify the submitting 
entity that the Commission is terminating fast-track review procedures 
and will review the proposed rule under the 180 day review period of 
section 5a(a)(12)(A) of the Act, if it appears that the proposed rule 
may violate a specific provision of the Act, regulations, or form or 
content requirements of this section. This termination notification 
will briefly specify the nature of the issues raised and the specific 
provision of the Act, regulations, or form or content requirements of 
this section that the proposed rule appears to violate. Within fifteen 
days of receipt of this termination notification, the designated 
contract market, recognized futures exchange, derivatives transaction 
facility or recognized clearing organization may:
    (A) Withdraw the rule;
    (B) Request the Commission to review the rule pursuant to the one 
hundred and eighty day review procedures set forth in section 
5a(a)(12)(A) of the Act; or
    (C) Request the Commission to render a decision whether to approve 
the proposed rule or to institute a proceeding to disapprove the 
proposed rule under the procedures specified in section 5a(a)(12)(A) of 
the Act by notifying the Commission that the submitting entity views 
its submission as complete and final as submitted.
    (2) Voluntary submission of rules for expedited approval. 
Notwithstanding the provisions of paragraph (d)(1) of this section, 
changes to terms and conditions of a contract that are consistent with 
the Act and Commission regulations and with standards approved or 
established by the Commission in a written notification to the market 
or clearing organization of the applicability of this paragraph (d)(2) 
shall be deemed approved by the Commission at such time and under such 
conditions as the Commission shall specify, provided, however, that the 
Commission may at any time alter or revoke the applicability of such a 
notice to any particular contract.
    (e)(1) Notification of rule amendments. Notwithstanding the rule 
approval and filing requirements of section 5a(a)(12) of the Act and of 
paragraphs (c) and (d) of this section, designated contract markets, 
recognized futures exchanges, derivatives transaction facilities and 
recognized clearing organizations may place the following rules into 
effect without prior notice to the Commission if the following 
conditions are met:
    (i) The designated contract market, recognized futures exchange, 
derivatives transaction facility or clearing organization provides to 
the Commission at least weekly a summary notice of all rule changes 
made effective pursuant to this paragraph during the preceding week. 
Such notice must be labeled ``Weekly Notification of Rule Changes'' and 
need not be filed for weeks during which no such actions have been 
taken. One copy of each such submission shall be furnished in hard copy 
or electronically in a format specified by the Secretary of the 
Commission to the Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581; and
    (ii) The rule change governs:
    (A) Non-material revisions. Corrections of typographical errors, 
renumbering, periodic routine updates to identifying information about 
approved entities and other such nonsubstantive revisions of contract 
terms and conditions that have no effect on the economic 
characteristics of the contract;
    (B) Delivery standards set by third parties. Changes to grades or 
standards of commodities deliverable on futures contracts that are 
established by an independent third party and that are incorporated by 
reference as terms of the contract, provided that the grade or standard 
is not established, selected or calculated solely for use in connection 
with futures or option trading;
    (C) Index contracts. Routine changes in the composition, 
computation, or method of selection of component entities of an index 
other than a stock index referenced and defined in the contract's 
terms, made by an independent third party whose business relates to the 
collection or dissemination of price information and that was not 
formed solely for the purpose of compiling an index for use in 
connection with a futures or option contract;
    (D) Transfer of membership or ownership. Procedures and forms for 
the purchase, sale or transfer of membership or ownership, but not 
including qualifications for membership or ownership, any right or 
obligation of membership or ownership or dues or assessments; or
    (E) Administrative Procedures. The organization and administrative 
procedures of a contract market's governing bodies such as a Board of 
Directors, Officers and Committees, but not voting requirements and 
procedures or requirements or procedures relating to conflicts of 
interest.
    (2) Notification of rule amendments not required. Notwithstanding 
the rule approval and filing requirements of section 5a(a)(12) of the 
Act and of paragraphs (c) and (d) of this section, designated contract 
markets, recognized futures exchanges, derivatives transaction 
facilities and recognized clearing organizations may place into effect 
without notice to the Commission, rules governing:
    (i) Administration. The routine, daily administration, direction 
and control of employees, requirements relating to gratuity and similar 
funds, but not

[[Page 38996]]

guaranty, reserves, or similar funds; declaration of holidays, and 
changes to facilities housing the market, trading floor or trading 
area; or
    (ii) Standards of decorum. Standards of decorum or attire or 
similar provisions relating to admission to the floor, badges, 
visitors, but not the establishment of penalties for violations of such 
rules.
* * * * *
    (i) Membership lists. Upon request of the Commission each 
designated contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization shall promptly 
furnish to the Commission a current list of the facility's or entity's 
members or owners subject to fitness requirements.
    4. In part 1, Secs. 1.43, 1.45, and 1.50 are proposed to be removed 
and reserved.
    5. Part 5 is proposed to be amended as as follows:

PART 5--PROCEDURES FOR LISTING NEW PRODUCTS

    a. The authority citation for part 5 continues to read as follows:

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

    b. The heading of part 5 is proposed to be revised as set forth 
above and Secs. 5.1 through 5.4 are proposed to be revised to read as 
follows:


Sec. 5.1  Listing contracts for trading by exchange certification.

    (a) Notwithstanding the provisions of section 4(a)(1) of the Act or 
Sec. 33.2 of this chapter, a board of trade that has been recognized by 
the Commission as a recognized futures exchange under Sec. 38.3 of this 
chapter may list for trading contracts of sale of a commodity for 
future delivery or commodity option contracts, if the recognized 
futures exchange:
    (1) Lists for trading at least one contract which is not dormant 
within the meaning of Sec. 5.3 of this part;
    (2) In connection with the trading of the contract complies with 
all requirements of the Act and Commission regulations thereunder 
applicable to the recognized futures exchange under part 38 of this 
chapter;
    (3) Files with the Commission at its Washington, D.C., headquarters 
either in electronic or hard-copy form a copy of the contract's initial 
terms and conditions and a certification by the recognized futures 
exchange that the contract's initial terms and conditions neither 
violate nor are inconsistent with any requirement of part 38 of this 
chapter, any applicable provision of the Commodity Exchange Act or of 
the rules thereunder, and the filing is received no later than the 
close of business of the business day preceding the contract's initial 
listing; and
    (4) Identifies the contract in its rules as listed for trading 
pursuant to exchange certification.
    (b) The provisions of this section shall not apply to:
    (1) A contract subject to the provisions of section 2(a)(1)(B) of 
the Act;
    (2) A contract to be listed initially for trading that is the same 
or substantially the same as one for which an application for 
Commission review and approval pursuant to Sec. 5.2 was filed by 
another board of trade while the application is pending before the 
Commission; or
    (3) A contract to be listed initially for trading that is the same 
or substantially the same as one which is the subject of a pending 
Commission proceeding to disapprove designation under section 6 of the 
Act, to disapprove a term or condition under section 5a(a)(12) of the 
Act, to alter or supplement a term or condition under section 8a(7) of 
the Act, to amend terms or conditions under section 5a(a)(10) of the 
Act, to declare an emergency under section 8a(9) of the Act, or to any 
other proceeding the effect of which is to disapprove, alter, 
supplement, or require a contract market to adopt a specific term or 
condition, trading rule or procedure, or to take or refrain from taking 
a specific action.


Sec. 5.2  Listing products for trading by derivatives transaction 
facilities.

    Notwithstanding the provisions of section 4(a)(1) of the Act or 
Sec. 33.2 of this chapter, a recognized derivatives transaction 
facility under Sec. 37.3 of this chapter may list contracts for trading 
if it files with the Commission at its Washington, D.C. headquarters, a 
submission labeled ``DTF Notice of Product Listing,'' which includes 
the text of the contract's terms or conditions at the time traders or 
participants in the market are notified, but in no event later than the 
close of business on the business day preceding initial listing.


Sec. 5.3  Voluntary submission of new products for Commission review 
and approval.

    (a) Cash-settled contracts. A new contract to be listed for trading 
by a recognized futures exchange under Sec. 38.3 of this chapter or a 
recognized derivatives transaction facility under Sec. 37.3 of this 
chapter shall be deemed approved by the Commission ten business days 
after receipt by the Commission of the application for contract 
approval, unless notified otherwise within that period, if:
    (1) The submitting entity labels the submission as being submitted 
pursuant to Commission rule 5.2--Fast Track Ten-Day Review;
    (2)(i) The application for approval is for a futures contract 
providing for cash settlement or for delivery of a foreign currency for 
which there is no legal impediment to delivery and for which there 
exists a liquid cash market; or
    (ii) For an option contract that is itself cash-settled, is for 
delivery of a foreign currency that meets the requirements of paragraph 
(a)(2)(i) of this section or is to be exercised into a futures contract 
which has already been designated as a contract market or approved 
under this section;
    (3) The application for approval is for a commodity other than 
those enumerated in section 1a(3) of the Act or one that is subject to 
the procedures of section 2(a)(1)(B) of the Act;
    (4) The submitting entity trades at least one contract which is not 
dormant within the meaning of this part;
    (5) The submission complies with the requirements of Appendix A of 
this part--Guideline No. 1;
    (6) The submitting entity does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or other such nonsubstantive 
revisions, during that period; and
    (7) The submitting entity has not instructed the Commission in 
writing during the review period to review the application for 
designation under the usual procedures under section 6 of the Act.
    (b) Contracts for physical delivery. A new contract to be listed 
for trading by a recognized futures exchange under Sec. 38.3 of this 
chapter or by a derivatives transaction facility under Sec. 37.3 of 
this chapter shall be deemed approved by the Commission forty-five days 
after receipt by the Commission of the application for contract 
approval, unless notified otherwise within that period, if:
    (1) The submitting entity labels the submission as being submitted 
pursuant to Commission rule 5.2--Fast Track Forty-Five Day Review;
    (2) The application for contract approval is for a commodity other 
than those subject to the procedures of section 2(a)(1)(B) of the Act;
    (3) The submitting entity lists for trading at least one contract 
which is not dormant within the meaning of this part;

[[Page 38997]]

    (4) The submission complies with the requirements of Appendix A to 
this part--Guideline No. 1;
    (5) The submitting entity does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or other such nonsubstantive 
revisions, during that period; and
    (6) The submitting entity has not instructed the Commission in 
writing during the forty-five day review period to review the 
application for designation under the usual procedures under section 6 
of the Act.
    (c) Notification of extension of time. The Commission, within ten 
days after receipt of a submission filed under paragraph (a) of this 
section, or forty-five days after receipt of a submission filed under 
paragraph (b) of this section, may notify the submitting entity that 
the review period has been extended for a period of thirty days where 
the application for approval raises novel or complex issues which 
require additional time for review. This notification will briefly 
specify the nature of the specific issues for which additional time for 
review is required. Upon such notification, the period for fast-track 
review of paragraphs (a) and (b) of this section shall be extended for 
a period of thirty days.
    (d) Notification of termination of fast-track procedures. During 
the fast-track review period provided under paragraphs (a) or (b) of 
this section, or of the thirty-day extension when the period has been 
enlarged under paragraph (c) of this section, the Commission shall 
notify the submitting entity that the Commission is terminating fast-
track review procedures and will review the proposed rule under the 
usual procedures of section 6 of the Act, if it appears that the 
proposed contract may violate a specific provision of the Act, 
regulations, or form or content requirements of Appendix A to this 
part. This termination notification will briefly specify the nature of 
the issues raised and the specific provision of the Act, regulation, or 
form or content requirement of Appendix A to this part that the 
proposed contract appears to violate. Within ten days of receipt of 
this termination notification, the submitting entity may request that 
the Commission render a decision whether to approve the designation or 
to institute a proceeding to disapprove the proposed application for 
designation under the procedures specified in section 6 of the Act by 
notifying the Commission that the exchange views its application as 
complete and final as submitted.
    (e) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Economic 
Analysis or to the Director's delegatee, with the concurrence of the 
General Counsel or the General Counsel's delegatee, authority to 
request under paragraphs (a)(6) and (b)(5) of this section that the 
recognized futures exchange or derivatives transaction facility amend 
the proposed contract or supplement the application, to notify a 
submitting entity under paragraph (c) of this section that the time for 
review of a proposed contract term submitted for review under 
paragraphs (a) or (b) of this section has been extended, and to notify 
the submitting entity under paragraph (d) of this section that the 
fast-track procedures of this section are being terminated.
    (2) The Director of the Division of Economic Analysis may submit to 
the Commission for its consideration any matter which has been 
delegated in paragraph (e)(1) of this section.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (e)(1) 
of this section.


Sec. 5.4  Dormant contracts.

    (a) Definitions. For purposes of this section:
    (1) The term dormant contract means any commodity futures or option 
contract:
    (i) In which no trading has occurred in any future or option 
expiration for a period of six complete calendar months; or
    (ii) Which has been certified by a recognized futures exchange or a 
recognized derivatives transaction facility to the Commission to be a 
dormant contract market.
    (2) [Reserved]
    (b) Listing of additional futures trading months or option 
expiration by certification. A contract that has been listed for 
trading initially under the procedures of either Secs. 5.1 or 5.3 of 
this part that has become dormant may be relisted for trading 
additional months pursuant to the procedures of Sec. 1.41(c) by filing 
the bylaw, rule, regulation or resolution to list additional trading 
months or expirations with the Commission as specified in that section. 
Upon relisting, the contract must be identified by the recognized 
futures exchange as listed for trading by exchange certification.
    (c) Approval for listing of additional futures trading months or 
option expirations. A contract that has been initially approved by the 
Commission under Sec. 5.3 of this part and that has become dormant may 
be relisted for trading additional months pursuant to the procedures of 
Sec. 1.41(d) by filing the bylaw, rule, regulation or resolution to 
list additional trading months or expirations with the Commission as 
specified in that section.
    (1) Each such submission shall clearly designate the submission as 
filed pursuant to Commission Rule 5.3; and
    (2) Include the information required to be submitted pursuant to 
Sec. 5.3 of this part or an economic justification for the listing of 
additional months or expirations in the dormant contract market, which 
shall include an explanation of those economic conditions which have 
changed subsequent to the time the contract became dormant and an 
explanation of how any new terms and conditions which are now being 
proposed, or which have been proposed for an option market's underlying 
futures contract market, would make it reasonable to expect that the 
futures or option contract will be used on more than an occasional 
basis for hedging or price basing.
    (d) Exemptions. No contract shall be considered dormant until the 
end of sixty (60) complete calendar months:
    (1) Following initial listing; or
    (2) Following Commission approval of the contract market bylaw, 
rule, regulation, or resolution to relist trading months submitted 
pursuant to paragraph (c) of this section.
    c. Appendices C and D are removed and reserved to read as follows:

Appendix C--[Reserved]

Appendix D--[Reserved]

PART 15--REPORTS--GENERAL PROVISIONS

    6. The authority citation for Part 15 is proposed to be revised to 
read as follows:

    Authority: 7 U.S.C. 2, 4, 5, 6(c), 6a, 6c(a)-(d), 6f, 6g, 6i, 
6k, 6m, 6n, 7, 9, 12a, 19 and 21.
    7. Section 15.05 is proposed to be amended by adding paragraphs (e) 
through (h) to read as follows:


Sec. 15.05  Designation of agent for foreign brokers, customers of a 
foreign broker and foreign traders.

* * * * *
    (e) Any derivatives transaction facility or recognized futures 
exchange that permits a foreign broker to intermediate transactions in 
futures contracts or options contracts on the facility or exchange, or 
permits a foreign trader to effect transactions in futures contracts

[[Page 38998]]

or options contracts on the facility or exchange shall be deemed to be 
the agent of the foreign broker and any of its customers for whom the 
transactions were executed, or the foreign trader for purposes of 
accepting delivery and service of any communication issued by or on 
behalf of the Commission to the foreign broker, any of its customers or 
the foreign trader with respect to any futures or options contracts 
executed by the foreign broker or the foreign trader on the derivatives 
transaction facility or recognized futures exchange. Service or 
delivery of any communication issued by or on behalf of the Commission 
to a derivatives transaction facility or recognized futures exchange 
pursuant to such agency shall constitute valid and effective service 
upon the foreign broker, any of its customers, or the foreign trader. A 
derivatives transaction facility or recognized futures exchange who has 
been served with, or to whom there has been delivered, a communication 
issued by or on behalf of the Commission to a foreign broker, any of 
its customers, or a foreign trader shall transmit the communication 
promptly and in a manner which is reasonable under the circumstances, 
or in a manner specified by the Commission in the communication, to the 
foreign broker, any of its customers or the foreign trader.
    (f) It shall be unlawful for any derivatives transaction facility 
or recognized futures exchange to permit a foreign broker, any of its 
customers or a foreign trader to effect transactions in futures 
contracts or options contracts unless the derivatives transaction 
facility or recognized futures exchange prior thereto informs the 
foreign broker, any of its customers or the foreign trader in any 
reasonable manner the derivatives transaction facility or recognized 
futures exchange deems to be appropriate, of the requirements of this 
section.
    (g) The requirements of paragraphs (e) and (f) of this section 
shall not apply to any transactions in futures contracts or options if 
the foreign broker, any of its customers or the foreign trader has duly 
executed and maintains in effect a written agency agreement in 
compliance with this paragraph with a person domiciled in the United 
States and has provided a copy of the agreement to the derivatives 
transaction facility or recognized futures exchange prior to effecting 
any transactions in futures contracts or options contracts on the 
derivatives transaction facility or recognized futures exchange. This 
agreement must authorize the person domiciled in the United States to 
serve as the agent of the foreign broker, any of its customers or the 
foreign trader for purposes of accepting delivery and service of all 
communications issued by or on behalf of the Commission to the foreign 
broker, any of its customers or the foreign trader and must provide an 
address in the United States where the agent will accept delivery and 
service of communications from the Commission. This agreement must be 
filed with the Commission by the derivatives transaction facility or 
recognized futures exchange prior to permitting the foreign broker, any 
of its customers or the foreign trader to effect any transactions in 
futures contracts or options contracts. Unless otherwise specified by 
the Commission, the agreements required to be filed with the Commission 
shall be filed with the Secretary of the Commission at Three Lafayette 
Centre, 1155 21st Street, NW, Washington, D.C. 20581. A foreign broker, 
any of its customers or a foreign trader shall notify the Commission 
immediately if the written agency agreement is terminated, revoked, or 
is otherwise no longer in effect. If the derivatives transaction 
facility or recognized futures exchange knows or should know that the 
agreement has expired, been terminated, or is no longer in effect, the 
derivatives transaction facility or recognized futures exchange shall 
notify the Secretary of the Commission immediately. If the written 
agency agreement expires, terminates, or is not in effect, the 
derivatives transaction facility or recognized futures exchange and the 
foreign broker, any of its customers or the foreign trader are subject 
to the provisions of paragraphs (e) and (f) of this section.
    (h) The provisions of paragraphs (e), (f) and (g) of this section 
shall not apply to a derivatives transactions facility or recognized 
futures exchange on which all transactions in futures contracts or 
options contracts of foreign brokers, their customers or foreign 
traders are executed through and the resulting transactions are 
maintained in accounts carried by a registered futures commission 
merchant or introducing broker subject to the provisions of Rules 
15.05(a), (b), (c) and (d).
    8. Chapter I of 17 CFR is proposed to be amended by adding a new 
Part 20 to read as follows:

PART 20--SPECIAL CALLS RELATING TO TRANSACTIONS ON DERIVATIVES 
TRANSACTION FACILITIES

Sec.
20.1   Special calls for information from derivatives transaction 
facilities.
20.2   Special calls for information from futures commission 
merchants.
20.3   Special calls for information from participants.
20.4   Delegations of authority.

    Authority: 7 U.S.C. 6(c), 6i and 12(a)(5).


Sec. 20.1  Special calls for information from derivatives transaction 
facilities.

    Upon special call by the Commission, a derivatives transaction 
facility shall provide to the Commission such information related to 
its business as a derivatives transaction facility, including 
information relating to data entry and trade details, in the form and 
manner and within the time as specified by the Commission in the 
special call.


Sec. 20.2  Special calls for information from futures commission 
merchants.

    Upon special call by the Commission, each person registered or 
deemed to be registered as a futures commission merchant that carries 
or has carried an account for a customer on a derivatives transaction 
facility shall provide information to the Commission concerning such 
accounts or related positions carried for the customer on other 
facilities or markets, in the form and manner and within the time 
specified by the Commission in the special call.


Sec. 20.3  Special calls for information from participants.

    Upon special call by the Commission, any person who enters into or 
has entered into a contract, agreement, or transaction on a derivatives 
transaction facility shall provide information to the Commission 
concerning such contracts, agreements, or transactions or related 
positions on other facilities or markets, in the form and manner and 
within the time specified by the Commission in the special call.


Sec. 20.4  Delegation of authority.

    The Commission hereby delegates, until the Commission orders 
otherwise, the authority to make special calls for information set 
forth in Secs. 20.1, 20.2 and 20.3 to the Directors of the Division of 
Economic Analysis and the Division of Trading and Markets to be 
exercised separately by each Director or by such other employee or 
employees as the Director may designate from time to time. The Director 
of the Divisions of Economic Analysis and Trading and Markets 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.
    9. PART 36 is proposed to be revised to read as follows:

[[Page 38999]]

PART 36--EXEMPTION OF TRANSACTIONS ON MULTILATERAL TRANSACTION 
EXECUTION FACILITIES

Sec.
36.1   Definitions.
36.2   Exemption.
36.3   Enforceability.

    Authority: 7 U.S.C. 2, 6, 6c, and 12a.


Sec. 36.1  Definitions.

    As used in this part:
    (a) Eligible participant means and shall be limited to the parties 
or entities listed in Sec. 35.1(b)(1)-(11) of this chapter; and
    (b) Multilateral transaction execution facility means an electronic 
or non-electronic market or similar facility through which persons, for 
their own accounts or for the accounts of others, enter into, agree to 
enter into or execute binding transactions by accepting bids or offers 
made by one person that are open to multiple persons who conduct 
business through such market or similar facility, but does not include:
    (1) A facility whose participants individually negotiate (or have 
individually negotiated) with counterparties the material terms 
applicable to transactions between them, including transactions 
conducted on the facility, and which are subject to subsequent 
acceptance by the counterparties;
    (2) Any electronic communications system on which the execution of 
a transaction results from the content of bilateral communications 
exchanged between the parties and not by the interaction of multiple 
orders within a predetermined, non-discretionary automated trade 
matching algorithm; or
    (3) Any facility on which only a single firm may participate as 
market maker and participants other than the market maker may not 
accept bids or offers of other non-market maker participants.


Sec. 36.2  Exemption.

    A contract, agreement or transaction traded on a multilateral 
transaction execution facility as defined in Sec. 36.1(b) is exempt 
from all provisions of the Act and any person or class of persons 
offering, entering into, rendering advice, or rendering other services 
with respect to such contract, agreement or transaction is exempt for 
such activity from all provisions of the Act (except in each case the 
provisions enumerated in Sec. 36.3(a)) provided the following terms and 
conditions are met:
    (a) Only eligible participants, either trading for their own 
account or through another eligible participant, have trading access to 
the multilateral transaction execution facility;
    (b) The contract, agreement or transaction listed on or traded 
through the multilateral transaction execution facility is based upon:
    (1) A debt obligation;
    (2) A foreign currency;
    (3) An interest rate;
    (4) An exempt security or index thereof, as provided in section 
2a(1)(B)(iv) of the Act;
    (5) A measure of credit risk or quality, including instruments 
known as ``total return swaps,'' ``credit swaps'' or ``spread swaps;''
    (6) An occurrence, extent of an occurrence or contingency beyond 
the control of the counterparties to the transaction; or
    (7) Cash-settled, based upon an economic or commercial index or 
measure beyond the control of the counterparties to the transaction and 
not based upon prices derived from trading in a directly corresponding 
underlying cash market;
    (c) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearing 
organization that is authorized by the Commission under Sec. 39.2 of 
this chapter: Provided, however, that nothing in this paragraph 
precludes:
    (1) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment 
obligations resulting from such agreements; or
    (2) Arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments 
resulting from such contracts, agreements or transactions;
    (d) The multilateral transaction execution facility on or through 
which such contracts, agreements or transactions are traded and the 
parties to, participants in, or intermediaries in such a facility that 
is exempt under this section are prohibited from claiming that the 
facility is regulated, recognized or approved by the Commission;
    (e) The facility must be legally separate from any designated 
contract market, any recognized futures exchange under part 38 of this 
chapter and any facility recognized as a derivatives trading facility 
under part 37 of this chapter;
    (f) The facility:
    (1) If an electronic system that also lists for trading products 
pursuant to parts 37 or 38 of this chapter, must provide notice of the 
agreements, contracts or transactions traded on the facility pursuant 
to this part 36 and that such transactions are not subject to 
regulation under the Act; or
    (2) If providing a physical trading environment, must provide that 
products trading pursuant to parts 37 or part 38 of this chapter be 
traded in a location separate from products traded pursuant to this 
part 36; and
    (g) If the Commission determines by order, after notice and an 
opportunity for a hearing, that the facility serves as a significant 
source for the discovery of prices for an underlying commodity, the 
facility must on a daily basis disseminate publicly trading volume and 
price ranges and other trading data appropriate to that market as 
specified in the order.
    (h) Any person or entity may apply to the Commission for exemption 
from any of the provisions of the Act (except 2(a)(1)(B)) for other 
arrangements or facilities, on such terms and conditions as the 
Commission deems appropriate, including, but not limited to, the 
applicability of other regulatory regimes.


Sec. 36.3  Enforceability.

    (a) Notwithstanding the exemption in Sec. 36.2, sections 
2(a)(1)(B), 4b, and 4o of the Act and Sec. 32.9 of this chapter as 
adopted under section 4c(b) of the Act, and sections 6(c) and 9(a)(2) 
of the Act to the extent they prohibit manipulation of the market price 
of any commodity in interstate commerce or for future delivery on or 
subject to the rules of any contract market, continue to apply to 
transactions and persons otherwise subject to those provisions.
    (b) A party to a contract, agreement, or transaction that is with 
an eligible counterparty (or counterparty reasonably believed by such 
party to be an eligible counterparty) shall be exempt from any claim, 
counterclaim or affirmative defense by such counterparty under section 
22(a)(1) of the Act or any other provision of the Act:
    (1) That such contract, agreement, or transaction is void, voidable 
or unenforceable, or
    (2) To rescind or recover any payment made in respect of such 
contract, agreement, or transaction, based solely on the failure of 
such party or such contract, agreement, or transaction to comply with 
the terms or conditions of the exemption under this part.
    10. Chapter I of 17 CFR is proposed to be amended by adding new 
Part 37 as follows:

PART 37--EXEMPTION OF TRANSACTIONS ON A DERIVATIVES TRANSACTION 
FACILITY

Sec.
37.1   Scope and definitions.
37.2   Exemption.

[[Page 39000]]

37.3   Conditions for recognition as a derivatives transaction 
facilities.
37.4   Procedures for recognition.
37.5   Enforceability.
37.6   Fraud in connection with Part 37 transactions.
Appendix A to Part 37--Application Guidance

    Authority: 7 U.S.C. 2, 6, 6c, 6(c) and 12a.


Sec. 37.1  Scope and Definitions.

    (a) Scope. (i) The derivatives transaction facility and the 
products listed for trading thereon under this exemption shall be 
deemed to be subject to all of the provisions of the Act and Commission 
regulations thereunder which are applicable to a ``board of trade,'' 
``board of trade licensed by the Commission,'' ``exchange,'' ``contract 
market,'' ``designated contract market,'' or ``contract market 
designated by the Commission'' as though those provisions were set 
forth in this section and included specific reference to contracts 
listed for trading by recognized derivatives transaction facilities 
pursuant to this section.
    (2) The provisions of this section shall not apply to a commodity 
or a contract subject to the provisions of section 2(a)(1)(B) of the 
Act.
    (b) Definition. As used in this part ``eligible commercial 
participant'' means, and shall be limited to, a party or entity listed 
in Secs. 35.1(b)(1), (b)(2), (b)(3), (b)(6) and (b)(8) of this chapter 
that in connection with its business, makes and takes delivery of the 
underlying physical commodity and regularly incurs risks related to 
such commodity, or is a dealer that regularly provides hedging, risk 
management or market-making services to the foregoing entities.


Sec. 37.2  Exemption.

    Notwithstanding Sec. 37.1(a)(1), a contract, agreement or 
transaction traded on a multilateral transaction execution facility as 
defined in Sec. 36.1(b) of this chapter, the facility and the 
facility's operator are exempt from all provisions of the Act and from 
all Commission regulations thereunder for such activity, except for 
those provisions of the Act and Commission regulations which, as a 
condition of this exemption, are reserved in Sec. 37.5(a), provided the 
following terms and conditions are met:
    (a)(1) Only eligible commercial participants trading for their own 
account have trading access to the derivatives transaction facility for 
contracts, agreements or transactions in any commodity except for those 
listed in section 1(a)(3) of the Act,; or
    (2)(i) The contract, agreement or transaction listed on or traded 
through the multilateral transaction execution facility meets the 
requirements set forth in Sec. 36.2(b) of this chapter or has been 
found by the Commission on a case-by-case determination to have a 
sufficiently liquid and deep cash market and a surveillance history 
based on actual trading experience to provide assurance that the 
contract is highly unlikely to be manipulated; and
    (ii) Participants that are not eligible participants as defined in 
Sec. 35.1(b) of this chapter may have trading access only through a 
registered futures commission merchant that operates in accordance with 
the provisions of Sec. 1.17(a)(1)(ii) of this chapter;
    (b) The multilateral transaction execution facility through which 
the contract agreement or transaction is entered into has been 
recognized by the Commission as a derivatives transaction facility 
pursuant to Sec. 37.3;
    (c) A multilateral transaction execution facility that applies to 
be, and is, a recognized derivatives transaction facility must comply 
with all of the conditions of this part 37 exemption and must disclose 
to participants transacting on or through its facility that 
transactions conducted on or through the facility are subject to the 
provisions of this part 37;
    (d) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearinghouse 
that is authorized by the Commission under part 39 of this chapter. 
Provided, however, that nothing in this paragraph precludes:
    (1) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment 
obligations resulting from such agreements; or
    (2) arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments 
resulting from such contracts, agreements or transactions; and
    (e) The products if traded on an electronic system must be clearly 
identified as traded on a recognized derivatives transaction facility 
or if traded in a physical trading environment must be traded in a 
location separate from products traded as designated contract markets, 
or pursuant to parts 36 and 38 of this chapter;


Sec. 37.3  Conditions for recognition as a derivatives transaction 
facility

    (a) To be recognized as a derivatives transaction facility, the 
facility initially must have:
    (1) Rules relating to trading on its facility, including, depending 
on the nature of the trading mechanism:
    (i) Rules to deter trading abuses, and adequate power and capacity 
to detect, investigate and take action against violation of its trade 
rules including arrangements to obtain necessary information to perform 
the functions in paragraph (a)(1)(i) of this section, or
    (ii) Use of technology that provides participants with impartial 
access to transactions and captures information that is available for 
use in determining whether violations of its rules have occurred;
    (2) Rules or terms and conditions defining, or specifications 
detailing, the operation of the trading mechanism or electronic 
matching platform;
    (3) Rules or terms and conditions detailing the financial framework 
applying to the transactions or ensuring the financial integrity of 
transactions entered into by, or through, its facilities; and
    (b) Initially, and on a continuing basis, must meet and adhere to 
the following seven core principles:
    (1) Enforcement. Monitor and enforce its rules or terms and 
conditions including, if applicable, limitations on access.
    (2) Market oversight. As appropriate to the market and the 
contracts traded:
    (i) Monitor markets on a routine and nonroutine basis as necessary 
to ensure orderly trading and have and where appropriate exercise 
authority to maintain an orderly market; or
    (ii) Provide information to the CFTC as requested by the CFTC to 
satisfy its obligations under the CEA.
    (3) Operational information. Disclose to regulators and market 
participants, to the extent possible, information concerning trading 
terms, contract terms and conditions, trading mechanisms, financial 
integrity arrangements or mechanisms, as well as other relevant 
information.
    (4) Transparency. Provide to market participants on a fair, 
equitable and timely basis information regarding prices, bids and 
offers, and other information appropriate to the market and, as 
appropriate to the market, make available to the public with respect to 
actively traded products and, to the extent applicable, information 
regarding daily opening and closing prices, price range, trading volume 
and other related market information.
    (5) Fitness. As appropriate to the market, have fitness standards 
for members, operators or owners with greater than 10 percent interest 
or an affiliate of such an owner, members of the governing board, and 
those who make disciplinary determinations.
    (6) Recordkeeping. Keep full books and records of all activities 
related to its

[[Page 39001]]

business as a recognized derivatives transaction facility, including 
full information relating to data entry and trade details sufficient to 
reconstruct trading, in a form and manner acceptable to the CFTC for a 
period of five years, during the first two of which the books and 
records are readily available, and which shall be open to inspection by 
any representative of the CFTC or the U.S. Department of Justice.
    (7) Competition. Avoid unreasonable restraints of trade or imposing 
any burden on competition not necessary or appropriate in furtherance 
of the objectives of the Act or the regulations thereunder.


Sec. 37. 4  Procedures for recognition.

    (a) Recognition by certification. A board of trade, facility or 
entity that is designated under sections 4c, 5, 5a(a) or 6 of the Act 
as a contract market in at least one commodity which is not dormant 
within the meaning of Sec. 5.2 of this chapter will be recognized by 
the Commission as a derivatives transaction facility upon receipt by 
the Commission at its Washington, D.C. headquarters of a copy of the 
derivatives transaction facility's rules and a certification by the 
board of trade, facility or entity that it meets the conditions for 
recognition under this part.
    (b) Recognition by application. A board of trade, facility or 
entity shall be recognized by the Commission as a derivatives 
transaction facility thirty days after receipt by the Commission of an 
application for recognition as a derivatives transaction facility 
unless notified otherwise during that period, if:
    (1) The application demonstrates that the applicant satisfies the 
conditions for recognition under this part;
    (2) The submission is labeled as being submitted pursuant to this 
part 37;
    (3) The submission includes a copy of the derivatives transaction 
facility's rules and a brief explanation of how the rules satisfy each 
of the conditions for recognition under Sec. 37.3;
    (4) The applicant does not amend or supplement the application for 
recognition, except as requested by the Commission or for correction of 
typographical errors, renumbering or other nonsubstantive revisions, 
during that period; and
    (5) The applicant has not instructed the Commission in writing 
during the review period to review the application pursuant to 
procedures under section 6 of the Act.
    (6) Appendix A to this part provides guidance to applicants on how 
the conditions for recognition enumerated in Sec. 37.3 could be 
satisfied.
    (c) Termination of Part 37 review. During the thirty-day period for 
review pursuant to paragraph (b) of this section, the Commission shall 
notify the applicant seeking recognition that the Commission is 
terminating review under this section and will review the proposal 
under the procedures of section 6 of the Act, if it appears that the 
application fails to meet the conditions for recognition under this 
part. This termination notification will state the nature of the issues 
raised and the specific condition of recognition that the application 
appears to violate, is contrary to or fails to meet. Within ten days of 
receipt of this termination notification, the applicant seeking 
recognition may request that the Commission render a decision whether 
to recognize the derivatives transaction facility or to institute a 
proceeding to disapprove the proposed submission under procedures 
specified in section 6 of the Act by notifying the Commission that the 
applicant seeking recognition views its submission as complete and 
final as submitted.
    (d) Delegation of Authority.
    (1) The Commission hereby delegates, until it orders otherwise, to 
the Directors of the Division of Trading and Markets and the Division 
of Economic Analysis or their delegatees, with the concurrence of the 
General Counsel or the General Counsel's delegatee, authority to notify 
the entity seeking recognition under paragraph (b) of this section that 
review under those procedures is being terminated.
    (2) The Directors of the Division of Trading and Markets or the 
Division of Economic Analysis may submit to the Commission for its 
consideration any matter which has been delegated in this paragraph.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (d)(1) 
of this section.
    (e) Request for Commission approval of rules and products. (1) An 
entity seeking recognition as a derivatives transaction facility may 
request that the Commission approve any or all of its rules and 
subsequent amendments thereto, including both operational rules and the 
terms or conditions of products listed for trading on the facility, at 
the time of recognition or thereafter, under section 5a(a)(12) of the 
Act and Secs. 1.41 and 5.3 of this chapter, as applicable. A 
derivatives transaction facility may label a product in its rules as, 
``Listed for trading pursuant to Commission approval,'' if the 
product's terms or conditions have been approved by the Commission. 
Rules of the derivatives trading facility not submitted pursuant to 
Sec. 37.4(b)(3) shall be submitted to the Commission pursuant to 
Sec. 1.41 of this chapter.
    (2) An entity seeking recognition as a derivatives transaction 
facility may request that the Commission consider under the provisions 
of section 15 of the Act any of the entity's rules or policies, 
including both operational rules and the terms or conditions of 
products listed for trading, at the time of recognition or thereafter.
    (f) Request for withdrawal of recognition. A recognized derivatives 
transaction facility may withdraw from Commission recognition by filing 
with the Commission at its Washington, D.C. headquarters such a 
request. Withdrawal from recognition 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 recognized by 
the Commission.


Sec. 37.5  Enforceability

    (a) Notwithstanding the exemption in Sec. 37.2, sections 1a, 
2(a)(1), 4, 4b, 4c, 4g, 4i, 4o, 5(6), 5(7), the rule disapproval 
procedures of 5a(a)(12), 5b, 6(a), 6(b), 6(c), 6b, 6c, 8(a), 8(c), 
8a(6), 8a(7), 8a(9) 8c(a), 9(a)(2), 9(a)(3), 9(f), 14, 20 and 22 of the 
Act and Secs. 1.3, 1.31, 1.37, 1.41, 5.3, 33.10, Part 5, Part 20, and 
Part 37 of this chapter continue to apply.
    (b) For purposes of section 22(a) of the Act, a party to a 
contract, agreement, or transaction is exempt from a claim that the 
contract, agreement or transaction is void, voidable, subject to 
rescission or otherwise invalidated or rendered unenforceable solely 
for failure of the parties to a contract, agreement or transaction, or 
the contract, agreement or transaction itself, to comply with the terms 
and conditions for the exemption under this part or as a result of:
    (1) A violation by the recognized derivatives transaction facility 
of the provisions of this part 37; or
    (2) Any Commission proceeding to disapprove a rule, term or 
condition under section 5a(a)(12) of the Act, to alter or supplement a 
rule, term or condition under section 8a(7) of the Act, to declare an 
emergency under section 8a(9) of the Act, or any other proceeding the 
effect of which is to disapprove, alter, supplement, or require a 
recognized derivatives transaction facility to adopt a specific term or 
condition, trading rule or procedure, or to take or refrain from taking 
a specific action.


Sec. 37.6  Fraud in connection with Part 37 transactions.

    It shall be unlawful for any person, directly or indirectly, in or 
in

[[Page 39002]]

connection with an offer to enter into, the entry into, the 
confirmation of the execution of, or the maintenance of any transaction 
entered pursuant to this part--
    (1) To cheat or defraud or attempt to cheat or defraud any person;
    (2) Willfully to make or cause to be made to any person any false 
report or statement thereof or cause to be entered for any person any 
false record thereof;
    (3) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.

Appendix A to Part 37--Application Guidance

    This appendix provides guidance to applicants for recognition as 
derivatives transaction facilities under Sec. 37.3. Addressing the 
issues and questions set forth below would help the Commission in 
its consideration of whether the application has met the conditions 
for recognition. To the extent that compliance with, or satisfaction 
of, a core principle is not self-explanatory from the face of the 
derivatives transaction facilities rules or terms, the application 
should include an explanation or other form of documentation 
demonstrating that the applicant meets the conditions for 
recognition.

Core Principle #1: Enforcement: Monitoring and enforcement of its 
rules or terms and conditions including, if applicable, limitations 
on access

    (a) A derivatives transaction facility should have arrangements 
and resources and authority for effectively and affirmatively 
enforcing its rules, including the authority and ability to collect 
or capture information and documents on both a routine and non-
routine basis and to investigate effectively possible rule 
violations.
    (b) This should include the authority and ability to discipline, 
and limit or suspend a member's or participant's activities and/or 
the authority and ability to terminate a member's or participant's 
activities or access pursuant to clear and fair standards.

Core Principle #2: Market Oversight: As appropriate to the market 
and the contracts traded, to: (1) Monitor markets on a routine and 
non-routine basis as necessary to ensure open and competitive 
trading and have and, where appropriate, exercise authority to 
maintain an open and competitive market; or (2) provide information 
to the Commission as necessary for the Commission to satisfy its 
obligations under the Act

    (a) Arrangements and resources for effective market surveillance 
programs should facilitate, on both a routine and non-routine basis, 
direct supervision of the market. Appropriate objective testing and 
review of any automated systems should occur initially and 
periodically to ensure proper system functioning, adequate capacity 
and security. The analysis of data collected should be suitable for 
the type of information collected and should occur in a timely 
fashion. A derivatives transaction facility should have the 
authority to collect the information and documents necessary to 
reconstruct trading for appropriate market analysis as it carries 
out its market surveillance programs. The derivatives transaction 
facility also should have the authority to intervene as necessary to 
maintain an open and competitive market. In carrying out this 
responsibility, the facility should address access to, and use of, 
material non-public information by members, owners or operators, 
participants or facility employees.
    (b) Alternatively, and as appropriate to the market, a 
derivatives transaction facility may choose to satisfy Core 
Principle #2 by providing information to the Commission as requested 
by the Commission to satisfy its obligations under the Act. The 
derivatives transaction facility should have the authority to 
collect or capture and retrieve all necessary information.
    (c) The Commission will collect reporting data from large 
traders only upon Special Call as provided in Part 20 of this 
chapter.

Core Principle #3: Operational Information: Disclose to regulators 
and market participants, to the extent possible, information 
concerning trading terms, contract terms and conditions, trading 
mechanisms, financial integrity arrangements or mechanisms, as well 
as other relevant information

    A derivatives transaction facility should have arrangements and 
resources for the disclosure and explanation of trading terms, 
contract terms and conditions, trading mechanisms, financial 
integrity arrangements or mechanisms. Such information may be made 
publicly available through the operation of a website by the 
derivatives transaction facility.

Core Principle #4: Transparency: Provide to market participants on 
a fair, equitable and timely basis information regarding prices, 
bids and offers, and other information appropriate to the market, 
make available to the public with respect to actively traded 
products and, to the extent applicable, information regarding daily 
opening and closing prices, price range, trading volume and other 
related market information

    All market participants should have information regarding 
prices, bids and offers, or other information appropriate to the 
market readily available on a fair and equitable basis. The 
derivatives transaction facility should provide to the public 
information regarding daily opening and closing prices, price range, 
trading volume, open interest and other related market information 
for actively traded contracts. Provision of information could be 
through such means as provision of the information to a financial 
information service or by placement of the information on a 
facility's web site.

Core Principle #5: Fitness: Appropriate fitness standards for 
members, operators or owners with greater than 10 percent interest 
or an affiliate of such an owner, members of the governing board, 
and those who make disciplinary determinations

    A derivatives transaction facility should have appropriate 
eligibility criteria for the categories of persons set forth in the 
Core Principle which would include standards for fitness and for the 
collection and verification of information supporting compliance 
with such standards. Minimum standards of fitness are those bases 
for refusal to register a person under section 8a(2) of the Act. A 
demonstration of the fitness of the applicant's members, operators 
or owners may include providing the Commission with registration 
information for such persons, certification to the fitness of such 
persons, an affidavit of such persons' fitness by the facility's 
Counsel or other information substantiating the fitness of such 
persons.

Core Principle #6: Recordkeeping: Maintenance of full books and 
records of all activities related to its business as a recognized 
derivatives transaction facility, including full information 
relating to data entry and trade details, in a form and manner 
acceptable to the Commission for a period of five years, during the 
first two of which the books and records are readily available, and 
which shall be open to inspection by any representative of the 
Commission or the United States Department of Justice

    Commission rule 1.31 constitutes the acceptable practice 
regarding the form and manner for keeping records.

Core Principle #7: Competition: To avoid unreasonable restraints of 
trade or imposing any burden on competition not necessary or 
appropriate in furtherance of the objectives of the Act or the 
regulations thereunder

    Guidance on individual rules, terms or practices is available by 
submitting a rule for Commission approval under the procedures of 
Sec. 1.41of this chapter or by requesting that the Commission issue 
an Order considering the rule, term or practice under the provision 
of section 15 of the Act.

    11. Chapter I of 17 CFR is proposed to be amended by adding new 
Part 38 as follows:

PART 38--EXEMPTION OF TRANSACTIONS ON A RECOGNIZED FUTURES EXCHANGE

Sec.
38.1   Scope.
38.2   Exemption.
38.3   Conditions for recognition as a recognized futures exchange.
38.4   Procedures for recignition.
38.5   Enforceability.
38.6   Fraud in connection with Part 38 transactions.
Appendix A to Part 38--Guidance for Applicants and Acceptable 
Practices

    Authority: 7 U.S.C. 2, 6, 6c, and 12a.


Sec. 38.1  Scope.

    (a) Except for commodities subject to paragraph (a) of this 
section, the provisions of the exemption in Sec. 38.2 of this part 
shall apply to every board of trade that has been designated as a 
contract market in a commodity under section 6 of the Act. Provided, 
however,

[[Page 39003]]

nothing in this provision affects the eligibility of designated 
contract markets for exemption under parts 36 or 37 of this chapter.
    (b) Recognized futures exchanges that have been recognized by the 
Commission by application under Sec. 38.3 and the products listed for 
trading thereon shall be deemed to be subject to all of the provisions 
of the Act and Commission regulations thereunder which are applicable 
to a ``board of trade,'' ``board of trade licensed by the Commission,'' 
``exchange,'' ``contract market,'' ``designated contract market,'' or 
``contract market designated by the Commission'' as though those 
provisions were set forth in this section and included specific 
reference to contracts listed for trading by recognized futures 
exchanges pursuant to this section.
    (c) The provisions of this section shall not apply to a commodity 
or a contract subject to the provisions of section 2(a)(1)(B) of the 
Act.


Sec. 38.2  Exemption.

    Notwithstanding Sec. 38.1(b), a contract, agreement or transaction 
traded on a multilateral transaction execution facility as defined in 
Sec. 36.1(b) of this chapter, the facility and the facility's operator 
are exempt from all provisions of the Act and from all Commission 
regulations thereunder for such activity, except for those provisions 
of the Act and Commission regulations which, as a condition of this 
exemption, are reserved in Sec. 38.5(a), provided the following terms 
and conditions are met:
    (a) The multilateral transaction execution facility on which the 
contract agreement or transaction is entered into has been recognized 
by the Commission as a recognized futures exchange pursuant to 
Sec. 38.3;
    (b) A multilateral transaction execution facility that applies to 
be, and is, a recognized futures exchange must comply with all of the 
conditions of this part 38 exemption and must disclose to participants 
transacting on or through its facilities that transactions conducted on 
or through the facility are subject to the provisions of this part 38;
    (c) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearinghouse 
which is authorized by the Commission under part 39 of this chapter. 
Provided, however, that nothing in this paragraph precludes:
    (1) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment 
obligations resulting from such agreements; or
    (2) Arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments 
resulting from such agreements; and
    (d) The products if traded on an electronic system must be clearly 
identified as traded on a recognized futures exchange or if traded in a 
physical trading environment must be traded in a location separate from 
products traded pursuant to parts 36 and 37 of this chapter;


Sec. 38.3  Conditions for recognition as a recognized futures exchange.

    (a) To be recognized as a recognized futures exchange, the exchange 
must demonstrate initially that it has:
    (1) A clear framework for conducting programs of market 
surveillance, compliance, and enforcement, including having procedures 
in place to make use of collected data for real-time monitoring and for 
post-event audit and compliance purposes to prevent market 
manipulation;
    (2) Rules relating to trading on the exchange, including rules to 
deter trading abuses, and adequate power and capacity to detect, 
investigate and take action against violations of its trading rules, 
and a dedicated regulatory department or delegation of that function to 
an appropriate entity;
    (3) Rules defining, or specifications detailing, the manner of 
operation of the trading mechanism or electronic matching platform and 
a trading mechanism or electronic matching platform that performs as 
defined in the operational rules or specifications;
    (4) A clear framework for ensuring the financial integrity of 
transactions entered into by or through the exchange;
    (5) Established procedures for impartial disciplinary committee(s) 
or other similar mechanisms empowered to discipline, suspend, and expel 
members, or to deny access to participants or, if provided for, 
discipline participants;
    (6) Arrangements to obtain necessary information to perform the 
above functions, including the capacity and arrangements to carry out 
the International Information Sharing Agreement and Memorandum of 
Understanding developed by the Futures Industry Association (FIA) 
Global Task Force on Financial Integrity, and a mechanism to provide to 
the public ready access to its rules and regulations; and
    (b) Initially, and on a continuing basis, must meet and adhere to 
the following fifteen core principles:
    (1) Rule enforcement. Monitor and enforce its rules;
    (2) Products. List contracts for trading which are not readily 
susceptible to manipulation;
    (3) Position monitoring and reporting. Monitor markets on a routine 
and nonroutine basis as necessary to prevent manipulation, price 
distortion, and disruptions of the delivery or cash settlement process;
    (4) Position limits. Adopt position limits on trading where 
necessary and appropriate to lessen the threat of market manipulation 
or congestion during delivery months;
    (5) Emergency authority. Exercise authority to intervene to 
maintain fair and orderly trading, including where applicable authority 
to liquidate or transfer open positions, to require the suspension or 
curtailment of trading, and to require the posting of additional 
margin;
    (6) Public information. Make information concerning the contract 
terms and conditions and the trading mechanism, as well as other 
relevant information, readily available to market authorities, users 
and the public;
    (7) Transparency. Provide, appropriate to the market, information 
to the public regarding prices, bids and offers, including the opening 
and closing prices and daily range, and information on volume and open 
interest;
    (8) Trading system. Provide a competitive, open, and efficient 
market;
    (9) Audit trail. Have procedures to ensure the recording of full 
data entry and trade details sufficient to reconstruct trading, the 
safe storage of such information and systems to enable information to 
be used in assisting in detecting and deterring customer and market 
abuse. Such procedures should ensure the quality of data captured;
    (10) Financial standards. Have, monitor, and enforce rules 
regarding the financial integrity of the transactions that have been 
executed on the exchange and, where intermediaries are permitted, have 
rules addressing the financial integrity of the intermediary and the 
protection of customer funds as appropriate and a program to enforce 
those requirements;
    (11) Customer protection. Have, monitor and enforce rules for 
customer protection;
    (12) Dispute resolution. Provide for alternative dispute resolution 
mechanisms appropriate to the nature of the market;
    (13) Governance. Have fitness standards for members, for owners or 
operators with greater than ten percent interest or an affiliate of 
such an owner, members of the governing board, and those who make 
disciplinary

[[Page 39004]]

determinations. The recognized futures exchange must have a means to 
address conflicts of interest in making decisions and access to, and 
use of, material non-public information by the foregoing persons and by 
exchange employees. For mutually owned futures exchanges, the 
composition of the governing board must reflect market participants;
    (14) Recordkeeping. Keep full books and records of all activities 
related to their business as a recognized futures exchange in a form 
and manner acceptable to the CFTC for a period of five years, during 
the first two of which the books and records are readily available, and 
which shall be open to inspection by any representative of the CFTC or 
the U.S. Department of Justice; and
    (15) Competition. Avoid unreasonable restraints of trade or impose 
any burden on competition not necessary or appropriate in furtherance 
of the objectives of the Act or the regulations thereunder.


Sec. 38. 4  Procedures for recognition.

    (a) Recognition by prior designation. A board of trade, facility or 
entity that is designated under sections 4c, 5, 5a(a) or 6 of the Act 
as a contract market on the effective date of this rule in at least one 
commodity which is not dormant within the meaning of Sec. 5.2 of this 
chapter is recognized by the Commission as a recognized futures 
exchange and each of the contracts traded thereon that has been 
designated by the Commission as a designated contract market in a 
commodity may be labeled in the recognized futures exchange's rules as 
listed for trading pursuant to Commission approval.
    (b) Recognition by application. A board of trade, facility or 
entity shall be recognized by the Commission as a recognized futures 
exchange sixty days after receipt by the Commission of an application 
for recognition unless notified otherwise during that period, if:
    (1) The application demonstrates that the applicant satisfies the 
conditions for recognition under this part;
    (2) The submission is labeled as being submitted pursuant to this 
part 38;
    (3) The submission includes a copy of the applicant's rules and a 
brief explanation of how the rules satisfy each of the conditions for 
recognition under Sec. 38.3;
    (4) The applicant does not amend or supplement the application for 
recognition, except as requested by the Commission or for correction of 
typographical errors, renumbering or other nonsubstantive revisions, 
during that period; and
    (5) The applicant has not instructed the Commission in writing 
during the review period to review the application pursuant to 
procedures under section 6 of the Act.
    (6) Appendix A to this part provides guidance to applicants on how 
the conditions for recognition enumerated in Sec. 38.3 could be 
satisfied.
    (c) Termination of Part 38 review. During the sixty-day period for 
review pursuant to paragraph (b) of this section, the Commission shall 
notify the applicant seeking recognition that the Commission is 
terminating review under this section and will review the proposal 
under the procedures of section 6 of the Act, if it appears that the 
application fails to meet the conditions for recognition under this 
part. This termination notification will state the nature of the issues 
raised and the specific condition of recognition that the application 
appears to violate, is contrary to or fails to meet. Within ten days of 
receipt of this termination notification, the applicant seeking 
recognition may request that the Commission render a decision whether 
to recognize the futures exchange or to institute a proceeding to 
disapprove the proposed submission under procedures specified in 
section 6 of the Act by notifying the Commission that the applicant 
seeking recognition views its submission as complete and final as 
submitted.
    (d) Delegation of Authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Directors of the Division of Trading 
and Markets and the Division of Economic Analysis or their delegatees, 
with the concurrence of the General Counsel or the General Counsel's 
delegatee, authority to notify the entity seeking recognition under 
paragraph (b) of this section that review under those procedures is 
being terminated.
    (2) The Directors of the Division of Trading and Markets or the 
Division of Economic Analysis may submit to the Commission for its 
consideration any matter which has been delegated in this paragraph.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (d)(1) 
of this section.
    (e) Request for Commission approval of rules and products. (1) An 
entity seeking recognition as a recognized futures exchange may request 
that the Commission approve any or all of its rules and subsequent 
amendments thereto, including both operational rules and the terms or 
conditions of products listed for trading on the exchange, at the time 
of recognition or thereafter, under section 5a(a)(12) of the Act and 
Secs. 1.41 and 5.3 of this chapter, as applicable. A product the terms 
or conditions of which have been approved by the Commission may be 
labeled in its rules as listed for trading pursuant to Commission 
approval. In addition, rules of the recognized futures exchange not 
submitted pursuant to Sec. 38.4(b)(3) shall be submitted to the 
Commission pursuant to Sec. 1.41 of this chapter.
    (2) An entity seeking recognition as a recognized futures exchange 
may request that the Commission consider under the provisions of 
section 15 of the Act any of the entity's rules or policies, including 
both operational rules and the terms or conditions of products listed 
for trading, at the time of recognition or thereafter.
    (f) Request for withdrawal of application for recognition or 
withdrawal of recognition. An entity may withdraw an application to be 
a recognized futures exchange or once recognized, may withdraw from 
Commission recognition by filing with the Commission at its Washington, 
D.C. headquarters such a request. Withdrawal from recognition 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 
exchange was recognized by the Commission.


Sec. 38.5  Enforceability

    (a) Notwithstanding the exemption in Sec. 38.2, sections 1a, 
2(a)(1), 4, 4a, 4b, 4c, 4g, 4i, 4o, 5(6), 5(7), the rule disapproval 
procedures of 5a(a)(12), 5b, 6(a), 6(b), 6(c), 6b, 6c, 8(a), 8(c), 
8a(6), 8a(7), 8a(9), 8c(a), 8c(b), 8c(c), 8c(d), 9(a), 9(f), 20 and 22 
of the Act and Secs. 1.3, 1.31, 1.37, 1.38, 1.41, 33.10, part 5, part 
9, parts 15-21 and part 38 of this chapter continue to apply.
    (b) For purposes of Section 22(a) of the Act, a party to a 
contract, agreement, or transaction is exempt from a claim that the 
contract, agreement or transaction is void, voidable, subject to 
rescission or otherwise invalidated or rendered unenforceable as a 
result of:
    (1) A violation by the recognized futures exchange of the 
provisions of this part 38; or
    (2) Any Commission proceeding to disapprove a rule, term or 
condition under section 5a(a)(12) of the Act, to alter or supplement a 
rule, term or condition under section 8a(7) of the Act, to declare an 
emergency under section 8a(9) of the Act, or any other proceeding the 
effect of which is to disapprove, alter, supplement, or require a 
recognized futures exchange to adopt a specific term or condition, 
trading rule

[[Page 39005]]

or procedure, or to take or refrain from taking a specific action.


Sec. 38.6  Fraud in connection with Part 38 transactions.

    It shall be unlawful for any person, directly or indirectly, in or 
in connection with an offer to enter into, the entry into, the 
confirmation of the execution of, or the maintenance of any transaction 
entered pursuant to this part:
    (a) To cheat or defraud or attempt to cheat or defraud any person;
    (b) Willfully to make or cause to be made to any person any false 
report or statement thereof or cause to be entered for any person any 
false record thereof; or
    (c) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.

Appendix A to Part 38--Guidance for Applicants and Acceptable 
Practices

    This appendix provides guidance and acceptable practices for the 
Core Principles found in Part 38. Guidance to applicants for 
recognition as recognized futures exchanges under Sec. 38.3 is 
offered under subsection (a) following a Core Principle. Addressing 
the issues and questions set forth therein would help the Commission 
in its consideration of whether the application has met the 
conditions for recognition. To the extent that compliance with, or 
satisfaction of, a core principle is not self-explanatory from the 
face of the recognized futures exchange's rules or terms, the 
application should include an explanation or other form of 
documentation demonstrating that the applicant meets the conditions 
for recognition. Acceptable practices meeting the requirements of 
the Core Principles are set forth in subsection (b). Recognized 
futures exchanges that follow specific practices outlined under 
subsection (b) for any Core Principle below will meet the applicable 
Core Principle. Except where otherwise provided, subsection (b) does 
not state the exclusive means for satisfying a Core Principle.

Core Principle #1: Rule Enforcement: Monitor and enforce its rules

    (a) Application Guidance.
    (1) A recognized futures exchange should have arrangements and 
resources for effective trade practice surveillance programs, with 
the authority to collect information and documents on both a routine 
and non-routine basis including the examination of books and records 
kept by members/participants of the exchange. The arrangements and 
resources should facilitate the direct supervision of the market and 
the analysis of data collected.
    (2) A recognized futures exchange should have arrangements, 
resources and authority for effective rule enforcement. The 
Commission believes that this should include the authority and 
ability to discipline and limit or suspend a member's or 
participant's activities as well as the authority and ability to 
terminate a member's or participant's activities pursuant to clear 
and fair standards.
    (b) Acceptable Practices. An effective trade practice 
surveillance program should include:
    (1) Maintenance of data reflecting the details of each 
transaction executed on an RFE;
    (2) Electronic analysis of these data routinely to detect 
potential trading violations;
    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to its attention; and
    (4) Prompt and effective disciplinary action for any violation 
that is found to have been committed. The Commission believes that 
the latter element should include the authority and ability to 
discipline and limit or suspend a member's or participant's 
activities pursuant to clear and fair standards. See, e.g., 17 CFR 
Part 8.

Core Principle #2 Products: List contracts for trading which are 
not readily susceptible to manipulation

    (a) Application Guidance. Applicants should submit their initial 
product for listing for Commission approval under Sec. 5.1 and Part 
5, Appendix A of this chapter. Subsequent products may be listed for 
trading by self-certification under Sec. 5.3 of this chapter.
    (b) Acceptable Practices. Guideline No. 1, 17 CFR Part 5, 
Appendix A may be used as guidance in meeting this Core Principle.

Core Principle #3: Position monitoring and reporting: Monitor 
markets on a routine and nonroutine basis as necessary to prevent 
manipulation, price distortion, and disruptions of the delivery or 
cash settlement process

    (a) Application Guidance. [Reserved].
    (b) Acceptable Practices. (1) An acceptable program for 
monitoring markets will generally involve the collection of various 
market data, including information on traders' market activity. 
Those data should be evaluated on an ongoing basis in order to make 
an appropriate regulatory response to potential market disruptions 
or abusive practices.
    (2) The recognized futures exchange should collect data in order 
to assess whether the market price is responding to the forces of 
supply and demand. Appropriate data usually include various 
fundamental data about the underlying commodity, its supply, its 
demand, and its movement through marketing channels. Especially 
important are data related to the size and ownership of deliverable 
supplies--the existing supply and the future or potential supply, 
and to the pricing of the deliverable commodity relative to the 
futures price and relative to similar, but nondeliverable, kinds of 
the commodity. For cash-settled markets, it is more appropriate to 
pay attention to the availability and pricing of the commodity 
making up the index to which the market will be settled, as well as 
monitoring the continued suitability of the methodology for deriving 
the index.
    (3) To assess a traders' activity and potential power in a 
market, at a minimum, every exchange should have routine access to 
the positions and trading done by the members of its clearing 
facility. Although clearing member data may be sufficient for some 
exchanges, an effective surveillance program for exchanges with 
substantial numbers of customers trading through intermediaries 
should employ a much more comprehensive large-trader reporting 
system (LTRS). The Commission operates an industry-wide LTRS. As an 
alternative to having its own LTRS or contracting out for such a 
system, exchanges may find it more efficient to use information 
available from the Commission's LTRS data for position monitoring.

Core Principle #4: Position Limits: Adopt position limits on 
trading where necessary and appropriate to lessen the threat of 
market manipulation or congestion during delivery months

    (a) Application Guidance. [Reserved].
    (b) Acceptable Practices. (1) In order to diminish potential 
problems arising from excessively large speculative positions, the 
Commission sets limits on traders' positions for certain 
commodities. These position limits specifically exempt bona fide 
hedging, permit other exemptions, and set limits differently by 
markets, by futures or delivery months, or by time periods. For 
purposes of evaluating an exchange speculative-limit program, the 
Commission considers the specified limit levels, aggregation 
policies, types of exemptions allowed, methods for monitoring 
compliance with the specified levels, and procedures for enforcement 
to deal with violations.
    (2) In general, position limits are not necessary for markets 
where the threat of excessive speculation or manipulation is very 
low. Thus, exchanges do not need to set position-limit levels for 
futures markets in major foreign currencies and in certain financial 
futures having very liquid and deep underlying cash markets. Where 
speculative limits are appropriate, acceptable speculative-limit 
levels typically are set in terms of a trader's combined position in 
the futures contract plus its position in the option contract (on a 
delta-adjusted basis).
    (3) Spot-month levels for physical-delivery markets should be 
based upon an analysis of deliverable supplies and the history of 
spot-month liquidations. Spot-month limits for physical-delivery 
markets are appropriately set at no more than 25 percent of the 
estimated deliverable supply. For cash-settled markets, spot-month 
position limits may be necessary if the underlying cash market is 
small or illiquid such that traders can disrupt the cash market or 
otherwise influence the cash-settlement price to profit on a futures 
position. In these cases, the limit should be set at a level that 
minimizes the potential for manipulation or distortion of the 
futures contract's or the underlying commodity's price. Markets may 
elect not to provide all-months-combined and non-spot month limits.
    (4) An exchange may provide for position accountability 
provisions in lieu of position limits for contracts on financial 
instruments, intangible commodities, or certain tangible 
commodities. Markets appropriate for

[[Page 39006]]

position accountability rules include those with large open-
interest, high daily trading volumes and liquid cash markets.
    (5) Exchanges must have aggregation rules that apply to those 
accounts under common control, those with common ownership, i.e., 
where there is a 10 percent or greater financial interest, and those 
traded according to an expressed or implied agreement. Exchanges 
will be permitted to set more stringent aggregation policies. For 
example, one major exchange adopted a policy of automatically 
aggregating members of the same household, unless they were granted 
a specific waiver. Exchanges may grant exemptions to their position 
limits for bona fide hedging (as defined in Commission Rule 1.3(z)) 
and may grant exemptions for reduced risk positions, such as 
spreads, straddles and arbitrage positions.
    (6) Exchanges must establish a program for effective monitoring 
and enforcement of these limits. One acceptable enforcement 
mechanism is a program whereby traders apply for these exemptions by 
the exchange and are granted a position level higher than the 
applicable speculative limit. The position levels granted under 
hedge exemptions are based upon the trader's commercial activity in 
related markets. Exchanges may allow a brief grace period where a 
qualifying trader may exceed speculative limits or an existing 
exemption level pending the submission and approval of appropriate 
justification. An exchange should consider whether it wants to 
restrict exemptions during the last several days of trading in a 
delivery month. Acceptable procedures for obtaining and granting 
exemptions include a requirement that the exchange approve a 
specific maximum higher level.
    (7) Exchanges with many markets with large numbers of traders 
should have an automated means of detecting traders' violations of 
speculative limits or exemptions. Exchanges should monitor the 
continuing appropriateness of approved exemptions by periodically 
reviewing each trader's basis for exemption or requiring a 
reapplication.
    (8) Finally, an acceptable speculative limit program must have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The exchange policy will 
need to consider appropriate actions where the violation is by a 
non-member and should address traders carrying accounts through more 
than one intermediary.
    (9) A violation of exchange position limits that have been 
approved by the Commission is also a violation of section 4a(e) of 
the Act.

Core Principle #5: Emergency Authority: Exercise authority to 
intervene to maintain fair and orderly trading markets including 
where applicable authority to liquidate or transfer open positions, 
to require the suspension or curtailment of trading, and to require 
the posting of additional margin

    (a) Application Guidance. [Reserved].
    (b) Acceptable Practices. A recognized futures exchange should 
have clear procedures and guidelines for exchange decision-making 
regarding emergency intervention in the market. An exchange should 
also have the authority to intervene as necessary to maintain 
markets with fair and orderly trading as well as procedures for 
carrying out the intervention. As is necessary to address perceived 
market threats, the exchange, among other things, should be able to 
impose position limits in particular in the delivery month, impose 
or modify price limits, modify circuit breakers, call for additional 
margin either from customers or clearing members, order the 
liquidation or transfer of open positions, order the fixing of a 
settlement price, order the reduction in positions, extend or 
shorten the expiration date or the trading hours, suspend or curtail 
trading on the market, order the transfer of customer contracts and 
the margin for such contracts from one member of the exchange to 
another or alter the delivery terms or conditions. The Commission 
believes that a recognized futures exchange should also have 
procedures and guidelines for the notification of the Commission of 
the exercise of regulatory emergency authority as well as procedures 
and guidelines for documentation of the exchange's decision-making 
process and the reasons for use of its emergency action authority.

Core Principle #6: Public Information: Make information concerning 
the contract terms and conditions and the trading mechanism, as 
well as other relevant information, readily available to market 
authorities, users and the public

    (a) Application Guidance. A recognized futures exchange should 
have arrangements and resources for the disclosure of contract terms 
and conditions and trading mechanisms to the Commission, users and 
the public. Procedures should also include the provision of 
information on listing new products, rule amendments or other 
changes to previously disclosed information to the Commission, users 
and the public.
    (b) Acceptable Practices. [Reserved].

Core Principle #7: Transparency. Provide, appropriate to the 
market, information to the public regarding prices, bids and 
offers, including the opening and closing prices and daily range, 
and information on volume and open interest

    (a) Application Guidance. [Reserved].
    (b) Acceptable Practices. [Reserved].

Core Principle #8: Trading system: Provide, a competitive, open, 
and efficient market

    (a) Application Guidance. (1) Appropriate objective testing and 
review of any automated systems should occur initially and 
periodically to ensure proper system functioning, adequate capacity 
and security. A recognized futures exchange's analysis of its 
automated system should address appropriate principles for the 
oversight of automated systems, ensuring proper system function, 
adequate capacity and security. The Commission believes that the 
guidelines issued by the International Organization of Securities 
Commissions (``IOSCO'') in 1990 (which have been referred to as the 
``Principles for Screen-Based Trading Systems''), subsequently 
adopted by the Commission on November 21, 1990 (55 FR 48670), are 
appropriate guidelines for a recognized futures exchange to apply to 
electronic trading systems. Any program of objective testing and 
review of the system should be performed by an independent third 
party. A professional that is a certified member of the 
Informational Systems Audit and Control Association experienced in 
the industry would be an acceptable party to carry out such testing 
and review. The Commission believes that information gathered by 
analysis, oversight or any program of objective testing and review 
of any automated systems regarding system functioning, capacity and 
security should be made available to the Commission and the public.
    (2) A recognized futures exchange that determines to allow block 
trading should have rules which:
    (i) Define the block based upon the customary size of large 
positions in the cash and derivatives market,
    (ii) Restrict access to block trading to eligible participants,
    (iii) Provide a mechanism for ensuring that the block's price 
will be fair and reasonable, and
    (iv) provide for transparency of the trade by requiring that it 
be reported for clearing within a reasonable period of time and that 
it be identified separately in the price reporting system.
    (b) Acceptable Practices. [Reserved].

Core Principle #9: Audit trail: Have in place procedures to ensure 
the recording of full data entry and trade details sufficient to 
reconstruct trading, the safe storage of such information and 
systems to enable information to be used in assisting in combating 
customer and market abuse. Such procedures should ensure the 
quality of data captured

    (a) Application Guidance. A recognized futures exchange should 
have arrangements and resources for recording of full data entry and 
trade details sufficient to reconstruct trading and the safe storage 
of audit trail data systems enabling information to be used in 
combating customer and market abuse.
    (b) Acceptable Practices. (1) The goal of an audit trail is to 
detect and deter customer and market abuse. An effective exchange 
audit trail should capture and retain sufficient trade-related 
information to permit exchange staff to detect trading abuses and to 
reconstruct all transactions. An audit trail should include 
specialized electronic surveillance programs that would identify 
potentially abusive trades and trade patterns, including for 
instance, withholding or disclosing customer orders, trading ahead, 
and preferential allocation. An acceptable audit trail must be able 
to track a customer order from time of receipt through fill 
allocation. The exchange must create and maintain an electronic 
transaction history database that contains information with respect 
to transactions affected on the recognized futures exchange.
    (2) An acceptable audit trail, therefore, should include the 
following: Original source documents, transaction history, 
electronic analysis capability, and safe storage capability. A 
registered futures exchange whose audit trail satisfies the 
following acceptable practices would satisfy Core Principle 9.

[[Page 39007]]

    (i) Original Source Documents. Original source documents include 
unalterable, sequentially identified records on which trade 
execution information is originally recorded, whether recorded 
manually or electronically. For each customer order, such records 
reflect the terms of the order, an account identifier that relates 
back to the account(s) owner(s), and the time of order entry. For 
floor-based exchanges, the time of report of execution of the order 
should also be captured.
    (ii) Transaction History. A transaction history which consists 
of an electronic history of each transaction, including:
    (A) All data that are input into the trade entry or matching 
system for the transaction to match and clear;
    (B) Whether the trade was for a customer or proprietary account;
    (C) Timing and sequencing data adequate to reconstruct trading; 
and
    (D) The identification of each account to which fills are 
allocated.
    (iii) Electronic Analysis Capability. An electronic analysis 
capability that permits sorting and presenting data included in the 
transaction history so as to reconstruct trading and to identify 
possible trading violations with respect to both customer and market 
abuse.
    (iv) Safe Storage Capability. Safe storage capability provides 
for a method of storing the data included in the transaction history 
in a manner that protects the data from unauthorized alteration, as 
well as from accidental erasure or other loss. Data should be 
retained in accordance with the recordkeeping standards of Core 
Principle 14.

Core Principle #10: Financial standards: Have, monitor, and enforce 
rules regarding the financial integrity of the transactions that 
have been executed on the exchange and, where intermediaries are 
permitted, have rules addressing the financial integrity of the 
intermediary and the protection of customer funds as appropriate 
and a program to enforce those requirements

    (a) Application Guidance. Clearing of transactions executed on a 
recognized futures exchange should be provided through a Commission 
recognized clearing facility. In addition, a recognized futures 
exchange should maintain the financial integrity of its transactions 
by maintaining minimum financial standards and having default rules 
and procedures. The minimum financial standards should be monitored 
for compliance purposes. The Commission believes that in order to 
monitor for minimum financial requirements, a recognized futures 
exchange should routinely receive financial and related information. 
Rules addressing the protection of customer funds should address the 
segregation of customer and proprietary funds, the custody of 
customer funds and the investment standards for customer funds.
    (b) Acceptable Practices. [Reserved]

Core Principle #11: Customer protection: Have, monitor and enforce 
rules for customer protection

    (a) Application Guidance. A recognized futures exchange 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. Intermediated markets are not required to have, monitor or 
enforce rules requiring intermediaries to provide risk disclosure or 
to comply with other sales practices.
    (b) Acceptable Practices. [Reserved]

Core Principle #12: Dispute resolution: Provide for alternative 
dispute resolution mechanisms appropriate to the nature of the 
market

    (a) Application Guidance. A recognized futures exchange should 
provide customer dispute resolution procedures that are fair and 
equitable and that are made available to the customer on a voluntary 
basis, either directly or through another self-regulatory 
organization.
    (b) Acceptable Practices. (1) Core Principle #12 requires a 
recognized futures exchange to provide for dispute resolution 
mechanisms that are appropriate to the nature of the market.
    (2) In order to satisfy acceptable standards, a recognized 
futures exchange should provide a customer dispute resolution 
mechanism that is fundamentally fair and is equitable. The procedure 
should provide:
    (i) The customer with an opportunity to have his or her claim 
decided by a decision-maker that is objective and impartial,
    (ii) Each party with the right to be represented by counsel, at 
the party's own expense,
    (iii) Each party with adequate notice of claims presented 
against him or her, an opportunity to be heard on all claims, 
defenses and permitted counterclaims, and an opportunity for a 
prompt hearing,
    (iv) For prompt written final settlement awards that are not 
subject to appeal within the exchange, and
    (v) Notice to the parties of the fees and costs which may be 
assessed.
    (3) The procedure employed also must be voluntary, as provided 
in Sec. 166.5 of this part. If the recognized futures exchange also 
provides a procedure for the resolution of disputes which do not 
involve customers (i.e., member-to-member disputes), the procedure 
for the resolution of such disputes must be independent of and shall 
not interfere with or delay the resolution of customers' claims or 
grievances.
    (4) A counterclaim which arises out of a transaction or 
occurrence that is the subject of a customer's claim or grievance 
and which does not require for adjudication the presence of 
essential witnesses, parties or third persons over whom the 
recognized futures exchanges does not have jurisdiction could be 
allowed under the recognized futures exchange's dispute resolution 
procedures. Other counterclaims should be permissible only if the 
customer agreed to the submission after the counterclaim had arisen, 
and if the aggregate monetary value of the counterclaim was capable 
of calculation.
    (5) A recognized futures exchange may delegate to another self-
regulatory organization or to a registered futures association its 
responsibility to provide for customer dispute resolution 
mechanisms, Provided, however, that, if the recognized futures 
exchange does so delegate that responsibility, the exchange shall in 
all respects treat any decision issued by such other organization or 
association as if the decision were its own including providing for 
the appropriate enforcement of any award issued against a delinquent 
member.

Core Principle #13: Governance: Have fitness standards for members, 
for owners or operators with greater than 10 percent interest or an 
affiliate of such an owner, members of the governing board, and 
those who make disciplinary determinations. The recognized futures 
exchange must have a means to address conflicts of interest in 
making decisions and access to, and use of, material non-public 
information by the foregoing persons and by exchange employees. For 
mutually owned futures exchanges, the composition of the governing 
board must reflect market participants

    (a) Application Guidance. A recognized futures exchange should 
have appropriate eligibility criteria for the categories of persons 
set forth in the Core Principle which should include standards for 
fitness and for the collection and verification of information 
supporting compliance with such standards. The standards could be 
based on the disqualification standards under section 8a(2) of the 
Act. The Commission believes that such standards should include the 
provision to the Commission of registration information for such 
persons, whether registration information, certification to the 
fitness of such persons, an affidavit of such persons' fitness by 
the facility's counsel or other information substantiating the 
fitness of such persons. If an exchange provided certification of 
the fitness of such a person, the Commission believes that such 
certification should be based on verified information that the 
person is fit to be in their position. The means to address 
conflicts of interest in decision-making should include methods to 
ascertain the presence of conflicts of interest and to make 
decisions in the event of such a conflict. In addressing the access 
to, and use of, material non-public information, the Commission 
believes that the recognized futures exchange should provide for 
limitations on exchange employee trading.
    (b) Acceptable Practices. [Reserved]

Core Principle #14: Recordkeeping: Must keep full books and records 
of all activities related to their business as a recognized futures 
exchange in a form and manner acceptable to the Commission for a 
period of five years, during the first two of which the books and 
records are readily available, and which shall be open to 
inspection by any representative of the Commission or the United 
States Department of Justice

    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices. Commission rule 1.31 constitutes the 
acceptable practice regarding the form and manner for keeping 
records.

[[Page 39008]]

Core Principle #15: Competition: Recognized futures exchanges 
should avoid unreasonable restraints of trade or impose any burden 
on competition not necessary or appropriate in furtherance of the 
objectives of the Act or the regulations thereunder

    (a) Application Guidance. A recognized futures exchange should 
avoid unreasonable restraints of trade in any terms and conditions 
of access or provision of services or any non-compete clauses or 
limitations on future activity.
    (b) Acceptable Practices. [Reserved]

PART 100--[REMOVED AND RESERVED]

    12. Part 100 is proposed to be removed and reserved.

PART 170--REGISTERED FUTURES ASSOCIATIONS

    13. The authority citation for Part 170 continues to read as 
follows:

    Authority: 7 U.S.C. 6p, 12a, and 21.

    14. Section 170.8 is proposed to be revised to read as follows:


Sec. 170.8  Settlement of customer disputes (section 17(b)(10) of the 
Act).

    A futures association must be able to demonstrate its capacity to 
promulgate rules and to conduct proceedings which provide a fair, 
equitable and expeditious procedure, through arbitration or otherwise, 
for the voluntary settlement of a customer's claim or grievance brought 
against any member of the association or any employee of a member of 
the association. Such rules shall conform to and be consistent with 
section 17(b)(10) of the Act and be consistent with the guidelines and 
acceptable practices for dispute resolution found within Appendix A and 
Appendix B to Part 38 of this chapter.

PART 180--ARBITRATION OR OTHER DISPUTE SETTLEMENT PROCEDURES 
[REMOVED]

    15. Part 180 is proposed to be removed.

    Issued in Washington, DC, this 8th day of June, 2000, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-14914 Filed 6-21-00; 8:45 am]
BILLING CODE 6351-01-P


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