38986 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

1Products 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.

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.

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 secretary@cftc.gov.

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:

(PArchitzel@cftc.gov),

(ASeifert@cftc.gov) or

(RAdriance@cftc.gov).

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 ‘‘onesize-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.

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 Commissionrecognized 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 noninstitutional 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

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 38987

2As 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.

3Recognizing 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.

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

Market Characteristics Requirements

Recognized Futures Exchange (RFE) ............... 1. Any commodity;

2. Any trader

Fifteen Core Principles.

Recognized Derivatives Transaction Facility

(DTF) 2.

1. Only commodities:

(a) included in box below; or

(b) individual contracts on a case-by-case

basis; or

2. Only commercial traders

Seven Core Principles.

Exempt Multilateral Transaction Facility (Exempt MTEF).1. Only for the following commodities:

(a) a debt obligation;

(b) a foreign currency;

(c) an interest rate;

(d) an exempt security

(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

1. Anti-fraud section of the CEA;

2. Anti-manipulation section of the CEA; and

3. May not hold self out as regulated.

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.

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 internationallyaccepted 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.’’

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

38988 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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.

1974, no contracts were cash-settled.

Today, many are. Over the past twentyfive 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 decisionmaking. 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, exchangetraded 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

§ 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 § 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?

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 nonnegotiable, 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.

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 38989

5 5 H.R. Rep. No. 978, 102d Cong., 2d Sess. 82–

83 (1992).

6For 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).

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 nonelectronic 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 § 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 § 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

§ 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

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.

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

38990 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

7The 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-bycase determination would be recognized as a DTF

for that contract or contracts only upon CFTC

approval. 8Proposed 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.

9Facilities 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.

10They 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.

11Many 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.

12For 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.

13Certain 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.

14Although 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.

15A 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.

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 noneligible 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

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

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.

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.

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

§ 5.2 of the Commission’s regulations, or

must apply to the Commission for

recognition as a DTF under part 37.

Under proposed § 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

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 § 37.3 and the

applicant and/or its rules or procedures

do not violate the Act or the

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 38991

16The 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.

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

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

38992 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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.

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

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.

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

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.’’

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.

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 noninstitutional participants.20

The Commission is also proposing to

amend § 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 § 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 selfregulatory duties under the Act.21

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

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

38994 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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:

§ 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:

§ 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

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

§ 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 fortyfive 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

38996 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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, §§ 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

§§ 5.1 through 5.4 are proposed to be

revised to read as follows:

§ 5.1 Listing contracts for trading by

exchange certification.

(a) Notwithstanding the provisions of

section 4(a)(1) of the Act or § 33.2 of this

chapter, a board of trade that has been

recognized by the Commission as a

recognized futures exchange under

§ 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 § 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 § 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.

§ 5.2 Listing products for trading by

derivatives transaction facilities.

Notwithstanding the provisions of

section 4(a)(1) of the Act or § 33.2 of this

chapter, a recognized derivatives

transaction facility under § 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.

§ 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

§ 38.3 of this chapter or a recognized

derivatives transaction facility under

§ 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

§ 38.3 of this chapter or by a derivatives

transaction facility under § 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;

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(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 fortyfive 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 fasttrack 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.

§ 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 §§ 5.1 or 5.3 of this

part that has become dormant may be

relisted for trading additional months

pursuant to the procedures of § 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 § 5.3 of this part and that has

become dormant may be relisted for

trading additional months pursuant to

the procedures of § 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 § 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:

§ 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

38998 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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).

§ 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.

§ 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.

§ 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.

§ 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 §§ 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:

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

§ 36.1 Definitions.

As used in this part:

(a) Eligible participant means and

shall be limited to the parties or entities

listed in § 35.1(b)(1)–(11) of this chapter;

and

(b) Multilateral transaction execution

facility means an electronic or nonelectronic 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.

§ 36.2 Exemption.

A contract, agreement or transaction

traded on a multilateral transaction

execution facility as defined in § 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

§ 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

§ 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.

§ 36.3 Enforceability.

(a) Notwithstanding the exemption in

§ 36.2, sections 2(a)(1)(B), 4b, and 4o of

the Act and § 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.

39000 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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.

§ 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 §§ 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.

§ 37.2 Exemption.

Notwithstanding § 37.1(a)(1), a

contract, agreement or transaction

traded on a multilateral transaction

execution facility as defined in § 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 § 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 § 36.2(b) of this chapter or has been

found by the Commission on a case-bycase 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 § 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

§ 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 § 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;

§ 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

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

§ 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 § 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 § 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 § 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 §§ 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 § 37.4(b)(3) shall be submitted to the

Commission pursuant to § 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.

§ 37.5 Enforceability

(a) Notwithstanding the exemption in

§ 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 §§ 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.

§ 37.6 Fraud in connection with Part 37

transactions.

It shall be unlawful for any person,

directly or indirectly, in or in

39002 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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 § 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 nonroutine 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 nonroutine basis, direct supervision of the

market. Appropriate objective testing and

review of any automated systems should

occur initially and periodically to ensure

proper system functioning, adequate capacity

and security. The analysis of data collected

should be suitable for the type of information

collected and should occur in a timely

fashion. A 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 § 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.

§ 38.1 Scope.

(a) Except for commodities subject to

paragraph (a) of this section, the

provisions of the exemption in § 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,

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

§ 38.2 Exemption.

Notwithstanding § 38.1(b), a contract,

agreement or transaction traded on a

multilateral transaction execution

facility as defined in § 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 § 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 § 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;

§ 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

39004 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

determinations. The recognized futures

exchange must have a means to address

conflicts of interest in making decisions

and access to, and use of, material nonpublic 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.

§ 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 § 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 § 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 § 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 §§ 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 § 38.4(b)(3) shall

be submitted to the Commission

pursuant to § 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.

§ 38.5 Enforceability

(a) Notwithstanding the exemption in

§ 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 §§ 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

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39005

or procedure, or to take or refrain from

taking a specific action.

§ 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 § 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 § 5.1 and

Part 5, Appendix A of this chapter.

Subsequent products may be listed for

trading by self-certification under § 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 spotmonth liquidations. Spot-month limits for

physical-delivery markets are appropriately

set at no more than 25 percent of the

estimated deliverable supply. For cashsettled 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

39006 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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 decisionmaking 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.

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

39008 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

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:

§ 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

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1, 3, 4, 140, 155 and 166

RIN 3038–AB56

Rules Relating to Intermediaries of

Commodity Interest Transactions

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rules.

SUMMARY: On February 22, 2000, a staff

task force of the Commodity Futures

Trading Commission (‘‘CFTC’’ or

‘‘Commission’’) submitted a report to

the CFTC’s Congressional oversight

committees entitled A New Regulatory

Framework. To further the regulatory

reform process, the Commission is

proposing to revise its rules relating to

intermediation of commodity futures

and commodity options (‘‘commodity

interest’’) transactions.

The proposed new rules would

provide greater flexibility in several

areas. To ease barriers to entry for

persons seeking registration as futures

commission merchants (‘‘FCMs’’) or

introducing brokers (‘‘IBs’’), the

Commission would: Provide a

simplified registration procedure for

those persons wishing to operate as

FCMs or IBs only on recognized

derivatives transaction facilities ‘‘DTFs’’

for institutional customers, and who are

regulated by other federal financial

regulatory agencies; and eliminate the

requirement to submit a certified

financial report as part of the standard

registration application for FCMs and

IBs. For all registrants, the Commission

would eliminate its rule requiring ethics

training, replacing it with a Statement of

Acceptable Practices. In addition, the

Commission would respond favorably to

a rule change of the National Futures

Association (‘‘NFA’’) that would relieve

sales personnel dealing only with

institutional customers of the

requirement to pass a proficiency test.

The Commission is also proposing to

amend the definition of the term

‘‘principal’’ in Rule 3.1(a), mainly to

eliminate inclusion of certain types of

officers of a firm, and to make

conforming amendments to other rules.

Account opening procedures would

be simplified to allow for all required

disclosures (with the exception of

arbitration agreements) to be

acknowledged with a single signature,

which may be an electronic signature.

The obligation for FCMs and IBs to

provide a specific disclosure statement

would also be eliminated for a greater

number of spohisticated customers.

Electronic transmission of account

statements would also be permitted, and

the Commission’s rules as to close-out

of offsetting positions would be

streamlined to allow for customer

choice.

Further, the Commission proposes to

expand the range of instruments in

which FCMs may invest customer

funds. The Commission also requests

comment concerning whether customers

should be allowed to ‘‘opt out’’ of the

rules requiring segregation of customer

funds, and whether FCMs should be

allowed to maintain, in the same

customer segregated account, funds

used for the purpose of securing or

margining instruments other than those

currently permitted. Finally, the

Commission is considering the issuance

of a separate order revising its previous

pronouncements regarding the

treatment of customer funds on deposit

with FCMs for the purpose of trading on

foreign markets.

DATES: Comments must be received on

or before August 7, 2000.

ADDRESSES: Comments on the proposed

rules should be sent to Jean A. Webb,

Secretary, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC

20581. Comments may be sent by

facsimile transmission to (202) 418–

5521, or by e-mail to secretary@cftc.gov.

Reference should be made to ‘‘Proposed

Rules Concerning Intermediaries.’’

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, Paul H. Bjarnason, Jr., Special

Advisor for Accounting Policy (with

respect to Rule 1.25 concerning

investment of customer funds), or

Andrew J. Shipe, Attorney-Advisor,

Division of Trading and Markets,

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581. Telephone: (202) 418–5450.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Proposed Rules

A. Core Principle One: Registration

1. Definition of the Term ‘‘Principal’’

2. Special Procedures Available to Firms

Subject to Securities or Banking

Regulation

3. Standard Application Procedures for

FCMs and IBs

B. Core Principles Two and Six: Fitness

and Supervision

1. Proficiency Testing and Ethics Training

for Individual Registrants

2. Reforms Relating to Statutory

Disqualification From Registration

C. Core Principle Three: Financial

Requirements

1. Trading by Non-Institutional Customers

on DTFs