79–010

Calendar No. 766

106TH CONGRESS REPORT

2d Session " ! SENATE 106–390

COMMODITY FUTURES MODERNIZATION ACT OF 2000

AUGUST 25, 2000.—Ordered to be printed

Mr. LUGAR, from the Committee on Agriculture, Nutrition, and

Forestry, submitted the following

REPORT

The Committee on Agriculture, Nutrition, and Forestry, having

considered an original bill to reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-thecounter derivatives; and for other purposes, reports favorably

thereon and recommends that the bill do pass.

CONTENTS

Page

I. Purpose, need and background ..................................................................... 1

II. Section-by-section analysis ............................................................................ 5

III. Legislative history and votes in the Committee .......................................... 13

IV. Regulatory impact statement ........................................................................ 16

V. Budgetary impact of the bill ......................................................................... 17

VI. Changes in existing law ................................................................................ 20

I. PURPOSE, NEED AND BACKGROUND

Signed into law in 1974, the modern Commodity Exchange Act

(‘‘CEA’’ or ‘‘the Act’’) is the body of law that governs the futures industry in the United States. Enforced by the Commodity Futures

Trading Commission (‘‘CFTC’’), this Act attempts to ensure that futures market participants are not defrauded and that the markets

remain efficient, transparent and free from manipulation. Authorization for the funding of the CFTC expires on September 30th of

this year.

The Commodity Futures Modernization Act of 2000 would reauthorize appropriations for the CFTC for five additional years and

would reform the CEA in three primary ways. First, it would incorporate the unanimous recommendations of the President’s Working

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Group (‘‘Working Group’’ or ‘‘PWG’’), consisting of the principals

from the U.S. Treasury Department (‘‘Treasury’’), the Federal Reserve System (‘‘Fed’’), the Securities and Exchange Commission

(‘‘SEC’’) and the CFTC on the proper legal and regulatory treatment of over-the-counter (‘‘OTC’’) derivatives. Second, it would codify the regulatory relief proposal of the CFTC to ensure that futures exchanges are appropriately regulated and remain competitive. Third, this legislation would reform the Shad-Johnson jurisdictional accord, which sought to establish jurisdictional boundaries

between the agencies and banned the trading of single stock futures 18 years ago.

Derivative instruments, both exchange-traded and those traded

over-the-counter, have played a significant role in our economy’s

current economic expansion due to their innovative nature and

their risk-transferring attributes. According to the International

Swaps and Derivatives Association, the global derivatives market

has a notional value that exceeds $58 trillion. Identified by Alan

Greenspan as the ‘most significant event in finance of the past decade,’ the development of the derivatives marketplace has substantially added to the productivity and wealth of our nation.

Derivatives enable companies to unbundle and transfer risk to

those entities who are willing and able to accept it. By doing so,

efficiency is enhanced as firms are able to concentrate on their core

business objectives. A farmer can purchase a futures contract, one

type of derivative, in order to lock in a price for a crop at harvest.

Automobile manufacturers, whose profits earned overseas can fluctuate with changes in currency values, can minimize this uncertainty through derivatives, allowing them to focus on the business

of building cars. Banks significantly lessen their exposure to interest rate movements by entering into derivatives contracts known as

interest rate swaps, which enable these institutions to hedge their

risk by exchanging variable and fixed rates of interest.

The CEA primarily governs one class of derivative transaction—

futures contracts. The Act requires that these contracts be traded

on a CFTC-regulated futures exchange. If a futures contract is

being traded off of an exchange, a court of law could rule the contract to be illegal and unenforceable. When Congress enacted the

CEA and created the CFTC to enforce it, the meanings of ‘‘futures

contract’’ and ‘‘exchange’’ were relatively apparent and the OTC derivatives business was in its infancy. However, in the 26 years

since the statute’s creation, the growth of the OTC derivatives market has significantly outpaced the exchange-traded futures market.

Along with this expansion, the boundaries between exchanges and

OTC markets and between futures and swaps began to blur both

practically and in legal status and treatment.

CFTC CONCEPT RELEASE

In 1998, the CFTC issued its concept release on OTC derivatives,

which was perceived by many as foreshadowing possible regulation

of these instruments as futures. The possibility of regulatory action

had considerable ramifications, given the size and importance of

the OTC market. This action significantly magnified the longstanding legal uncertainty surrounding these instruments, raising

concerns in the OTC market, including suggestions it would cause

portions of the business to move overseas.

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This prospect led the Treasury, the Fed and the SEC to oppose

the concept release and request that Congress enact a moratorium

on the CFTC’s ability to regulate these instruments until after the

Working Group could complete a study on the issue. As a result,

Congress passed a six-month moratorium on the CFTC’s ability to

regulate OTC derivatives. In November 1999, the Working Group

completed its unanimous recommendations on OTC derivatives and

presented Congress with these findings.

ADOPTION OF PRESIDENT’S WORKING GROUP REPORT

This legislation adopts many of the recommendations of the PWG

report. The bill contains several mechanisms for ensuring that

legal certainty is attained and that certain transactions remain

outside the CEA. The electronic trading facility exclusion would exclude transactions in certain financial and other intangible commodities from the Act if conducted: (1) on a principal to principal

basis; (2) between institutions or persons with high net worth; and

(3) on an electronic trading facility. A second exclusion would exclude certain transactions from the CEA if (1) conducted between

institutions or persons with high net worth; and (2) not traded on

a trading facility. A third exclusion confirms and clarifies the

Treasury Amendment language already contained in the CEA by

excluding all transactions in foreign currency and government securities from the Act unless those transactions are futures contracts and traded on an organized exchange. As recommended by

the Working Group, the bill would clarify the CFTC’s jurisdiction

over off-exchange retail futures transactions in foreign currency

that are not effected with a regulated entity. A fourth exclusion for

hybrid securities and depository instruments clarifies circumstances under which structured securities and depository instruments with embedded futures- and commodity option-like payments are excluded from regulations under the CEA. Another important recommendation of the PWG was to authorize clearing organizations, including futures clearinghouses, to clear OTC derivatives in an effort to lessen systemic risk. This bill incorporates this

recommendation and establishes a regulatory framework for this

activity.

ADOPTION OF THE CFTC’S REGULATORY MODERNIZATION PROPOSAL

The second major portion of this legislation addresses regulatory

modernization and reform for the futures industry. When the CEA

was enacted in 1974, the futures industry was primarily agricultural in nature. Farmers, agri-businesses and speculators traded

futures contracts in open-outcry pits on futures exchanges in an effort to transfer volatile price risk. Realizing that futures trading

was an effective way to transfer all types of risks, the financial sector began to develop and trade financial futures, and this market

has flourished. Today non-agricultural futures comprise approximately 85 percent of the volume on U.S. futures exchanges. With

the widespread adoption of computer technology, electronic exchanges began to compete head-to-head with open-outcry futures

exchanges at a fraction of the cost. Last year witnessed the SwissGerman electronic futures exchange, Eurex, overtaking the Chicago

Board of Trade as the global leader in futures trading volume.

Many industry observers believe that the regulatory structure of

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the CEA has had a significant competitive impact on the U.S. futures exchanges and has inhibited the development of the OTC

markets.

In February of 2000, the CFTC issued a proposal that would provide regulatory reform to futures exchanges and their customers.

Instead of listing specific requirements for complying with the

CEA, the proposal would require exchanges to meet internationally

agreed-upon core principles. The CFTC proposal creates tiers of

regulation for exchanges based on whether the underlying commodities being traded are susceptible to manipulation or whether the

users of the exchange are limited to institutional customers.

The legislation incorporates a similar framework and provides for

three levels of regulation. A board of trade that is designated as

a contract market would receive the highest level of oversight due

to the fact that products offered on a contract market are susceptible to manipulation or are offered to retail customers. The bill

provides for a second level of regulation under which, in lieu of contract market designation, a board of trade may register as a derivatives transaction execution facility (‘‘DTEF’’) if the products being

offered by the board of trade are not susceptible to manipulation

and are traded among institutional customers or retail customers

who utilize large futures commission merchants (‘‘FCMs’’). A third

option provided in the bill allows a board of trade to choose to be

an exempt board of trade (‘‘XBOT’’) and not be subject to the Act

(except for the CFTC’s anti-manipulation authority) if the products

being offered are traded among institutions or high net worth persons and the instruments are not susceptible to manipulation. This

bill would allow a board of trade that is a DTEF or an XBOT to

opt to trade derivatives that are otherwise excluded from the Act.

To the extent that these products are traded on these facilities, the

CFTC would have exclusive jurisdiction over them. With this provision, it was the intent of the Committee to provide these facilities

that trade certain specified derivatives with a choice—if regulation

is beneficial, the facility may choose to be regulated. If not, the facility may choose to be excluded or exempted from the Act.

REFORM OF THE SHAD-JOHNSON JURISDICTIONAL ACCORD

The third portion of the bill addresses the Shad-Johnson jurisdictional accord. In 1982, SEC Chairman John Shad and CFTC Chairman Phillip Johnson reached an agreement on allocating between

the agencies jurisdiction over futures on securities. Known as the

Shad-Johnson Accord, this agreement prohibited the trading of futures on non-exempt securities and narrow-based indices of non-exempt securities (as defined by the Securities Act of 1933 and the

Securities Exchange Act of 1934), allocated to the SEC jurisdiction

over options on securities and securities indices, and allocated to

the CFTC jurisdiction over futures on exempt securities and broadbased indices of securities.

Many have suggested that the Shad-Johnson accord, meant as a

temporary agreement, should now be repealed. The Working Group

unanimously agreed that the Accord can be repealed if regulatory

disparities are resolved between the regulation of futures and securities. In April 2000, the General Accounting Office (‘‘GAO’’) found

no legitimate policy reason for maintaining the ban on single stock

futures. The GAO noted in its report that these products are alVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
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ready being traded in foreign markets, synthetically in the options

markets, and that economically equivalent transactions are being

conducted in the OTC market.

Despite an eight month effort to get the two agencies to reach

an agreement on lifting the ban on single stock futures, the SEC

and the CFTC were unable to come to any agreement before this

bill was introduced. Furthermore, they were unable to reach agreement before the bill was reported out of the Committee despite continued urging from the Chairmen of the Senate Agriculture and

Banking Committees.

This legislation would repeal the prohibition on single stock futures and narrow-based stock index futures. It would allow these

products, termed designated futures on securities, to trade on either a CFTC-regulated contract market or a SEC-regulated national securities exchange or association. The SEC would maintain

its insider trading and anti-fraud enforcement authority over these

products even though traded on a futures exchange and the CFTC

would maintain its anti-manipulation authority, including the ability to enforce its large trader reporting requirements, over these

products even though traded on a national securities exchange or

association. Each agency would be required to provide the other

regulator with notice before exercising these authorities affecting

markets outside their primary jurisdictions. Under the bill, margin

levels on these products would be required to be harmonized with

the options markets. The bill allows for the creation of an Intermarket Margin Board, consisting of members from the Fed, the

CFTC and the SEC, to set and maintain margin levels for these

products. The bill provides a one year period before the repeal of

Shad-Johnson is effective in order to provide the regulators adequate time to implement the regulatory safeguards contained in

the bill.

The various sections of this legislation have support from a broad

spectrum of regulators and industry participants. Input has been

solicited and received throughout the drafting process from numerous groups, including the CFTC, the Treasury, the Fed, the Chicago Board of Trade, the Chicago Mercantile Exchange, the New

York Mercantile Exchange, the International Swaps and Derivatives Association, the National Futures Association, the Coalition of

Commercial and Investment Banks, the Securities Industry Association, the Coalition of Commercial and Investment Banks, the

American Farm Bureau Federation, the National Cattlemen’s Beef

Association, the American Bankers Association, the New York

Stock Exchange, the U.S. Securities Markets Coalition, the Bond

Market Association, the Foreign Exchange Committee, the Futures

Industry Association, and the Financial Services Roundtable.

II. SECTION-BY-SECTION ANALYSIS

Sec. 1. Short Title and Table of Contents. The Act is entitled the

Commodity Futures Modernization Act of 2000.

Sec. 2. Purposes. The section lists 8 purposes for the bill including reauthorizing and streamlining the CEA; eliminating unnecessary regulation for the futures exchanges; clarifying the jurisdiction

of the CFTC over certain retail foreign currency transactions;

transforming the role of the CFTC; providing a legislative and regulatory framework for the trading of futures on securities; proVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
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moting innovation and reducing systemic risk for futures and OTC

derivatives; allowing clearing of OTC derivatives; and enhancing

the competitive position of the U.S. financial institutions and markets.

Sec. 3. Definitions. The section adds definitions to section 1(a) of

the CEA for the following terms: derivatives clearing organization;

designated future on a security; electronic trading facility; eligible

commercial participant; eligible contract participant; exclusion-eligible commodity; exempted security; financial commodity; financial

institution; hybrid instrument; national securities exchange; option;

organized exchange; registered entity; security and trading facility.

Sec. 4. Agreements, Contracts, and Transactions in Foreign Currency, Government Securities and Certain Other Commodities. The

section strikes clause (ii) of subparagraph 2(a)(1)(A) (the current

law Treasury Amendment) and replaces it with a new subsection

2(c), which states that nothing in the CEA applies to transactions

in foreign currency, government securities and other similar instruments unless these instruments are futures or commodity options

traded on an organized exchange. The bill defines ‘‘organized exchange’’ as a trading facility that either serves retail customers,

permits brokered or similar agency trades, or performs a self regulatory role. New section 2(c)(2) also excludes from CFTC regulation

foreign currency transactions (other than those conducted on an organized exchange) between specified regulated entities and persons

who are not eligible contract participants (i.e. retail customers).

These excluded transactions include transactions executed on an

electronic facility on which only a single firm is entitled to act as

a market-maker and on which non-market maker counterparties

may not accept bids and offers of other non-market-maker

counterparties (either directly or through the market-maker running a matched book in which non-market-maker counterparties’

bids and offers become bids and offers of the market-maker).

The Committee intends that new section 2(c) of the Commodity

Exchange Act codify the decision in Dunn v. Commodity Futures

Trading Commission, 519 U.S. 465 (1997). Accordingly, the meaning of the phrase ‘‘transactions in’’ that is referenced in section 2(c)

should be interpreted in a manner consistent with the holding of

that decision. In making these clarifications, the Committee does

not intend to draw any distinction between the use of the words

‘‘in’’ or ‘‘involving’’ contained elsewhere in the CEA.

Sec. 5. Legal Certainty for Over-the-Counter Transactions. The

section amends section 2 of the CEA to create a new subsection

2(d), which provides two exclusions from the CEA for OTC derivatives. Paragraph (1) of subsection 2(d) provides that nothing in the

CEA applies to transactions in an exclusion-eligible commodity if

the transaction: (1) is between eligible contract participants (institutions or high net worth persons) and (2) is not executed on a

trading facility. The second exclusion in paragraph 2(d)(2) provides

that nothing in the CEA shall apply to a transaction in an exclusion-eligible commodity if the transaction: (1) is entered into on a

principal to principal basis between parties trading for their own

accounts; (2) is between eligible contract participants (large, institutional entities) and (3) is executed on an electronic trading facility.

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The exclusion for transactions conducted on a trading facility

only applies to principal to principal transactions. The exclusion

does not apply if an eligible contract participant: (1) acts as broker

or in an equivalent agency capacity for any other party; or (2)

trades in its own name for the economic risk and benefit of any

other party. This limitation does not preclude an eligible contract

participant from transacting with a counterparty and contemporaneously entering into an economically identical hedging transaction, for the eligible contract participant’s own account and risk,

on a trading facility. The limitation also does not preclude certain

regulated eligible contract participants from acting in a discretionary investment management or equivalent fiduciary capacity

for another eligible contract participant as contemplated under the

definition of eligible contract participant.

Finally, transactions between participants that are otherwise

conducted on a principal to principal basis are not ineligible for the

exclusion merely because the trading facility itself or its sponsor

acts in the capacity of an inter-participant broker by bringing buyers and sellers together.

Sec. 6. Excluded Electronic Trading Facilities. The section

amends section 2 of the CEA to create a new subsection 2(e) that

clarifies that trading instruments that are otherwise excluded from

the CEA on an electronic trading facility does not subject the transactions to regulation under the CEA. Paragraph (2) of subsection

2(e) states that nothing in the CEA shall prohibit a contract market or derivatives transaction execution facility from establishing

and operating an excluded electronic trading facility.

Sec. 7. Hybrid Instruments. The section amends section 2 of the

CEA to create a new subsection 2(f) that provides that nothing in

the CEA applies to a hybrid instrument that is predominantly a security or depository instrument. Paragraph (2) of subsection 2(f) defines predominant in terms of any hybrid instrument in which (1)

the issuer of the instrument receives payment in full of the purchase price at the time the instrument is delivered; (2) the purchaser is not required to make additional payments; (3) the issuer

of the instrument is not subject to mark-to-market margining requirements; and (4) the instrument is not marketed as a futures

contract. Paragraph (3) of subsection 2(f) clarifies that mark-tomarketing requirements do not include the obligation of an issuer

of a secured debt instrument to increase the amount of collateral

securing its obligations under the instrument.

New section 2(f)(2)(C) refers to mark-to-market margining requirements between the purchaser and the issuer of the hybrid instrument, and it is not intended to preclude a hybrid instrument

from qualifying for the exclusion based on the issuer being subject

to mark-to-market margining requirements when hedging the initial transaction on a regulated futures exchange or in another market.

Sec. 8. Futures on Securities. Subsection (a) amends section 2 of

the CEA by adding a new subsection 2(g) that repeals the Shad

Johnson jurisdictional accord. The new paragraph 2(g)(1) is a savings clause to ensure that excluded OTC equity derivatives remain

outside the CEA and the jurisdiction of the CFTC. This paragraph

also prohibits the CFTC from designating a board of trade as a contract market in options on securities (as in current law).

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Paragraph (2) allows the trading of futures on security indexes

on contract markets and gives the CFTC exclusive jurisdiction in

regulating these futures. In order for these products to be designated as a contract market, the contracts must be cash settled

and must not be susceptible to manipulation (applies to both the

price of the contract or the underlying securities (or an option on

such securities)).

Paragraph (3) allows the trading of designated futures on securities (defined in the bill as a contract for future delivery on a single

non-exempted security, an index based on fewer than 5 non-exempted securities or any index in which a single stock predominates by its value accounting for more than 30 percent of the

index’s total value). The Act authorizes these products to be traded

on designated contract markets and national securities exchanges

or associations.

Paragraph (4) provides criteria for contract market designation of

these products including: cash settlement; real-time audit trails;

insusceptibility to price manipulation (both of the contract and the

underlying stock or an option on that stock); eligibility for listing

on a national securities exchange; margin requirements; conflict of

interest rules; and making information available to the regulators.

Paragraph (5) authorizes the SEC to enforce the securities laws

related to insider trading and fraud with respect to designated futures on securities listed on a contract market after providing the

CFTC with notice. This paragraph also requires the SEC and the

CFTC, beginning three years from the date of enactment, to jointly

compile a report on the implementation of this new authority and,

four years after the date of enactment, to submit the report to Congress.

Paragraph (6) authorizes the CFTC to enforce its large trader reporting and other anti-fraud and anti-manipulation authorities for

designated futures on securities listed on a national securities exchange after providing the SEC with notice. It requires national securities exchanges to provide the CFTC with information to enforce

these provisions.

Paragraph (7) provides the process for listing a designated future

on a security on either a futures exchange or a national securities

exchange.

As in current law, paragraph (8) provides the Federal Reserve

with the authority to set margin requirements and delegate this

authority. The paragraph would allow the Fed to create a three

member board consisting of principals of the CFTC, SEC and the

Fed, or their confirmed designees to set and maintain margin levels

on designated futures on securities. Paragraph (9) would allow futures commission merchants to offer to U.S. customers futures on

foreign stock or foreign stock indices listed on foreign boards of

trade as long as the U.S. is not the primary market for such products. New section 2(g)(9) of the Act confirms the scope of the Commission’s interest in futures contracts on foreign securities or foreign securities indices listed for trading on a foreign exchange. Except as set forth in this section, the Commission, consistent with

existing law, will have no authority to review or approve any futures contract (or option thereon) on a foreign security or foreign

security index listed for trading on a foreign exchange.

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Paragraph (10) mandates that a registered futures association

adopt customer suitability rules for the trading of designated futures on securities.

Subsection (b) of section 8 of the bill contains a sense of the Senate that Congress, to the extent necessary, should harmonize the

tax treatment of equity options and designated futures on securities and the transaction fees for equity options and designated futures on securities prior to section 8 of the bill taking effect.

Sec. 9. Exempted Transactions. The section adds a new section

that would allow for an exemption for transactions other than agricultural products that are traded between institutional entities on

a bilateral basis. The CFTC would retain its anti-fraud, anti-manipulation authorities over these transactions.

Although this exemption is limited to transactions between eligible contract participants that occur off of a trading facility, the

CFTC is encouraged to use its current exemptive authority, as appropriate and consistent with the public interest, under section 4(c)

of the CEA to exempt transactions between eligible contract participants that occur on an electronic trading facility.

Sec. 10. Protection of the Public Interest. Replaces section 3 of the

CEA with a new section listing the responsibilities of the CFTC in

protecting the public interest.

Sec. 11. Prohibited Transactions. Re-writes the current section 4c

for clarity.

Sec. 12. Designation of Boards of Trade as Contract Markets.

Strikes current law sections 5 and 5a and adds a new section 5 providing for the designation of boards of trade as contract markets.

Subsection (b) contains criteria that boards of trade must meet in

order to be designated as a contract market. These include establishing and enforcing rules preventing market manipulation; ensuring fair and equitable trading; specifying how the trade execution

facility operates—including any electronic matching systems; ensuring the financial integrity of transactions; disciplining members

or market participants who violate the rules; allowing for public access to the board of trade rules and enabling the board of trade to

obtain information in order to enforce its rules. Existing contract

markets would be automatically designated ‘‘contract markets’’

under this section.

Subsection (d) sets out the 17 core principles that must be met

to maintain designation as a contract market. This subsection provides that a board of trade must: monitor and enforce compliance

with the contract market rules; list only contracts that are not susceptible to manipulation; monitor trading to prevent manipulation,

price distortion and delivery or settlement disruptions; adopt position limits for speculators; adopt rules to provide for the exercise

of emergency authority, including the authority to liquidate or

transfer open positions, suspend trading and make margin calls;

make available the terms and conditions of the contracts and the

mechanisms for executing transactions; publish daily information

on prices, bids, offers, volume, open interest, and opening and closing ranges; provide a competitive, open and efficient market and

mechanism for executing transactions; provide for the safe storage

of all trade information in a readily usable manner to assist in

fraud prevention; provide for the financial integrity of the contracts, the futures commission merchants and customer funds; proVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
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tect market participants from abusive practices; provide for alternative dispute resolutions for market participants and intermediaries; establish and enforce rules regarding fitness standards

for those involved in market governance; ensure that the composition of the governing board represents the market participants and

a diversity of interests (in the case of mutually owned exchanges);

maintain records and make them available at any time for inspection by the Attorney General; and avoid taking any action that restrains trade or imposes anticompetitive burdens on the markets.

Sec. 13. Derivatives Transaction Execution Facilities. The section

amends the CEA by adding a new section 5a authorizing a new

trading designation, the derivatives transaction execution facility

(DTEF). Under subsection (b), a board of trade may elect to operate

as a DTEF rather than a contract market if it meets the DTEF

designation requirements. A registered DTEF may trade any nondesignated futures contract if the commodity underlying the contract: (1) has a nearly inexhaustible supply; (2) is not susceptible

to manipulation; (3) does not have a cash market in commercial

practice; or (4) is determined by the CFTC (based on market characteristics and the facility’s surveillance history, capacity, and selfregulatory role) to be unlikely to be susceptible to manipulation.

This subsection allows eligible commercial participants to trade on

a DTEF contracts in non-agricultural commodities. In order to be

eligible to trade on a DTEF, a person must (1) be authorized to

trade on the DTEF by the exchange and (2) be either an eligible

contract participant or a person trading through a registered FCM

that has capital of at least $20,000,000. For purposes of this section, the term ‘authorized’ should not be construed to require a

board of trade to approve individually every customer trading

through a qualified FCM on a DTEF.

Boards of trade that have been designated as contract markets

may operate DTEFs if they provide a separate location for DTEF

trading or, in the case of an electronic system, identify whether the

trading is on a DTEF or contract market.

Subsection (c) provides requirements for boards of trade that

wish to register as DTEFs, including: establishing and enforcing

trading rules that will deter abuses and provide market participants impartial access to the markets and capture information that

may be used in rule enforcement; define trading procedures to be

used; and provide for the financial integrity of DTEF transactions.

To maintain registration as a DTEF, the board of trade must

comply with 8 core principles listed in subsection (d): maintain and

enforce rules; ensure orderly trading and provide trading information to the CFTC; publicly disclose information regarding contract

terms, trading practices, and financial integrity protections; provide

information on prices, bids and offers to market participants as

well as daily information in volume and open interest for the actively traded contracts; establish and enforce rules regarding fitness standards for those involved in DTEF governance; maintain

records and make them available at any time for inspection by the

Attorney General; and avoid taking any action that restrains trade

or imposes anticompetitive burdens on the markets.

Subsection (e) allows a broker-dealer or a bank in good standing

to act as an intermediary on behalf of its customers and to receive

customer funds serving as margin or security for the customer’s

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transactions. If the broker-dealer holds the DTEF customer funds

or accounts for more than 1 business day, the broker-dealer must

be a registered FCM and a member of a registered futures association. The CFTC and SEC are to coordinate in adopting rules to implement this subsection.

In complying with the implementation of this subsection, the

Commission, in coordination with the SEC, shall endeavor to subject broker-dealers and financial institutions trading on a DTEF to

record-keeping and reporting requirements that are comparable to

and consistent with the requirements faced by futures commission

merchants trading on a DTEF.

Under (f), the CFTC may adopt regulations to allow FCMs to

provide their customers with the right to opt out of segregating

customer funds for purposes of trading on the DTEF.

Subsection (g) clarifies that a DTEF may trade derivatives that

otherwise would be excluded from the CEA. The CFTC has exclusive jurisdiction over these instruments to the extent that these instruments are traded on a DTEF.

Sec. 14. Derivatives Clearing Organizations. The section amends

the CEA to create a new section 5b regarding derivatives clearing

organizations. Under subsection (a), these clearing entities, which

are allowed to clear derivatives (that are not a security), must register with the CFTC and meet a set of 13 core principles set out

in subsection (d), including principles on financial resources of the

clearing facility, participant eligibility, risk management systems,

settlement procedures, treatment of client funds, default rules, rule

enforcement, system safeguards, reporting, record keeping, public

information disclosure, information sharing, and minimizing competitive restraints.

Under subsection (b), a derivatives clearing organization will not

have to register with the CFTC if it is registered with another federal financial regulator and it does not clear futures. This is intended to encompass those clearing facilities registered with other

financial regulators as well as those clearing facilities that have

previously received an exemption from registration from these financial regulators. Under subsection (c), a derivatives clearing organization that is exempt from registration may opt to register

with the CFTC. Subsection (e) provides that an existing clearing

entity that clears futures contracts on a designated contract market

will automatically be deemed a derivatives clearing organization

for purposes of this section.

Sec. 15. Common Provisions Applicable to Registered Entities.

The section amends the CEA to create a new section 5c that contains provisions affecting all registered entities (contract markets,

derivatives transaction execution facilities and derivatives clearing

organizations).

Subsection (a) would allow the CFTC to issue or approve interpretations to describe what would constitute an acceptable business

practice under the core principles for registered entities.

Subsection (b) would allow a registered entity to delegate its self

regulatory functions to a registered futures association, while specifying that responsibility for carrying out these functions remain

with the registered entity.

Subsection (c) would enable the registered entity to trade new

products or adopt or amend rules by providing the CFTC (and the

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Treasury Department for contracts in government securities) a

written certification that the new contract or new rule or amendment complies with the CEA. This subsection would allow a registered entity to request that the CFTC grant prior approval of a

new contract, new rule or rule amendment. This subsection would

require the CFTC to pre-approve any rule changes with regard to

open interest agricultural contracts.

Subsection (d) grants the CFTC the authority to informally resolve potential violations of the core principles for registered entities.

Subsection (e) provides that nothing in this section limits or affects the emergency authorities of the CFTC.

Subsection (f) directs the CFTC to implement core principles for

intermediaries. In carrying out this subsection, the Commission

shall conduct a study of the Act and the Commission’s rules, regulations and orders governing the conduct of persons required to be

registered with the Commission. Within one year after the date of

the enactment of the bill, the Commission would file a report with

the Senate Committee on Agriculture, Nutrition and Forestry and

the House Committee on Agriculture. The report would identify: (1)

the core principles and interpretations of acceptable business practices that the Commission has adopted as substitutes for the provisions of the Act and the Commission’s rules and regulations thereunder; (2) the rules and regulations that the Commission has determined must be retained and the reasons therefor; (3) the extent

to which the Commission believes that it can effect the changes

identified in paragraph (1) through its exemptive authority under

section 4(c) of the Act; and (4) the regulatory functions that the

Commission currently performs that can be delegated to a registered futures association and the regulatory functions that the

Commission has determined must be retained and the reasons

therefor.

Subsection (g) adds a new provision (sec. 4c(a)(3)(B)) to allow futures commission merchants to trade futures off the floor of a futures exchange as long as the board of trade allows such transactions and the FCMs report, record and clear the transactions in

accordance with the rules of the contract market or derivatives

trading execution facility.

Sec. 16. Exempt Boards of Trade. The section amends the CEA

to create a new section 5d regarding exempt boards of trade. Under

subsections (a) and (b), futures contracts traded on an exempt

board of trade would be exempt from the CEA if (1) participants

are eligible contract participants (large institutional investors) and

(2) the commodity underlying the futures contract is not a security,

has an inexhaustible deliverable supply, is not subject to manipulation, or has no cash market. Subsection (c) subjects futures contracts traded on an exempt board of trade to the anti-manipulation

provisions of the CEA. Under subsection (d), if the CFTC finds that

an exempt board of trade is a significant source of price discovery

for the underlying commodity, the board of trade shall disseminate

publicly on a daily basis trading volume, opening and closing price

ranges, open interest, and other trading data as appropriate to the

market.

Sec. 17. Suspension or Revocation of Designation as Registered

Entity. The section designates current section 5b as 5e and amends

13

it to authorize the CFTC to suspend the registration of a registered

entity for 180 days for any violation of the CEA.

Sec. 18. Authorization of Appropriations. The section amends section 12(d) of the CEA by striking 2000 and reauthorizing appropriations through fiscal year 2005.

Sec. 19. Preemption. The section rewrites paragraph 12(e)(2) of

the CEA for clarity and to conform with changes made in the bill.

Re-states the current provisions that the CEA supersedes and preempts other laws in the case of transactions conducted on a registered entity or subject to regulation by the CFTC (even if outside

the United States), and adds that in the case of excluded electronic

trading facilities, and any agreements, contracts or transactions

that are excluded or covered by a section 4(c) exemption, the CEA

supersedes and preempts state gaming and bucket shop laws (except for the anti-fraud provisions of those laws that are generally

applicable). It is not a requirement that the underlying transaction

be a futures contract or commodity option in order to be eligible for

the preemption from these state law provisions.

Sec. 20. Predispute Resolution Agreements for Institutional Customers. The section amends section 14 of the CEA to clarify that

futures commission merchants, as a condition of doing business,

may require customers that are eligible contract participants to

waive their right to file a reparations claim with the CFTC.

Sec. 21. Consideration of Costs and Benefits. The section amends

section 15 of the CEA to add a new subsection (a) requiring the

CFTC, before promulgating regulations and issuing orders, to consider the costs and benefits of their action. This does not apply to

orders associated with an adjudicatory or investigative process,

emergency actions or findings of fact regarding compliance with

CFTC rules.

Sec. 22. Contract Enforcement Between Eligible Counterparties.

The section amends section 22 of the CEA to provide a safe harbor

so that transactions will not be voidable based solely on the failure

of the transaction to comply with the terms or conditions of an exclusion or exemption from the Act or CFTC regulations.

Sec. 23. Legal Certainty for Swaps. The section provides that

nothing in the bill gives the SEC or CFTC jurisdiction over swap

agreements. It requires the President’s Working Group to conduct

a study on the regulatory treatment of swaps in relation to the securities laws.

Sec. 24. Repeal of Deficiency Orders. The section repeals section

8e of the Commodity Exchange Act.

Sec. 25. Technical and Conforming Amendments. The section

makes technical and conforming amendments throughout the CEA

to reflect changes made by the bill.

Sec. 26. Effective Date. The Act takes effect on the date of enactment, except section 8 (dealing with futures on securities), which

takes effect one year after enactment.

III. LEGISLATIVE HISTORY AND COMMITTEE VOTES

On July 30,1998, the Senate Committee on Agriculture, Nutrition and Forestry held a hearing on the CFTC’s concept release on

OTC derivatives. Many industry observers believed that this document was the first step leading to regulating these transactions as

futures. If these transactions were found to be off-exchange futures,

14

a court of law could rule them to be illegal and unenforceable. This

possibility posed the risk of this trillion dollar industry moving offshore. Federal Reserve Chairman Alan Greenspan, Deputy Treasury Secretary Lawrence Summers and SEC Chairman Arthur

Levitt testified in opposition to the CFTC’s stance and urged Congress to adopt a regulatory moratorium on the CFTC until the

President’s Working Group could study and report to Congress on

this issue. CFTC Chair Brooksley Born testified in support of the

concept release and urged the Committee to refrain from taking

this action. Tom Jasper, managing director of Salomon Smith Barney and William Miller, president of the End Users of Derivatives

Association also testified regarding this subject.

In October 1998, Congress agreed to impose a six month regulatory moratorium on the CFTC with regard to OTC derivatives.

This moratorium was contained in the annual agricultural appropriations bill.

On December 16, 1998, the Senate Committee on Agriculture,

Nutrition and Forestry held a hearing regarding the status of the

CFTC concept release on OTC derivatives and the near collapse of

Long Term Capital Management hedge fund. All five CFTC commissioners testified, including Chair Brooksley Born, Commissioner

David Spears, Commissioner John Tull, Commissioner Barbara

Holum, and Commissioner James Newsome. Testifying on a second

panel were Roger Anderson, Deputy Assistant Secretary for Federal Finance of the Treasury, Patrick Parkinson, Director of the Division of Research and Statistics of the Fed, Richard Lindsay, Director of the Division of Market Regulation of the SEC and Dan

Waldman, General Counsel of the CFTC. A third panel, consisting

of former CFTC chairs, included Susan Philips, Dean of the George

Washington School of Business and Public Management; Wendy

Gramm, James Buchanan Center of George Mason University; William Albrecht, Professor of Economics at the University of Iowa;

and Martin Mayer, Guest Scholar at the Brookings Institute. The

Committee also released for public comment 48 public policy questions regarding CEA reauthorization.

On February 25 and 26, 1999, the Senate and House Agriculture

Committees held a joint Roundtable on Futures, Derivatives and

Public Policy. Hosted by former CFTC chair Phillip Johnson and

National Futures Association President Bob Wilmouth, this roundtable assembled a diverse group of eighteen individuals from the

industry and academia to discuss derivatives policy and possible

legislative solutions. These participants included Jack Coffee, Columbia University; George Crapple, Millburn Ridgefield Corp.;

David Downey, Timber Hill LLC; Jerry Gulke, Strategic Marketing

Services and farmer; Robert Kohlmeyer, World Perspectives; Howard Kramer, Schiff, Hardin & Waite; Robert Mackay, National Economic Research Associates Assoc.; Leo Melamed, Sakura Dellsher,

INC.; Merton Miller, University of Chicago; Ernest T. Patrikis,

American International Group; Todd Petzel, Common Fund; David

Pryde, JP Morgan Futures; Thomas Russo, Lehman Brothers; Rich

Sandor, Environmental Financial Products; Charles Smithson,

CIBC World Markets; Steven Spence, Merrill Lynch; and Jack

Wing, Illinois Institute of Technology.

On May 5, 1999, the Senate Committee on Agriculture, Nutrition

and Forestry held a hearing regarding agricultural trade options

15

and how these instruments might benefit producers in managing

the risks of farming. In 1997, the CFTC began a pilot program to

allow these products to trade on a conditional basis. As of the hearing date, no one in the industry had signed up to participate in the

program. The Committee heard from Commissioner David Spears

regarding the CFTC’s pilot program on agricultural trade options

and whether additional rulemaking or legislation was necessary to

fix it. Other witnesses included Jerry Slocum, President, North

Mississippi Grain Company; Dan Dye, Vice President, Cargill;

Scott Stewart, National Introducing Brokers Association; Steve

Manaster, Director, Financial Risk Management Pamplin College

of Business, Virginia Tech; Kenneth Ackerman, Risk Management

Agency, United States Department of Agriculture; and Dave

Rempe, Extension Assistant, Department of Agricultural Economics, Kansas State University.

On September 23, 1999, the Senate Committee on Agriculture,

Nutrition and Forestry held a hearing to explore the impact of electronic trading on the derivatives industry and its regulation. Specifically, the Committee heard testimony regarding how this industry will look in the near- and long-term as a result of technological

advances; what types of electronic trading activity should be regulated under the CEA; and whether electronic exchanges should be

regulated differently than open outcry exchanges. The first panel,

consisting of representatives from the futures exchanges and electronic OTC trading facilities, addressed the policies that should

drive whether transactions are regulated. These witnesses included

Roger Barton, BrokerTec; David P. Brennan and Thomas Donovan,

Chicago Board of Trade; Shawn Dorsch, Derivatives Net, Inc.

(Blackbird); Howard Lutnick, Cantor Fitzgerald; Leo Melamed,

Chicago Mercantile Exchange; and Edward J. Rosen, Coalition of

Commercial and Investment Banks. The second panel provided the

Committee with demonstrations on electronic trading and commentary on the future of the industry. These witnesses included

Phillip McBride Johnson, Skadden, Arps, Slate, Meagher & Flom;

David Downey, InterActive Brokers; and Matt Andresen, Island

ECN.

On February 10, 2000, the Senate Committee on Agriculture,

Nutrition and Forestry held a hearing on the release of the President’s Working Group report on OTC derivatives and the CEA.

Senate Agriculture Committee Chairman Richard Lugar and House

Agriculture Committee Chairman Bob Smith had requested this report subsequent to the regulatory moratorium that Congress placed

on the CFTC regarding OTC derivatives. This unanimous report

made recommendations to Congress on the proper regulatory treatment for over-the-counter derivatives. Treasury Secretary Lawrence Summers, Federal Reserve Chairman Alan Greenspan, CFTC

Chairman William Rainer, and Annette Nazareth, Director of the

Division of Market Regulation of the SEC, testified in support of

the report’s recommendations. Also providing testimony were

Chairman David Brennan, Chicago Board of Trade; Chairman Daniel Rappaport, New York Mercantile Exchange; Jerry Salzman,

counsel for the Chicago Mercantile Exchange; Richard Grove, CEO

and President of the International Swaps and Derivatives Association (ISDA); and Edward J. Rosen, counsel for the Coalition of

Commercial and Investment Banks.

16

On June 8, 2000, Senate Agriculture Committee Chairman Richard Lugar, along with Senate Banking Committee Chairman Phil

Gramm and Senator Peter Fitzgerald, introduced S. 2967, The

Commodity Futures Modernization Act of 2000, legislation to reauthorize and amend the Commodity Exchange Act.

On June 21, 2000, the Senate Committee on Agriculture, Nutrition and Forestry and the Senate Committee on Banking, Housing,

and Urban Affairs held a joint hearing to consider S. 2697, the

Commodity Futures Modernization Act of 2000. Witnesses included

members of the President’s Working Group on Financial Markets

consisting of Fed Chairman Alan Greenspan, Treasury Secretary

Lawrence Summers, CFTC Chairman William Rainer and SEC

Chairman Arthur Levitt.

COMMITTEE VOTE

In compliance with paragraph 7 of rule XXVI of the Standing

Rules of the Senate, the following statements are made concerning

the votes of the Committee in its consideration of the bill:

The Committee met in open session on Thursday, June 29, 2000,

to mark up this bill. The bill was agreed to unanimously by voice

vote. The Committee then ordered that the bill be favorably reported by a voice vote.

IV. REGULATORY IMPACT STATEMENT

In compliance with paragraph 11(b) of rule XXVI of the Standing

Rules of the Senate, the following evaluation is made concerning

the regulatory impact of enacting this legislation:

The number of individuals and businesses who would be impacted by regulations issued under this bill is substantial. The entire futures industry in the United States would be directly affected

by this legislation. Its impact would be one of lower cost both to

the businesses and to individuals in the futures markets due to the

expanded market opportunities opened under the bill and the decrease in the cost of implementing the regulations under the legislation. As for the record keeping requirements under the bill, the

records that futures exchanges are required to keep are less circumscribed and therefore the cost will be lower for the futures exchanges. This cost savings will result in lower transaction costs to

individuals and businesses trading on the exchanges.

The securities industry would likewise be affected as they would

have new business opportunities opened to them with the repeal of

the ban on single stock futures. Firms in the financial services

business would experience a growth in opportunities as would individuals trading futures on these markets. Individuals and businesses in the securities markets would be better situated to manage their risk.

With the legislation’s language to provide legal certainty for OTC

derivatives transactions, firms and banks would experience decreased legal and paperwork costs associated with these transactions.

This bill would not affect the personal privacy of the individuals

affected by the changes. The amount of additional paperwork that

will result from the regulations to be promulgated pursuant to the

bill, is moderate. The futures exchanges would be the most imVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
17

pacted as they would have new levels of regulations under which

they could choose to operate. During the transition period when

new regulations are being implemented, the paperwork burden on

the futures exchanges might be relatively high. But as the shift to

the new structures is accomplished, the paperwork burden will decrease resulting in less paper work for the regulated industry.

The National Futures Association (‘‘NFA’’) and its members will

be impacted as well by the bill. Section 8 of the bill mandates that

the NFA adopt rules requiring its members who recommend purchase or sales of futures on securities to ascertain the suitability

of the recommendation for that customer. This cost would be small

because the NFA has had a substantially similar rule in effect

since 1985. The bill also allows futures exchanges to delegate their

self regulatory functions to a registered futures association, thus

potentially increasing the NFA’s responsibilities under the Act.

V. BUDGETARY IMPACT OF THE BILL

In accordance with paragraph 11(a) of rule XXVI of the Standing

Rules of the Senate, the following letter has been received from the

Congressional Budget Office regarding the budgetary impact of the

bill:

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

S. 2697—Commodity Futures Modernization Act of 2000

Summary: S. 2697 would reauthorize funding for the activities of

the Commodity futures Trading Commission (CFTC) during the

2001–2005 period. The bill would also allow the trading of single

stock futures under certain conditions, with oversight being shared

by the CFTC and the Securities and Exchange Commission (SEC).

In addition, S. 2697 would clarify that certain over-the-counter derivative transactions are outside of the jurisdiction of the CFTC.

The bill also would authorize the CFTC to designate boards of

trade as contract markets or execution facilities for derivatives

transactions.

Assuming appropriation of the necessary amounts, CBO estimates that implementing this legislation would cost $363 million

over the 2001–2005 period. Although most of this cost would be incurred by the CFTC, CBO estimates that the SEC would spend

about $3 million a year to regulate single stock futures. S. 2697

also would increase governmental receipts, because the bill would

make single stock futures subject to fees charged by the SEC. Although CBO estimates that this increase in fee collections would

not be significant, pay-as-you-go procedures would apply.

S. 2697 contains an intergovernmental mandate as defined in the

Unfunded Mandates Reform Act (UMRA), but CBO estimates that

the costs, if any, would not exceed the threshold established in the

act ($55 million in 2000, adjusted annually for inflation). The bill

also contains a new private-sector mandate as defined by UMRA,

but CBO estimates the costs of this mandate would not exceed the

threshold established in the act ($109 million in 2000, adjusted annually for inflation).

Estimated Cost to the Federal Government: The estimated budgetary impact of S. 2697 is shown in the following table. The costs

18

of this legislation fall within budget function 370 (commerce and

housing credit).

By fiscal year, in millions of dollars—

2001 2002 2003 2004 2005

CHANGES IN SPENDING SUBJECT TO APPROPRIATION1

Proposed changes to CFTC spending:

Estimated authorization level .................................................... 67 69 72 74 77

Estimated outlays ...................................................................... 60 68 71 73 76

Proposed changes to SEC spending:

Estimated authorization level .................................................... 3 3 3 3 3

Estimated outlays ...................................................................... 3 3 3 3 3

Total changes in spending:

Estimated authorization level .................................................... 70 72 75 77 80

Estimated outlays ...................................................................... 63 71 74 76 79

1 CBO estimates that enactment of S. 2697 also would result in an insignificant increase in revenues over the 2001–2005 period.

Basis of estimate: For this estimate, CBO assumes that the bill

will be enacted by the end of fiscal year 2000 and that the necessary amounts will be appropriated by the start of each fiscal

year. Provisions related to the regulation of single stock futures

would take effect one year after enactment. CBO estimates that S.

2697 would cost $363 million over the 2001–2005 period, and would

have a negligible effect on revenues.

Spending subject to appropriation

S. 2697 would reauthorize funding for the activities of the CFTC

during the 2001–2005 period. For 2000, the agency received an appropriation of $63 million. Based on the agency’s current budget

and adjusting for anticipated inflation, this reauthorization would

cost about $59 million in 2001 and a total of $343 million over the

five-year period.

The bill also would make several changes to the Commodity Exchange Act that would increase the administrative costs of the

CFTC. Based on information from the CFTC, CBO estimates that

these changes to the CFTC’s administrative responsibilities would

cost $1 million a year over the 2001–2005 period. The CFTC would

share oversight of single stock futures transactions with the SEC.

The bill also clarifies that the CFTC does not have jurisdiction over

certain over-the-counter derivatives transactions. The CFTC also

would be authorized to designate boards of trade as contract markets or execution facilities for derivatives transactions with the

SEC. CBO estimates that these changes to the CFTC’s regulatory

responsibilities would require the agency to hire new staff.

S. 2697 also would require that the SEC play a significant role

in overseeing the market for single stock futures. Based on information from the SEC, CBO estimates that the SEC would have to

hire additional staff to handle these new responsibilities. These

new personnel would cost about $3 million a year during the 2001–

2005 period.

Finally, CBO estimates that S. 2697 would increase the amount

of offsetting collections received by the SEC, although the increase

would not be significant. The bill would allow single stock futures

to be traded on a national securities association and would therefore make them subject to transaction fees collected by the SEC.

Under current law, fees on transactions conducted on national securities associations are recorded as offsetting collections, which

19

are credited as an offset to discretionary spending. However, based

on information from the CFTC, the SEC, and private groups, CBO

does not expect that the volume of transactions of single stock futures that would be conducted on national securities associations

would be large enough to generate a significant increase in offsetting collections.

Revenues

Under current law, transactions conducted on national securities

exchanges are also subject to certain SEC fees that are accounted

for as governmental receipts (revenues). These fees are equal to 1/

300 of a percent of the aggregate dollar amount of securities sales.

S. 2697 would allow the trading of single stock futures on national securities exchanges. By creating a new category of financial

transactions that would be subject to SEC fees, this bill would increase revenues collected by the SEC. However, based on information provided by the CFTC, the SEC, and by private groups, CBO

estimates that any increase in revenues would not be significant.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting receipts or direct spending. S. 2697 would affect

receipts by adding a new set of financial transactions that would

be subject to fees collected by the SEC. However, CBO estimates

that the amount of additional receipts would not be significant.

Estimated impact on State, local, and tribal governments: S.

2697 would preempt state laws affecting certain commodities transactions that are conducted in markets regulated by the Commodities Futures Trading Commission. Such a preemption would be a

mandate as defined by UMRA. CBO estimates that the costs of this

mandate, if any, would not exceed the threshold in that act ($55

million in 2000, adjusted annually for inflation). The bill would impose no other costs on state, local, or tribal governments.

Estimated impact on the private sector: Section 8 of the bill

would require a registered futures association to adopt rules requiring a futures commission merchant, a commodity trading advisor, or an introducing broker that recommends a purchase or sale

of a futures on a security, to ascertain the suitability of that recommendation for that customer. The national futures association

already adopted a ‘‘know your customer’’ rule in 1985. According to

industry sources, the requirements of that rule are very similar to

the requirements of a suitability rule. Thus, CBO estimates that

the direct costs of complying with this mandate would be negligible.

Previous CBO estimate: On June 29, 2000, CBO transmitted a

cost estimate for H.R. 4541, the Commodity Futures Modernization

Act of 2000, as ordered reported by the House Committee on Agriculture on June 27, 2000. Assuming appropriation of the necessary

amounts, CBO estimates that H.R. 4541 would cost $353 million

over the 2001–2005 period. In comparison, CBO estimates that the

costs of S. 2697 would total $363 million during that time period.

Although the two bills are similar in many respects, CBO estimates

that the costs of S. 2697 would be higher because the SEC would

require additional staff to regulate the trading of single stock futures on national securities exchanges and associations. S. 2697

also would increase the revenues and offsetting collections received

20

by the SEC, although we estimate that these increases would not

be significant.

Estimate prepared by: Federal Costs: Kenneth Johnson. Impact

on the State, Local and Tribal Governments: Susan Sieg Tompkins.

Impact on the Private Sector: Judith Ruud.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

VI. CHANGES IN EXISTING LAW

In compliance with paragraph 12 of rule XXVI of the Standing

Rules of the Senate, changes in existing law made in the bill, as

reported are shown as follows (existing law proposed to be omitted

is enclosed in black brackets, new material is printed in italic, existing law in which no change is proposed is shown in roman):

COMMODITY EXCHANGE ACT

SEC. 1a. DEFINITIONS.

As used in this Act:

* * * * * * *

(4) COMMODITY POOL OPERATOR.—The term ‘‘commodity pool

operator’’ means any person engaged in a business that is of

the nature of an investment trust, syndicate, or similar form

of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock

or other forms of securities, or otherwise, for the purpose of

trading in any commodity for future delivery on or subject to

the rules of any contract market or derivatives transaction execution facility, except that the term does not include such persons not within the intent of the definition of the term as the

Commission may specify by rule, regulation, or order.

(5) COMMODITY TRADING ADVISOR.—

(A) IN GENERAL.—Except as otherwise provided in this

paragraph, the term ‘‘commodity trading advisor’’ means

any person who—

(i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value

of or the advisability of trading in—

(I) any contract of sale of a commodity for future

delivery made or to be made on or subject to the

rules of a contract market or derivatives transaction execution facility;

* * * * * * *

(B) EXCLUSIONS.—Subject to subparagraph (C), the term

‘‘commodity trading advisor’’ does not include—

* * * * * * *

(vi) any contract market or derivatives transaction

execution facility; and

* * * * * * *

(7) COOPERATIVE ASSOCIATION OF PRODUCERS.—The term ‘‘cooperative association of producers’’ * * *

21

(8) DERIVATIVES CLEARING ORGANIZATION.—

(A) IN GENERAL.—The term ‘‘derivatives clearing organization’’ means a clearinghouse, clearing association, clearing corporation, or similar entity, facility, system, or organization that, with respect to a derivative agreement, contract, or transaction (other than a security)—

(i) enables each party to the derivative agreement,

contract, or transaction to substitute, through novation

or otherwise, the credit of the derivatives clearing organization for the credit of the parties;

(ii) arranges or provides, on a multilateral basis, for

the settlement or netting of obligations resulting from

such agreements, contracts, or transactions executed by

participants in the derivatives clearing organization; or

(iii) otherwise provides clearing services or arrangements that mutualize or transfer among participants in

the derivatives clearing organization the credit risk

arising from such agreements, contracts, or transactions executed by the participants.

(B) EXCLUSIONS.—The term ‘‘derivatives clearing organization’’ does not include an entity, facility, system, or organization solely because it arranges or provides for—

(i) settlement, netting, or novation of obligations resulting from agreements, contracts, or transactions, on

a bilateral basis and without a centralized

counterparty;

(ii) settlement or netting of cash payments through

an interbank payment system; or

(iii) settlement, netting, or novation of obligations resulting from a sale of a commodity in a transaction in

the spot market for the commodity.

(9) DESIGNATED FUTURE ON A SECURITY.—The term ‘‘designated future on a security’’ means a contract of sale (or option

on such a contract) for future delivery of—

(A) a single nonexempted security;

(B) an index based on fewer than 5 nonexempted securities; or

(C) an index in which during at least 3 of the 4 calendar

quarters preceding the date of any transaction in the index,

a single nonexempted security accounted for a daily average

of 30 percent or more of the value of the index.

(10) ELECTRONIC TRADING FACILITY.—The term ‘‘electronic

trading facility’’ means a trading facility that—

(A) operates by means of an electronic network; and

(B) maintains a real-time audit trail of bids, offers, and

the matching of orders or the execution of transactions.

(11) ELIGIBLE COMMERCIAL PARTICIPANT.—The term ‘‘eligible

commercial participant’’ means an eligible contract participant

described in clause (i), (ii), (v), or (vii) of paragraph (12)(A) or

in subparagraph (12)(C) that—

(A) in connection with its business has a demonstrable

capacity or ability, directly or through separate contractual

agreements, to make or take delivery of the underlying

physical commodity;

22

(B) incurs risk, in addition to price risk, related to the

commodity; or

(C) is a dealer that regularly provides hedging, risk management, or market-making services to such eligible contract participants.

(12) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘‘eligible

contract participant’’ means—

(A) acting for its own account—

(i) a financial institution;

(ii) an insurance company (as defined in section 2 of

the Bank Holding Company Act of 1956 (12 U.S.C.

1841));

(iii) an investment company subject to regulation

under the Investment Company Act of 1940 (15 U.S.C.

80a–1 et seq.) or a foreign person performing a similar

role or function subject as such to foreign regulation

(regardless of whether each investor in the investment

company or the foreign person is itself an eligible contract participant);

(iv) a commodity pool that— (I) has total assets exceeding $5,000,000; and

(II) is formed and operated by a person subject

to regulation under this Act or a foreign person

performing a similar role or function subject as

such to foreign regulation (regardless of whether

each investor in the commodity pool or the foreign

person is itself an eligible contract participant);

(v) a corporation, partnership, proprietorship, organization, trust, or other entity— (I) that has total assets exceeding $10,000,000;

(II) the obligations of which under an agreement,

contract, or transaction are guaranteed or otherwise supported by a letter of credit or keepwell,

support, or other agreement by an entity described

in subclause (I), in clause (i), (ii), (iii), (iv), or (vii),

or in subparagraph (C); or

(III) that—

(aa) has a net worth exceeding $1,000,000;

and

(bb) enters into an agreement, contract, or

transaction in connection with the conduct of

the entity’s business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by the entity in the conduct of the entity’s business;

(vi) an employee benefit plan subject to the Employee

Retirement Income Security Act of 1974 (29 U.S.C.

1001 et seq.) or a foreign person performing a similar

role or function subject as such to foreign regulation—

(I) that has total assets exceeding $5,000,000; or

(II) the investment decisions of which are made

by—

(aa) an investment adviser subject to regulation under the Investment Advisers Act of

23

1940 (15 U.S.C. 80b–1 et seq.) or a commodity

trading advisor subject to regulation under

this Act;

(bb) a foreign person performing a role or

function similar to that of such an investment

adviser or commodity trading advisor subject

to foreign regulation in the performance of

that role or function;

(cc) a financial institution; or

(dd) an insurance company (as defined in

section 2 of the Bank Holding Company Act of

1956 (12 U.S.C. 1841));

(vii)(I) a governmental entity (including the United

States, a State, or a foreign government) or political

subdivision of a governmental entity;

(II) a multinational or supranational government entity; or

(III) an instrumentality, agency, or department of an

entity described in subclause (I) or (II);

(viii) a broker or dealer subject to regulation under

the Securities Exchange Act of 1934 (15 U.S.C. 78a et

seq.) or a foreign person performing a similar role or

function subject as such to foreign regulation, except

that, if the broker or dealer or foreign person is a natural person or proprietorship, the broker or dealer or

foreign person shall not be considered to be an eligible

contract participant unless the broker or dealer or foreign person also meets the requirements of clause (v) or

(xi);

(ix) a futures commission merchant subject to regulation under this Act or a foreign person performing a

similar role or function subject as such to foreign regulation, except that, if the futures commission merchant

or foreign person is a natural person or proprietorship,

the futures commission merchant or foreign person

shall not be considered to be an eligible contract participant unless the futures commission merchant or foreign person also meets the requirements of clause (v) or

(xi);

(x) a floor broker or floor trader subject to regulation

under this Act, to the extent that the floor broker or

floor trader trades on or through the facilities of a registered entity or exempt board of trade or any affiliate

of a registered entity or exempt board of trade; or

(xi) a natural person with total assets exceeding

$10,000,000;

(B)(i) a person described in any of clauses (i) through (x)

of subparagraph (A) or in subparagraph (C), acting as

broker or performing an equivalent agency function on behalf of another person described in subparagraph (A) or

(C); or

(ii)(I) an investment adviser subject to regulation under

the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et

seq.);

24

(II) a commodity trading advisor subject to regulation

under this Act;

(III) a foreign person performing a role or function similar to that of such an investment adviser or commodity

trading advisor subject to foreign regulation in the performance of that role or function; or

(IV) a person described in any of clauses (i) through (x)

of subparagraph (A) or in subparagraph (C), that is acting

as an investment manager or fiduciary (but excluding a

person acting as a broker or performing an equivalent

agency function) for another person described in subparagraph (A) or (C) and that is authorized by the other person

to commit the other person to the transaction; or

(C) any other person that the Commission determines to

be eligible in light of the financial or other qualifications

of the person.

(13) EXCLUSION-ELIGIBLE COMMODITY.— (A) IN GENERAL.—The term ‘‘exclusion-eligible commodity’’ means—

(i) a financial commodity; and

(ii) a commodity that has no cash market.

(B) EXCLUSION.—The term ‘‘exclusion-eligible commodity’’

does not include any commodity described in paragraph (3)

that is an agricultural commodity.

(14) EXEMPTED SECURITY.— (A) IN GENERAL.—The term ‘‘exempted security’’ means a

security that is an exempted security under section 3(a) of

the Securities Act of 1933 (15 U.S.C. 77c(a)) or section 3(a)

of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).

(B) EXCLUSION.—The term ‘‘exempted security’’ does not

include a municipal security (as defined in section 3(a) of

the Securities Exchange Act of 1934 (15 U.S.C. 78c(a))).

(15) FINANCIAL COMMODITY.—The term ‘‘financial commodity’’

means—

(A) an interest rate, exchange rate, currency, security, security index, credit risk, debt or equity instrument, or index

or measure of inflation; or

(B) any other rate, differential, index, or measure of economic risk, return, or value (excluding any rate, differential, index, or measure based on a commodity not described

in subparagraph (A) that has a finite supply).

(16) FINANCIAL INSTITUTION.—The term ‘‘financial institution’’ means—

(A) a corporation operating under the fifth undesignated

paragraph of section 25 of the Federal Reserve Act (12

U.S.C. 603), commonly known as ‘‘an agreement corporation’’;

(B) a corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.), commonly known

as an ‘‘Edge Act corporation’’;

(C) an institution that is regulated by the Farm Credit

Administration;

(D) a Federal credit union or State credit union (as defined in section 101 of the Federal Credit Union Act (12

U.S.C. 1752));

25

(E) a depository institution (as defined in section 3 of the

Federal Deposit Insurance Act (12 U.S.C. 1813));

(F) a foreign bank or a branch or agency of a foreign

bank (each as defined in section 1(b) of the International

Banking Act of 1978 (12 U.S.C. 3101(b)));

(G) a trust company; or

(H) a regulated subsidiary or affiliate of an entity described in any of subparagraphs (A) through (G).

ø(8)¿ (17) FLOOR BROKER.—The term ‘‘floor broker’’ means

any person who, in or surrounding any pit, ring, post, or other

place provided by a contract market for the meeting of persons

similarly engaged, shall purchase or sell for any other person

any commodity for future delivery on or subject to the rules of

any contract market or derivatives transaction execution facility ***

ø(9)¿ (18) FLOOR TRADER.—The term ‘‘floor trader’’ means

any person who, in or surrounding any pit, ring, post, or other

place provided by a contract market for the meeting of persons

similarly engaged, purchases, or sells solely for such person’s

own account, any commodity for future delivery on or subject

to the rules of any contract market or derivatives transaction

execution facility *** ø(10)¿ (19) FOREIGN FUTURES AUTHORITY.—The term ‘‘foreign

futures authority’’ * * *

ø(11)¿ (20) FUTURE DELIVERY.—The term ‘‘future

delivery’’*** ø(12)¿ (21) FUTURES COMMISSION MERCHANT.—The term ‘‘futures commission merchant’’ means an individual, association,

partnership, corporation, or trust that—

(A) is engaged in soliciting or in accepting orders for the

purchase or sale of any commodity for future delivery on

or subject to the rules of any contract market or derivatives transaction execution facility; and * * *

* * * * * * *

(22) HYBRID INSTRUMENT.—The term ‘‘hybrid instrument’’

means a deposit (as defined in section 3 of the Federal Deposit

Insurance Act (12 U.S.C. 1813)) offered by a financial institution, or a security, having 1 or more payments indexed to the

value, level, or rate of 1 or more commodities.

ø(13)¿ (23) INTERSTATE COMMERCE.—The term ‘‘interstate

commerce’’ * * *

ø(14)¿ (24) INTRODUCING BROKER.—The term ‘‘introducing

broker’’ means any person (except an individual who elects to

be and is registered as an associated person of a futures commission merchant) engaged in soliciting or in accepting orders

for the purchase or sale of any commodity for future delivery

on or subject to the rules of any contract market or derivatives

transaction execution facility who does not accept any money,

securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or

may result therefrom.

ø(15)¿ (25) MEMBER OF A øCONTRACT MARKET¿ REGISTERED

ENTITY.—The term ‘‘member of a øcontract market¿ registered

entity means an individual, association, partnership, corporation, or trust owning or holding membership in, or admitted to

26

membership representation on, a contract market or given

members’ trading privileges thereon.

(26) NATIONAL SECURITIES EXCHANGE.—The term ‘‘national

securities exchange’’ means—

(A) an exchange that is registered as a national securities

exchange under section 6 of the Securities Exchange Act of

1934 (15 U.S.C. 78f); or

(B) an association that is registered as a national securities association under section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o–3).

(27) OPTION.—The term ‘‘option’’ means an agreement, contract, or transaction that is of the character of, or is commonly

known to the trade as, an ‘‘option,’’ ‘‘privilege,’’ ‘‘indemnity,’’

‘‘bid,’’ ‘‘offer,’’ ‘‘put,’’ ‘‘call,’’ ‘‘advance guaranty,’’ or ‘‘decline

guaranty.’’

(28) ORGANIZED EXCHANGE.—The term ‘‘organized exchange’’

means a trading facility that—

(A) permits—

(i) trading by or on behalf of a person that is not an

eligible contract participant; or

(ii) trading by persons other than on a principal-toprincipal basis; or

(B) has adopted (directly or through another nongovernmental entity) rules that—

(i) govern the conduct of participants, other than

rules that govern the submission of orders or execution

of transactions on the trading facility; or

(ii) include disciplinary sanctions other than the exclusion of participants from trading.

ø(16)¿ (29) PERSON.—The term ‘‘person’’ * * *

(30) REGISTERED ENTITY.—The term ‘‘registered entity’’

means—

(A) a board of trade designated as a contract market

under section 5;

(B) a derivatives transaction execution facility registered

under section 5a; or

(C) a derivatives clearing organization registered under

section 5b.

(31) SECURITY.—The term ‘‘security’’ has the meaning given

the term in section 3(a) of the Securities Exchange Act of 1934

(15 U.S.C. 78c(a)).

(32) TRADING FACILITY.—

(A) IN GENERAL.—The term ‘‘trading facility’’ means a

person or group of persons that constitutes, maintains, or

provides a physical or electronic facility or system in which

multiple participants have the ability to execute or trade

agreements, contracts, or transactions by accepting bids

and offers made by other participants that are open to multiple participants in the facility or system.

(B) EXCLUSIONS.—The term ‘‘trading facility’’ does not

include—

(i) a person or group of persons solely because the

person or group of persons—

(I) constitutes, maintains, or provides an electronic facility or system that enables participants

27

to negotiate the terms of and enter into bilateral

transactions with other participants as a result of

the communications exchanged between the participants and not from interaction of multiple orders

within a centralized, predetermined, nondiscretionary, automated trade matching algorithm;

or

(II)(aa) is a derivatives clearing organization; or

(bb) permits participants to submit agreements,

contracts, or transactions to a derivatives clearing

organization;

(ii) a government securities dealer or government securities broker, to the extent that the dealer or broker

executes or trades agreements, contracts, or transactions in government securities, or assists persons in

communicating about, negotiating, entering into, executing, or trading an agreement, contract, or transaction in government securities (as the terms ‘‘government securities dealer’’, ‘‘government securities broker’’,

and ‘‘government securities’’ are defined in section 3(a)

of the Securities Exchange Act of 1934 (15 U.S.C.

78c(a))); or

(iii) a facility on which bids and offers and acceptances of bids and offers effected on the facility are not

binding.

* * * * * * *

øSEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL

FOR ACT OF AGENT.¿

SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR

ACT OF AGENT; COMMODITY FUTURES TRADING COMMISSION; TRANSACTION IN INTERSTATE COMMERCE.

ø(a)(1)(A)(i) The¿

(a) JURISDICTION OF COMMISSION; COMMODITY FUTURES TRAD- ING COMMISSION.— (1) JURISDICTION OF COMMISSION.— (A) IN GENERAL.—The Commission shall have exclusive

jurisdiction, except to the extent otherwise provided in

øsubparagraph (B) of this paragraph¿ subsection (g), with

respect to accounts, agreements (including any transaction

which is of the character of, or is commonly known to the

trade as, an ‘‘option’’, ‘‘privilege’’, ‘‘indemnity’’, ‘‘bid’’,

‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline guaranty’’), and transactions involving contracts of sale of a

commodity for future delivery, traded or executed on a

øcontract market designated pursuant to section 5 of this

Act¿ contract market designated or derivatives transaction

execution facility registered pursuant to section 5 or 5a

***

* * * * * * *

ø(ii) Nothing in this Act shall be deemed to govern or in any way

be applicable to transactions in foreign currency, security warrants,

security rights, resales of installment loan contracts, repurchase

options, government securities, or mortgages and mortgage purVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00027 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
28

chase commitments, unless such transactions involve the sale

thereof for future delivery conducted on a board of trade.¿

ø(iii) The¿ (B) LIABILITY OF PRINCIPAL FOR ACT OF AGENT.—The

act, omission, or failure of any official, agent, or other person acting

for any individual, association, partnership, corporation, or trust

within the scope of his employment or office shall be deemed the

act, omission, or failure of such individual, association, partnership,

corporation, or trust, as well as of such official, agent, or other person.

ø(B) Notwithstanding any other provision of law—

ø(i) This Act shall not apply to and the Commission shall

have no jurisdiction to designate a board of trade as a contract

market for any transaction whereby any party to such transaction acquires any put, call, or other option on one or more

securities (as defined in section 2(1) of the Securities Act of

1933 or section 3(a)(10) of the Securities Exchange Act of 1934

on the date of enactment of the Futures Trading Act of 1982),

including any group or index of such securities, or any interest

therein or based on the value thereof.

ø(ii) This Act shall apply to and the Commission shall have

exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an ‘‘option’’, ‘‘privilege’’, ‘‘indemnity’’, ‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline guaranty’’) and transactions involving, and may designate

a board of trade as a contract market in, contracts of sale (or

options on such contracts) for future delivery of a group or

index of securities (or any interest therein or based upon the

value thereof): Provided, however, That no board of trade shall

be designated as a contract market with respect to any such

contracts of sale (or options on such contracts) for future delivery unless the board of trade making such application demonstrates and the Commission expressly finds that the specific

contract (or option on such contract) with respect to which the

application has been made meets the following minimum requirements:

ø(I) Settlement of or delivery on such contract (or option

on such contract) shall be effected in cash or by means

other than the transfer or receipt of any security, except

an exempted security under section 3 of the Securities Act

of 1933 or section 3(a)(12) of the Securities Exchange Act

of 1934 as in effect on the date of enactment of the Futures Trading Act of 1982 (other than any municipal security, as defined in section 3(a)(29) of the Securities Exchange Act of 1934 on the date of enactment of the Futures Trading Act of 1982);

ø(II) Trading in such contract (or option on such contract) shall not be readily susceptible to manipulation of

the price of such contract (or option on such contract), nor

to causing or being used in the manipulation of the price

of any underlying security, option on such security or option on a group or index including such securities; and

ø(III) Such group or index of securities shall be predominately composed of the securities of unaffiliated issuers

and shall be a widely published measure of, and shall reVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00028 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
29

flect, the market for all publicly traded equity or debt securities or a substantial segment thereof, or shall be comparable to such measure.

ø(iii) Upon application by a board of trade for designation as

a contract market with respect to any contract of sale (or option on such contract) for future delivery involving a group or

index of securities, the Commission shall provide an opportunity for public comment on whether such contracts (or options on such contracts) meet the minimum requirements set

forth in clause (ii) of this subparagraph.

ø(iv)(I) The Commission shall consult with the Securities and

Exchange Commission with respect to any application which is

submitted by a board of trade before December 9, 1982, for

designation as a contract market with respect to any contract

of sale (or option on such contract) for future delivery of a

group or index of securities. If, no later than fifteen days following the close of the public comment period, the Securities

and Exchange Commission shall object to the designation of a

board of trade as a contract market in such contract (or option

on such contract) on the ground that any minimum requirement of clause (ii) of this subparagraph is not met, the Commission shall afford the Securities and Exchange Commission

an opportunity for an oral hearing, to be transcribed, before

the Commission, and shall give appropriate weight to the

views of the Securities and Exchange Commission. Such oral

hearing shall be held after the public comment period, prior to

Commission action upon such designation, and not less than

thirty nor more than forty-five days after the close of the public comment period, unless both the Commission and the Securities and Exchange Commission otherwise agree. If such an

oral hearing is held, the Securities and Exchange Commission

fails to withdraw its objections, and the Commission issues an

order designating a board of trade as a contract market with

respect to any such contract (or option on such contract), the

Securities and Exchange Commission shall have the right of

judicial review of such order in accordance with the standards

of section 6(c) of this Act. If, pursuant to section 6 of this Act,

there is a hearing on the record with respect to such application for designation, the Securities and Exchange Commission

shall have the right to participate in that hearing as an interested party.

ø(II) Effective for any application submitted by a board of

trade on or after December 9, 1982, for designation as a contract market with respect to any contract of sale (or option on

such contract) for future delivery of a group or index of securities, the Commission shall transmit a copy of such application

to the Securities and Exchange Commission for review. The

Commission shall not approve any such application if the Securities and Exchange Commission determines that such contract

(or option on such contract) fails to meet the minimum requirements set forth in clause (ii) of this subparagraph. Such determination shall be made by order no later than forty-five days

after the close of the public comment period under clause (iii)

of this subparagraph. In the event of such determination, the

board of trade shall be afforded an opportunity for a hearing

30

on the record before the Securities and Exchange Commission.

If a board of trade requests a hearing on the record, the hearing shall commence no later than thirty days following the receipt of the request, and a final determination shall be made

no later than thirty days after the close of the hearing. A person aggrieved by any such order of the Securities and Exchange Commission may obtain judicial review thereof in the

same manner and under such terms and conditions as are provided in section 6(b) of this Act.

ø(v) No person shall offer to enter into, enter into, or confirm

the execution of any contract of sale (or option on such contract) for future delivery of any security, or interest therein or

based on the value thereof, except an exempted security under

section 3 of the Securities Act of 1933 or section 3(a)(12) of the

Securities Exchange Act of 1934 as in effect on the date of enactment of the Futures Trading Act of 1982 (other than any

municipal security as defined in section 3(a)(29) of the Securities Exchange Act of 1934 on the date of enactment of the Futures Trading Act of 1982), or except as provided in clause (ii)

of this subparagraph, any group or index of such securities or

any interest therein or based on the value thereof.

ø(vi)(I) Notwithstanding any other provision of this Act, any

contract market in a stock index futures contract (or option

thereon) shall file with the Board of Governors of the Federal

Reserve System any rule establishing or changing the levels of

margin (initial and maintenance) for the stock index futures

contract (or option thereon).

ø(II) The Board may at any time request any contract market to set the margin for any stock index futures contract (or

option thereon) at such levels as the Board in its judgment determines are appropriate to preserve the financial integrity of

the contract market or its clearing system or to prevent systemic risk. If the contract market fails to do so within the time

specified by the Board in its request, the Board may direct the

contract market to alter or supplement the rules of the contract market as specified in the request.

ø(III) Subject to such conditions as the Board may determine, the Board may delegate any or all of its authority under

this clause only to the Commission.

ø(IV) Nothing in this clause shall supersede or limit the authority granted to the Commission in section 8a(9) to direct a

contract market, on finding an emergency to exist, to raise

temporary emergency margin levels on any futures contract or

option on the contract covered by this clause.

ø(V) Any action taken by the Board, or by the Commission

acting under the delegation of authority under subclause III,2–

095 under this clause directing a contract market to alter or

supplement a contract market rule shall be subject to review

only in the Court of Appeals where the party seeking review

resides or has its principal place of business, or in the United

States Court of Appeals for the District of Columbia Circuit.

The review shall be based on the examination of all information before the Board or the Commission, as the case may be,

at the time the determination was made. The court reviewing

the action of the Board or the Commission shall not enter a

31

stay or order of mandamus unless the court has determined,

after notice and a hearing before a panel of the court, that the

agency action complained of was arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law.¿

* * * * * * *

(7) No Commissioner or employee of the Commission shall accept

employment or compensation from any person, exchange, or clearinghouse subject to regulation by the Commission under this Act

during his term of office, nor shall he participate, directly or indirectly, in any øcontract market¿ registered entity operations or

transactions of a character subject to regulation by the

Commission***

(8)(B)(ii) When a board of trade applies for ødesignation as a contract market¿ designation or registration as a contract market or

derivatives transaction execution facility involving transactions for

future delivery of any security issued or guaranteed by the United

States or any agency thereof, the Commission shall promptly deliver a copy of such application to the Department of the Treasury

and the Board of Governors of the Federal Reserve System. The

Commission may not ødesignate a board of trade as a contract

market¿ designate or register a board of trade as a contract market

or derivatives transaction execution facility based on such application until forty-five days after the date the Commission delivers the

application to such agencies or until the Commission receives comments from each of such agencies on the application, whichever period is shorter. Any comments received by the Commission from

such agencies shall be included as part of the public record of the

Commission’s designation proceeding. In ødesignating, or refusing,

suspending, or revoking the designation of, a board of trade as a

contract market involving transactions for future delivery referred

to in this clause or in considering possible emergency action under

section 8a(9) of this Act¿ designating, registering, or refusing, suspending, or revoking the designation or registration of, a board of

trade as a contract market or derivatives transaction execution facility involving transactions for future delivery referred to in this

clause or in considering any action under this Act (including emergency action under section 8a(9)) with respect to such transactions,

the Commission shall take into consideration all comments it receives from the Department of the Treasury and the Board of Governors of the Federal Reserve System and shall consider the effect

that any such ødesignation, suspension, revocation, or emergency

action¿ designation, registration, suspension, revocation, or other

action may have on the debt financing requirements of the United

States Government and the continued efficiency and integrity of

the underlying market for government securities

* * * * * * *

(b) For the purposes of this Act (but not in any wise limiting the

foregoing definition of interstate commerce) a transaction in respect

to any article shall be considered to be in interstate commerce if

such article is part of that current of commerce usual in the commodity trade whereby commodities and commodity products and

by-products thereof are sent from one State with the expectation

that they will end their transit, after purchase, in another, including, in addition to cases within the above general description, all

32

cases where purchase or sale is either for shipment to another

State, or for manufacture within the State and the shipment outside the State of the products resulting from such manufacture. Articles normally in such current of commerce shall not be considered

out of such commerce through resort being had to any means or device intended to remove transactions in respect thereto from the

provisions of this Act. For the purpose of this paragraph the word

‘‘State’’ includes Territory, the District of Columbia, possession of

the United States, and foreign nation.

(c) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN FOREIGN

CURRENCY, GOVERNMENT SECURITIES, AND CERTAIN OTHER COMMODITIES.—

(1) IN GENERAL.—Except as provided in paragraph (2), nothing in this Act (other than section 5b or 12(e)(2)(B)) governs or

applies to an agreement, contract, or transaction in—

(A) foreign currency;

(B) government securities;

(C) security warrants;

(D) security rights;

(E) sales and resales of installment loan contracts;

(F) purchase transactions and repurchase transactions in

a financial commodity; or

(G) mortgages or mortgage purchase or sale commitments.

(2) COMMISSION JURISDICTION.—

(A) AGREEMENTS, CONTRACTS, AND TRANSACTIONS THAT

ARE FUTURES TRADED ON AN ORGANIZED EXCHANGE.—This

Act applies to, and the Commission shall have jurisdiction

over, an agreement, contract, or transaction described in

paragraph (1) that—

(i)(I) is a contract of sale of a commodity for future

delivery (or an option on such a contract); and

(II) is executed or traded on an organized exchange;

(ii)(I) is an option on a commodity other than foreign

currency or a security; and

(II) is executed or traded on an organized exchange;

or

(iii)(I) is an option on foreign currency; and

(II) is executed or traded on an organized exchange

that is not a national securities exchange.

(B) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN RETAIL FOREIGN CURRENCY.—This Act applies to, and the

Commission shall have jurisdiction over, an agreement,

contract, or transaction in foreign currency that—

(i) is—

(I) a contract of sale for future delivery; or

(II) an option; and

(ii) is offered to, or entered into with, a person that

is not an eligible contract participant, unless the

counterparty, or the person offering to be the

counterparty, of the person is—

(I) a financial institution;

(II) a broker or dealer registered under section

15(b) or 15C of the Securities Exchange Act of

33

1934 (15 U.S.C. 78o(b), 78o–5) or a futures commission merchant registered under this Act;

(III) an associated person of a broker or dealer

registered under section 15(b) or 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b), 78o–

5), or an affiliated person of a futures commission

merchant registered under this Act, concerning the

financial or securities activities of which the registered person makes and keeps records under section 15C(b) or 17(h) of the Securities Exchange Act

of 1934 (15 U.S.C. 78o–5(b), 78q(h)) or section

4f(c)(2)(B) of this Act;

(IV) an insurance company (as defined in section

2 of the Bank Holding Company Act of 1956 (12

U.S.C. 1841));

(V) a financial holding company (as defined in

section 2 of the Bank Holding Company Act of

1956 (12 U.S.C. 1841)); or

(VI) an investment bank holding company (as

defined in section 17(i) of the Securities Exchange

Act of 1934 (15 U.S.C. 78q(i))).

(d) EXCLUDED DERIVATIVE TRANSACTIONS.— (1) IN GENERAL.—Nothing in this Act (other than section 5b

or 12(e)(2)(B)) governs or applies to an agreement, contract, or

transaction in an exclusion-eligible commodity if—

(A) the agreement, contract, or transaction is entered into

only between persons that are eligible contract participants

at the time at which the persons enter into the agreement,

contract, or transaction; and

(B) the agreement, contract, or transaction is not executed

or traded on a trading facility.

(2) ELECTRONIC TRADING FACILITY EXCLUSION.—Nothing in

this Act (other than section 5b or 12(e)(2)(B)) governs or applies

to an agreement, contract, or transaction in an exclusion-eligible commodity if—

(A) the agreement, contract, or transaction is entered into

on a principal-to-principal basis between parties trading

for their own accounts or as described in section

1a(11)(B)(ii);

(B) the agreement, contract, or transaction is entered into

only between persons that are eligible contract participants

(as defined in subparagraph (A), (B)(ii), or (C) of section

1a(11)) at the time at which the persons enter into the

agreement, contract, or transaction; and

(C) the agreement, contract, or transaction is executed or

traded on an electronic trading facility.

(3) EXCEPTION TO PREVENT MANIPULATION.—Notwithstanding

paragraphs (1) and (2), any agreement, contract, or transaction

in an exclusion-eligible commodity (other than a financial commodity) that is susceptible to a material risk of manipulation

shall be subject to sections 6(c) and 9(a)(2).

(e) ELECTRONIC TRADING FACILITIES.—

(1) IN GENERAL.—Nothing in this Act (other than section

12(e)(2)(B)) governs or is applicable to an electronic trading facility that limits transactions authorized to be conducted on the

34

facility to transactions that satisfy the requirements of subsection (d)(2).

(2) EFFECT ON AUTHORITY TO ESTABLISH AND OPERATE.—

Nothing in this Act shall prohibit a board of trade designated

by the Commission as a contract market or derivatives transaction execution facility, or an exempt board of trade, from establishing and operating an electronic trading facility excluded

under this Act by paragraph (1).

(f) EXCLUSION FOR QUALIFYING HYBRID INSTRUMENTS.—

(1) IN GENERAL.—Nothing in this Act (other than section

12(e)(2)(B)) governs or is applicable to a hybrid instrument that

is predominantly a security or depository instrument.

(2) PREDOMINANCE.—A hybrid instrument shall be considered

to be predominantly a security or depository instrument if—

(A) the issuer of the hybrid instrument receives payment

in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument;

(B) the purchaser or holder of the hybrid instrument is

not required to make any payment to the issuer in addition

to the purchase price paid under subparagraph (A), whether as margin, settlement payment, or otherwise, during the

life of the hybrid instrument or at maturity;

(C) the issuer of the hybrid instrument is not subject by

the terms of the instrument to mark-to-market margining

requirements; and

(D) the hybrid instrument is not marketed as a contract

of sale for future delivery of a commodity (or option on such

a contract) subject to this Act.

(3) MARK-TO-MARKET MARGINING REQUIREMENTS.—For the

purposes of paragraph (2)(C), mark-to-market margining requirements do not include the obligation of an issuer of a secured debt instrument to increase the amount of collateral held

in pledge for the benefit of the purchaser of the secured debt instrument to secure the repayment obligations of the issuer under

the secured debt instrument.

(g) FUTURES ON SECURITIES.—

(1) EXCLUSIONS.—

(A) EXCLUSION OF OVER-THE-COUNTER EQUITY INSTRUMENTS.—Nothing in this subsection governs or applies to—

(i) an agreement, contract, or transaction in a commodity that is excluded under subsection (c) or (d);

(ii) an electronic trading facility that is excluded

under subsection (e); or

(iii) a hybrid instrument that is covered by an exclusion under subsection (f) or an exemption granted by

the Commission under section 4(c) (whether or not the

hybrid instrument is otherwise subject to this Act).

(B) EXCLUSION OF SECURITY OPTIONS.—This Act does not

apply to, and the Commission shall have no jurisdiction to

designate a board of trade as a contract market or register

a derivatives transaction execution facility for, any transaction under which a party to the transaction acquires an

option on 1 or more securities, group or index of securities,

35

or interest in, or interest that is based on the value of, a

security.

(2) INCLUSION OF TRADING OF NONDESIGNATED FUTURES ON

SECURITIES ON A CONTRACT MARKET.— (A) IN GENERAL.—This Act applies to, and the Commission shall have exclusive jurisdiction with respect to and

may designate a board of trade as a contract market in, accounts, agreements, and transactions involving a contract

of sale (or option on such a contract) for future delivery of

a group or index of nonexempted securities (or an interest

in, or interest that is based on the value of, such securities),

none of which is a designated future on a security.

(B) REQUIREMENTS FOR DESIGNATION.— (i) IN GENERAL.—No board of trade shall be designated as a contract market with respect to any contract of sale (or option on such a contract) for future

delivery under subparagraph (A) unless—

(I) the board of trade files with the Commission

an application for designation; and

(II) the board of trade demonstrates and the

Commission expressly finds that the specific contract (or option on such a contract) with respect to

which the application is made meets the minimum

requirements of clauses (ii) and (iii).

(ii) MEANS OF EFFECTUATION OF SETTLEMENT OR DE- LIVERY.—Settlement of or delivery on a contract (or option on such a contract) described in subparagraph (A)

shall be effected in cash or by means other than the

transfer or receipt of a security other than an exempted

security.

(iii) SUSCEPTIBILITY TO PRICE MANIPULATION.—Trading in a contract (or option on such a contract) described in subparagraph (A) shall not be readily susceptible to—

(I) manipulation of the price of the contract (or

option on such a contract); or

(II) causing or being used in the manipulation of

the price of any underlying security, option on a security, or option on a group or index that includes

a security.

(3) TRADING OF DESIGNATED FUTURES ON SECURITIES ON A

CONTRACT MARKET OR NATIONAL SECURITIES EXCHANGE.—No

person shall offer to enter into, enter into, or confirm the execution of a designated future on a security, or an interest in or

interest that is based on the value of a designated future on a

security, unless the contract—

(A) is transacted on or subject to the rules of—

(i) a board of trade that has been designated by the

Commission as a contract market for the commodity

that is the subject of the contract; or

(ii) a securities exchange that is registered with the

Securities and Exchange Commission as a national securities exchange; and

(B) meets the requirements of clauses (ii) through (vii) of

paragraph (4)(B).

36

(4) MINIMUM REQUIREMENTS FOR DESIGNATED FUTURES ON

SECURITIES TRADED ON A CONTRACT MARKET.— (A) IN GENERAL.—Subject to paragraph (5), this Act applies to, and the Commission shall have jurisdiction with

respect to and may designate a board of trade as a contract

market in, accounts, agreements, and transactions involving a designated future on a security.

(B) REQUIREMENTS FOR DESIGNATION.— (i) IN GENERAL.—No board of trade shall be designated as a contract market with respect to any contract of sale (or option on such a contract) under subparagraph (A) unless—

(I) the board of trade files with the Commission

an application for designation; and

(II) the board of trade demonstrates and the

Commission expressly finds that the specific contract (or option on such a contract) with respect to

which the application is made meets the minimum

requirements of clauses (ii) through (viii).

(ii) MEANS OF EFFECTUATION OF SETTLEMENT OR DE- LIVERY.—Settlement of or delivery on a contract (or option on such a contract) described in subparagraph (A)

shall be effected in cash or by means other than the

transfer or receipt of a security other than an exempted

security.

(iii) REAL-TIME AUDIT TRAIL.—Trading in a contract

(or option on such a contract) described in subparagraph (A) shall occur on a contract market that executes trades by means of a system that provides a realtime audit trail.

(iv) SUSCEPTIBILITY TO PRICE MANIPULATION.—Trading in a contract (or option on such a contract) described in subparagraph (A) shall not be readily susceptible to—

(I) manipulation of the price of the contract (or

option on such a contract); or

(II) causing or being used in the manipulation of

the price of any underlying security, option on a security, or option on a group or index that includes

a security.

(v) UNDERLYING SECURITY APPROVED FOR LISTING ON

NATIONAL SECURITIES EXCHANGE.—Each security that

underlies a designated future on a security shall—

(I) meet all requirements for the listing of an option on that security on a national securities exchange: or

(II) be the subject of options trading on a national securities exchange.

(vi) MARGINS FOR FUTURES CONTRACTS.—

(I) IN GENERAL.—The contract described in subparagraph (A) shall be traded on a board of trade

that establishes and maintains margin levels for

designated futures on securities that are consistent

with the margin levels established and maintained

on an option contract on the same underlying secuVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00036 Fmt 6659 Sfmt 6603 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
37

rity that is listed on any national securities exchange.

(II) CONSISTENCY.—For the purposes of subclause (I), a margin for designated futures on securities and options on securities shall be considered

to be consistent if the margin provides a similar

level of protection against defaults by

counterparties, taking into account any differences

in—

(aa) the price volatility of the contracts;

(bb) the frequency with which compliance

with margin requirements is assessed;

(cc) the length of time permitted to cure any

margin deficiency; and

(dd) the degree of leverage permitted by the

margin.

(vii) CONFLICTS OF INTEREST.—The contract described in subparagraph (A) shall be traded on a board

of trade that establishes and enforces rules that protect

the customer from conflicts of interest and related trading abuses on the part of brokers or any other person

performing similar roles or functions.

(viii) PROVISION OF INFORMATION NECESSARY FOR

ENFORCEMENT.—The contract described in subparagraph (A) shall be traded on a board of trade that, in

accordance with regulations promulgated by the Commission, collects, maintains, and promptly provides to

the Securities and Exchange Commission on request

such information as the Commission and the Securities

and Exchange Commission jointly determine to be appropriate for the performance of the enforcement responsibilities described in paragraph (5).

(5) SEC ENFORCEMENT AUTHORITY FOR DESIGNATED FUTURES

ON SECURITIES CONTRACTS LISTED ON A CONTRACT MARKET.—

(A) IN GENERAL.—On notice to the Commission, the Securities and Exchange Commission may enforce the provisions of the securities laws specified in subparagraph (B)

against any person that purchases or sells a designated future on a security to the same extent as if the person had

purchased or sold an option on a security.

(B) PROVISIONS OF THE SECURITIES LAWS.—The provisions of the securities laws referred to in subparagraph (A)

are—

(i) section 16 of the Securities Exchange Act of 1934

(15 U.S.C. 78p); and

(ii) section 10(b) of the Securities Exchange Act of

1934 (15 U.S.C. 78j(b)).

(C) AUTHORITY OF SEC.—Nothing in this paragraph expands the authority of the Securities and Exchange Commission with respect to registered entities or contracts of

sale of a commodity for future delivery (or options on such

contracts) except as specifically provided in this paragraph.

(D) REPORT.—Not earlier than the date that is 3 years

after the date of enactment of this subsection, the Commission and the Securities and Exchange Commission shall

38

begin to compile, and not later than the date that is 4 years

after the date of enactment of this subsection, the Commission and the Securities and Exchange Commission shall

submit to Congress, a report on the implementation of this

subsection.

(6) CFTC ENFORCEMENT AUTHORITY FOR DESIGNATED FU- TURES ON SECURITIES LISTED ON A NATIONAL SECURITIES EX- CHANGE.—

(A) IN GENERAL.—Except as provided in subparagraph

(B), the Securities and Exchange Commission shall have

jurisdiction over a designated future on a security to the extent that the designated future on a security is traded on

a national securities exchange.

(B) LARGE TRADER REPORTING, ANTI-FRAUD, AND ANTI- MANIPULATION AUTHORITY.—On notice to the Securities and

Exchange Commission, the Commission shall enforce sections 4b, 4i, 4o, 6(c), and 9(a)(2) against any person that

purchases or sells a designated future on a security on a

national securities exchange.

(C) PROVISION OF INFORMATION NECESSARY FOR EN- FORCEMENT.—A designated future on a security shall be

traded on a national securities exchange that, in accordance with regulations promulgated by the Securities and

Exchange Commission, collects, maintains, and promptly

provides to the Commission on request such information as

the Securities and Exchange Commission and the Commission jointly determine to be appropriate for the performance

of the enforcement responsibilities described in subparagraph (B).

(7) PROCESS FOR LISTING FUTURES ON A SECURITY.— (A) CONTRACT MARKET PROCESS.— (i) IN GENERAL.—The Commission shall transmit to

the Securities and Exchange Commission a copy of any

application that is submitted by a board of trade for

designation as a contract market with respect to a contract of sale (or option on such a contract) for future

delivery of a nonexempted security or a group or index

of nonexempted securities.

(ii) HEARING.—

(I) OBJECTION BY SEC.—If, not later than 15

days following transmittal of an application under

clause (i), the Securities and Exchange Commission submits to the Commission an objection to

designation of the board of trade as a contract

market in the contract (or option on such a contract) based on evidence (including an economic

analysis of relevant factors including benefits and

costs) that any minimum requirement under paragraph (2)(B) or (4)(B) is not met, the Commission

shall afford the Securities and Exchange Commission an opportunity for a hearing on the record before the Commission.

(II) TIMING.—A hearing under subclause (I)

shall be held before the Commission takes action

on the application, and not less than 30 nor more

39

than 45 days after the Securities and Exchange

Commission submits the objection.

(B) NATIONAL SECURITIES EXCHANGE PROCESS.— (i) IN GENERAL.—The Securities and Exchange Commission shall transmit to the Commission a copy of

any application that is submitted by a person for listing of a designated future on a security on a national

securities exchange.

(ii) OBJECTION BY THE COMMISSION.—If, not later

than 15 days following transmittal of an application

under clause (i), the Commission submits to the Securities and Exchange Commission an objection to listing

of a designated future on a security on a national securities exchange based on evidence (including an economic analysis of relevant factors including benefits

and costs) that any minimum requirement under paragraph (4)(B) is not met, the Securities and Exchange

Commission shall afford the Commission an opportunity for a hearing on the record before the Securities

and Exchange Commission.

(8) MARGIN.— (A) IN GENERAL.—Notwithstanding any other provision of

this Act, any designated contract market in a contract for

sale of future delivery of a nonexempted security or nonexempted securities index (or option on such a contract)

shall file with the Board of Governors of the Federal Reserve System any rule establishing or changing the level of

initial margin or maintenance margin for the nonexempted

security or nonexempted securities index futures contract

(or option on such a contract).

(B) REQUEST TO SET MARGIN.— (i) IN GENERAL.—The Board may at any time request

a contract market to set the margin for a nonexempted

security or nonexempted securities index futures contract (or option on a nonexempted security or nonexempted securities index futures contract) at a level

that the Board determines is appropriate to—

(I) preserve the financial integrity of the contract

market or of the clearing system of the contract

market;

(II) prevent competitive distortions between markets offering similar products; or

(III) prevent systemic risk.

(ii) FAILURE TO SET MARGIN.—If the contract market

fails to comply with a request under clause (i) within

the time specified by the Board in the request, the

Board may direct the contract market to alter or supplement the rules of the contract market as specified in

the request.

(C) DELEGATION OF AUTHORITY TO THE COMMISSION.—

Subject to such conditions as the Board may determine, the

Board may delegate any or all of its authority with respect

to margin levels—

(i) in the case of a designated future on a security or

other stock index futures contract or related option, to

40

the Commission, if the contract or option is traded on

a designated contract market or derivatives transaction

execution facility; or

(ii) in the case of a designated future on a security—

(I) to the Securities and Exchange Commission,

if the designated future on a security is listed on

a national securities exchange; or

(II) to the intermarket margin board established

under subparagraph (D).

(D) INTERMARKET MARGIN BOARD.—

(i) ESTABLISHMENT.—With the concurrence of the Securities and Exchange Commission and the Commission, the Board may establish an intermarket margin

board consisting of the Chairman of the Board, the

Chairman of the Commission, and the Chairman of the

Securities and Exchange Commission, or their designees.

(ii) DUTIES.—The intermarket margin board established under clause (i) may set and maintain margin

levels and rules pertaining to margin for a designated

future on a security listed on a contract market or on

a national securities exchange.

(iii) REQUIREMENT AS TO DESIGNEES.—An individual

may not be designated as a member of the intermarket

margin board unless the individual is an officer of the

United States appointed by the President with the advice and consent of the Senate.

(E) RELATIONSHIP TO OTHER AUTHORITY.—Nothing in

this section supersedes or limits the authority of the Commission under section 8a(9).

(F) JUDICIAL REVIEW.—

(i) IN GENERAL.—Any action taken by the Board (or

by the Commission acting under the delegation of authority under subparagraph (C) or by the intermarket

margin board established under subparagraph (D))

under this paragraph directing a contract market to

alter or supplement a contract market rule shall be

subject to review only in the United States Court of Appeals for the judicial circuit in which the party seeking

review resides or has its principal place of business, or

in the United States Court of Appeals for the District

of Columbia Circuit.

(ii) BASIS FOR REVIEW.—Review under clause (i)

shall be based on the examination of all information

before the Board (or the Commission, Securities and

Exchange Commission, or intermarket margin board)

at the time at which the action was taken.

(iii) STANDARD OF REVIEW.—The court reviewing an

action of the Board (or the Commission, Securities and

Exchange Commission, or intermarket margin board)

shall not enter a stay or order of mandamus unless the

court determines, after notice and hearing, that the action was arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law.

41

(9) FUTURES ON SECURITIES LISTED ON FOREIGN EX- CHANGES.—Nothing in this Act requires or authorizes the Commission to review or approve any contract, rule, regulation, or

action adopted by a foreign board of trade, exchange, or market,

or a clearinghouse for such a board of trade, exchange, or market, relating to any transaction involving a contract of sale for

future delivery (or option on such a contract) in any security,

including any foreign government debt security, or group or

index of such securities, if—

(A)(i) in the case of a contract of sale for future delivery

(or option on such a contract) in a single equity security,

the United States is not the primary trading market for the

underlying security; or

(ii) in the case of a contract of sale for future delivery (or

option on such a contract) in or involving a group or index

of equity securities, less than 25 percent of the weighting of

the group or index is derived from securities for which the

United States is the primary trading market for the securities underlying the contract for future delivery (or option on

the contract); and

(B) settlement of or delivery on the contract for future delivery (or option on such a contract) is to be effected in cash

or by means other than the transfer or receipt of a security

in the United States other than an exempted security.

(10) SUITABILITY STANDARDS.— (A) RULES.— (i) IN GENERAL.—Not later than 270 days after the

date of enactment of this subsection, a registered futures association shall adopt rules requiring a futures

commission merchant, a commodity trading advisor, or

an introducing broker that recommends to any customer the purchase or sale of a designated future on a

security to ascertain through reasonable due diligence

that the recommendation is suitable for that customer

in light of the customer’s financial position and trading goals.

(ii) PROCEDURE.—Before adopting a rule under

clause (i), a registered futures association shall—

(I) consult with the Commission and the Securities and Exchange Commission; and

(II) submit the proposed rule to the Commission

for approval in accordance with section 17(j).

(iii) TIMING.—If the Commission fails to disapprove

a proposed rule within 90 days after the date on which

the rule is submitted for approval, the rule shall become effective on the day after that date.

(B) COMPLIANCE.—No futures commission merchant,

commodity trading advisor, or introducing broker shall recommend to any customer the purchase or sale of a designated future on a security unless the futures commission

merchant, commodity advisor, or introducing broker complies with the rules, adopted under subparagraph (A,) of a

registered futures association of which suchmerchant, advisor, or broker is a member.

(h) EXEMPTED TRANSACTIONS.—

42

(1) EXEMPTION.—Except as provided in paragraph (2) and except with respect to a contract, agreement, or transaction in or

involving an agricultural commodity specified in section 1a(3),

nothing in this Act applies to a contract, agreement, or

transaction—

(A) that is entered into solely between eligible contract

participants;

(B) that is not entered into or traded on or through a

trading facility; and

(C) except for contract, agreement, or transaction submitted for clearance or settlement to a clearinghouse as provided under section 5b, in which the creditworthiness of

any party having an actual or potential obligation under

the contract, agreement, or transaction would be a material

consideration in entering into or determining the terms of

the contract, agreement, or transaction (including pricing,

cost, credit enhancement terms).

(2) RESERVATION OF AUTHORITY.—A contract, agreement, or

transaction described in paragraph (1) shall be subject to—

(A) sections 4b, 4n, 5b and 12(e)(2)(B);

(B) any anti-fraud regulation promulgated by the Commission under section 4c(b); and

(C) sections 6(c) and 9(a)(2), to the extent that those provisions prohibit manipulation of the market price of any

commodity in interstate commerce or for future delivery.

øSEC. 3. Transactions in commodities involving the sale thereof

for future delivery as commonly conducted on boards of trade and

known as ‘‘futures’’ are affected with a national public interest.

Such futures transactions are carried on in large volume by the

public generally and by persons engaged in the business of buying

and selling commodities and the products and byproducts thereof

in interstate commerce. The prices involved in such transactions

are generally quoted and disseminated throughout the United

States and in foreign countries as a basis for determining the

prices to the producer and the consumer of commodities and the

products and byproducts thereof and to facilitate the movements

thereof in interstate commerce. Such transactions are utilized by

shippers, dealers, millers, and others engaged in handling commodities and the products and byproducts thereof in interstate commerce as a means of hedging themselves against possible loss

through fluctuations in price. The transactions and prices of commodities on such boards of trade are susceptible to excessive speculation and can be manipulated, controlled, cornered or squeezed, to

the detriment of the producer or the consumer and the persons

handling commodities and the products and byproducts thereof in

interstate commerce, rendering regulation imperative for the protection of such commerce and the national public interest therein.

Furthermore, transactions which are of the character of, or are

commonly known to the trade as, ‘‘options’’ are or may be utilized

by commercial and other entities for risk shifting and other purposes. Options transactions are in interstate commerce or affect

such commerce and the national economy, rendering regulation of

such transactions imperative for the protection of such commerce

and the national public interest.¿

43

SEC. 3. FINDING AND PURPOSES.

(a) FINDING.—Congress finds that the futures contracts and options contracts that are subject to this Act are entered into regularly

in interstate and international commerce and are affected with a

national public interest, in that such futures contracts and options

contracts provide a means for managing and assuming price risks,

discovering prices, and disseminating pricing information through

trading in liquid, fair, and financially secure trading facilities.

(b) PURPOSES.—The purposes of this Act are—

(1) to serve the public interest described in subsection (a)

through a system of effective self-regulation of trading facilities,

clearing systems, market participants, and market professionals

under the oversight of the Commission; and

(2) to authorize the Commission—

(A) to deter and prevent price manipulation or any other

disruptions to market integrity;

(B) to ensure the financial integrity of all transactions

subject to this Act and the avoidance of systemic risk;

(C) to protect all market participants from fraudulent or

other abusive sales practices and misuse of customer assets;

and

(D) to promote responsible innovation and fair competition among boards of trade, other markets, and market

participants.

SEC. 4. (a) Unless exempted by operation of section 5d or unless

exempted by the Commission * * *

(1) such transaction is conducted on or subject to the rules

of a board of trade which has been ødesignated by the Commission as a ‘‘contract market’’ for¿ designated or registered by the

Commission as a contract market or derivatives transaction execution facility for such commodity;

(2) such contract is executed or consummated by or through

a ømember of such¿ contract market; and

(3) such contract is evidenced by a record in writing which

shows the date, the parties to such contract and their addresses, the property covered and its price, and the terms of delivery: Provided, That each contract market or derivatives transaction execution facility member shall keep such record for a

period of three years from the date thereof, or for a longer period if the Commission shall so direct, which record shall at all

times be open to the inspection of any representative of the

Commission or the Department of Justice.

* * * * * * *

(c)(1) In order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or

order, after notice and opportunity for hearing, may (on its own initiative or on application of any person, including any board of trade

ødesignated as a contract market¿ designated or registered as a

contract market or derivatives transaction execution facility for

transactions for future delivery in any commodity under section 5

of this Act) exempt any agreement, contract, or transaction (or

class thereof) that is otherwise subject to subsection (a) (including

any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement,

contract, or transaction), either unconditionally or on stated terms

44

or conditions or for stated periods and either retroactively or prospectively, or both, from any of the requirements of subsection (a),

or from any other provision of this Act (except øsection 2(a)(1)(B)¿

section 2(g)), if the Commission determines that the exemption

would be consistent with the public interest.

* * * * * * *

(2)(B) the agreement, contract, or transaction—

(i) will be entered into solely between appropriate persons;

and

(ii) will not have a material adverse effect on the ability of

the Commission or any contract market or derivatives transaction execution facility to discharge its regulatory or self-regulatory duties under this Act * * *

* * * * * * *

SEC. 4a. EXCESSIVE SPECULATION AS BURDEN ON INTERSTATE COMMERCE.

(a) Excessive speculation in any commodity under contracts of

sale of such commodity for future delivery made on or subject to

the rules of contract markets or derivatives transaction execution

facilities causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and

unnecessary burden on interstate commerce in such commodity.

For the purpose of diminishing, eliminating, or preventing such

burden, the Commission shall, from time to time, after due notice

and opportunity for hearing, by rule, regulation, or order, proclaim

and fix such limits on the amounts of trading which may be done

or positions which may be held by any person under contracts of

sale of such commodity for future delivery on or subject to the rules

of any contract market or derivatives transaction execution facilities

as the Commission

* * * * * * *

(b) The Commission shall, in such rule, regulation, or order, fix

a reasonable time (not to exceed ten days) after the promulgation

of the rule, regulation, or order; after which, and until such rule,

regulation, or order is suspended, modified, or revoked, it shall be

unlawful for any person—

(1) directly or indirectly to buy or sell, or agree to buy or sell,

under contracts of sale of such commodity for future delivery

on or subject to the rules of the contract market or derivatives

transaction execution facilities or markets to which the rule,

regulation, or order applies, any amount of such commodity

during any one business day in excess of any trading limit

fixed for one business day by the Commission in such rule, regulation, or order for or with respect to such commodity; or

(2) directly or indirectly to hold or control a net long or a net

short position in any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facilities in excess of any position limit fixed

by the Commission for or with respect to such commodity.

* * * * * * *

(e) Nothing in this section shall prohibit or impair the adoption

by any øcontract market or¿ contract market, derivatives transaction execution facility, or by any other board of trade ølicensed

45

or designated¿ licensed, designated, or registered by the Commission of any bylaw, rule, regulation, or resolution fixing limits on

the amount of trading which may be done or positions which may

be held by any person under contracts of sale of any commodity for

future delivery traded on or subject to the rules of such øcontract

market, or¿ contract market, derivatives transaction execution facility, or under options on such contracts or commodities traded on or

subject to the rules of such øcontract market or¿ contract market,

derivatives transaction execution facility, or such board of trade:

Provided, That if the Commission shall have fixed limits under this

section for any contract or under section 4c of this Act for any commodity option, then the limits fixed by the bylaws, rules, regulations, and resolutions adopted by such øcontract market or¿ contract market, derivatives transaction execution facility, or such

board of trade shall not be higher than the limits fixed by the Commission. It shall be a violation of this Act for any person to violate

any bylaw, rule, regulation, or resolution of any øcontract market

or¿ contract market, derivatives transaction execution facility, or

other board of trade ølicensed or designated¿ licensed, designated,

or registered by the Commission fixing limits on the amount of

trading which may be done or positions which may be held by any

person under contracts of sale of any commodity for future delivery

or under options on such contracts or commodities, if such bylaw,

rule, regulation, or resolution has been approved by the Commission: Provided, That the provisions of section 9(c) of this Act shall

apply only to those who knowingly violate such limits.

SEC. 4b. CONTACTS DESIGNED TO DEFRAUD OR MISLEAD.

(a) It shall be unlawful (1) for any member of a øcontract market¿ registered entity, or for any correspondent, agent, or employee

of any member, in or in connection with any order to make, or the

making of, any contract of sale of any commodity in interstate commerce, made, or to be made, on or subject to the rules of any øcontract market¿ registered entity, for or on behalf of any other person,

or

* * * * * * *

øSEC. 4c PROHIBITED TRANSACTIONS

ø(a) It shall be unlawful * * * for any person to offer to enter

into, enter into, or confirm the execution of, any transaction involving any commodity, which is or may be used for (1) hedging any

transaction in interstate commerce in such commodity or the products or byproducts thereof, or (2) determining the price basis of any

such transaction in interstate commerce in such commodity, or (3)

delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof—

ø(A) if such transaction is, is of the character of, or is commonly known to the trade as, a ‘‘wash sale’’, ‘‘cross trade’’, or

‘‘accommodation trade’’, or is a fictitious sale; or

ø(B) if such transaction is used to cause any price to be reported, registered, or recorded which is not a true and bona

fide price.

Nothing in this section shall be construed to prevent the exchange

of futures in connection with cash commodity transactions or of futures for cash commodities, or of transfer trades or office trades if

made in accordance with board of trade rules applying to such

46

transactions and such rules shall have been approved by the Commission.¿

SEC. 4c. PROHIBITED TRANSACTIONS.

(a) IN GENERAL.—

(1) PROHIBITION.—It shall be unlawful for any person to offer

to enter into, enter into, or confirm the execution of a transaction described in paragraph (2) involving any commodity if

the transaction is used or may be used to—

(A) hedge any transaction in interstate commerce in the

commodity or the product or byproduct of the commodity;

(B) determine the price basis of any such transaction in

interstate commerce in the commodity; or

(C) deliver any such commodity sold, shipped, or received

in interstate commerce for the execution of the transaction.

(2) TRANSACTION.—A transaction referred to in paragraph (1)

is a transaction that—

(A)(i) is, is of the character of, or is commonly known to

the trade as, a ‘‘wash sale’’ or ‘‘accommodation trade’’; or

(ii) is a fictitious sale; or

(B) is used to cause any price to be reported, registered,

or recorded that is not a true and bona fide price.

(b) No person shall offer to enter into, * * *

* * * * * * *

(g) The Commission shall adopt rules requiring that a contemporaneous written record be made, as practicable, of all orders for

execution on the floor or subject to the rules of each contract market or derivatives transaction execution facility placed by a member

of the contract market or derivatives transaction execution facility

who is present on the floor at the time such order is placed.

SEC. 4d. DEALING BY UNREGISTERED FUTURES COMMISSION MERCHANTS OR INTRODUCING MERCHANTS PROHIBITED.

It shall be unlawful for any person to engage as futures commission merchant or introducing broker in soliciting orders or accepting orders for the purchase or sale of any commodity for future delivery, or involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or

derivatives transaction execution facility unless—

* * * * * * *

(2) such person shall, if a futures commission merchant,

whether a member or nonmember of a contract market or derivatives transaction execution facility, treat and deal with all

money, securities, and property received by such person to

margin, guarantee, or secure the trades or contracts of any

customer of such person, or accruing to such customer as the

result of such trades or contracts, as belonging to such customer. Such money, securities, and property shall be separately accounted for and shall not be commingled with the

funds of such commission merchant or be used to margin or

guarantee the trades or contracts, or to secure or extend the

credit, of any customer or person other than the one for whom

the same are held: Provided, however, That such money, securities, and property of the customers of such futures commission merchant may, for convenience, be commingled and deposVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00046 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
47

ited in the same account or accounts with any bank or trust

company or with the clearing house organization of such contract market or derivatives transaction execution facility, and

that such share thereof as in the normal course of business

shall be necessary to margin, guarantee, secure, transfer, adjust, or settle the contracts or trades of such customers, or resulting market positions, with the clearing-house organization

of such contract market or derivatives transaction execution facility or with any member of such contract market, may be

withdrawn and applied to such purposes, including the payment of commissions, brokerage, interest, taxes, storage, and

other charges, lawfully accruing in connection with such contracts and trades: Provided further, That in accordance with

such terms and conditions as the Commission may prescribe by

rule, regulation, or order, such money, securities, and property

of the customers of such futures commission merchant may be

commingled and deposited as provided in this section with any

other money, securities, and property received by such futures

commission merchant and required by the Commission to be

separately accounted for and treated and dealt with as belonging to the customers of such futures commission merchant:

Provided further, That such money may be invested in obligations of the United States, in general obligations of any State

or of any political subdivision thereof, and in obligations fully

guaranteed as to principal and interest by the United States,

such investments to be made in accordance with such rules

and regulations and subject to such conditions as the Commission may prescribe.

It shall be unlawful for any person, including but not limited to

any clearing agency of a contract market or derivatives transaction

execution facility and any depository, that has received any money,

securities, or property for deposit in a separate account as provided

in paragraph (2) of this section, to hold, dispose of, or use any such

money, securities, or property as belonging to the depositing futures commission merchant or any person other than the customers

of such futures commission merchant.

SEC. 4e. REQUIRED REGISTRATION OF FLOOR TRADERS AND FLOOR

BROKERS.

It shall be unlawful for any person to act as floor trader in executing purchases and sales, or as floor broker in executing any orders for the purchase or sale, of any commodity for future delivery,

or involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or derivatives

transaction execution facility unless such person shall have registered, under this Act, with the Commission as such floor trader

or floor broker and such registration shall not have expired nor

been suspended nor revoked.

SEC. 4f. REGISTRATION OF FUTURES COMMISSION MERCHANTS, INTRODUCING BROKERS, AND FLOOR BROKERS.

(a) Any person desiring to register as a futures commission merchant, introducing broker, floor broker, or floor trader hereunder

shall be registered upon application to the Commission. The application shall be made in such form and manner as prescribed by the

Commission, giving such information and facts as the Commission

may deem necessary concerning the business in which the appliVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00047 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
48

cant is or will be engaged, including in the case of an application

of a futures commission merchant or an introducing broker, the

names and addresses of the managers of all branch offices, and the

names of such officers and partners, if a partnership, and of such

officers, directors, and stockholders, if a corporation, as the Commission may direct. Such person, when registered hereunder, shall

likewise continue to report and furnish to the Commission the

above-mentioned information and such other information pertaining to such person’s business as the Commission may require.

Each registration shall expire on December 31 of the year for which

issued or at such other time, not less than one year from the date

of issuance, as the Commission may by rule, regulation, or order

prescribe, and shall be renewed upon application therefor unless

the registration has been suspended (and the period of such suspension has not expired) or revoked pursuant to the provisions of

this Act.

(b) Notwithstanding any other provisions of this Act, no person

desiring to register as futures commission merchant or as introducing broker shall be so registered unless he meets such minimum financial requirements as the Commission may by regulation

prescribe as necessary to insure his meeting his obligations as a

registrant, and each person so registered shall at all times continue

to meet such prescribed minimum financial requirements: Provided, That such minimum financial requirements will be considered met if the applicant for registration or registrant is a member

of a contract market or derivatives transaction execution facility

and conforms to minimum financial standards and related reporting requirements set by such contract market or derivatives transaction execution facility in its bylaws, rules, regulations, or resolutions and approved by the Commission as adequate to effectuate

the purposes of this subsection * * *

* * * * * * *

(B) The Commission, in requiring reports pursuant to

this paragraph, shall specify the information required, the

period for which it is required, the time and date on which

the information must be furnished, and whether the information is to be furnished directly to the Commission or to

a contract market or derivatives transaction execution facility or other self- regulatory organization with primary responsibility for examining the registered futures commission merchant’s financial and operational condition.

SEC. 4g. REPORTING AND RECORDKEEPING.

* * * * * * *

(b) Every øclearinghouse and contract market¿ registered entity

shall maintain daily trading records. The daily trading records

shall include such information as the Commission shall prescribe

by rule* * *

* * * * * * *

(f) Nothing contained in this section shall be construed to prohibit the Commission from making separate determinations for different øclearinghouses, contract markets, and exchanges¿ registered entity when such determinations are warranted in the judgment of the Commission.

49

SEC. 4h. FALSE SELF-REPRESENTATION AS øCONTRACT MARKET¿

REGISTERED ENTITY MEMBER PROHIBITED.

It shall be unlawful for any person falsely to represent such person to be a member of a øcontract market¿ registered entity or the

representative or agent of such member, or to be a registrant under

this Act or the representative or agent of any registrant, in soliciting or handling any order or contract for the purchase or sale of

any commodity in interstate commerce or for future delivery, or

falsely to represent in connection with the handling of any such

order or contract that the same is to be or has been executed on,

or by or through a member of, any øcontract market¿ registered entity.

SEC. 4i. REPORTS OF DEALS EQUAL TO OR IN EXCESS OF TRADING

LIMIT.

It shall be unlawful for any person to make any contract for the

purchase or sale of any commodity for future delivery on or subject

to the rules of any contract market or derivatives transaction execution facility—

* * * * * * *

øSEC. 4j. TRADES AND EXECUTIONS BY FLOOR BROKERS.

ø(a)(1) The Commission shall issue regulations to prohibit the

privilege of dual trading on each contract market which has not

been exempted from such regulations under paragraph (3). The

regulations issued by the Commission under this paragraph—

ø(A) shall provide that the prohibition of dual trading thereunder shall take effect not less than thirty days after the

issuance of the regulations;

ø(B) shall provide for exceptions, as the Commission determines necessary and appropriate, to ensure fairness and orderly trading in affected contract markets, including—

ø(i) transition measures and a reasonable phase-in period,

ø(ii) exceptions for spread transactions and the correction of trading errors,

ø(iii) allowance for a customer to designate in writing

not less than once annually a named floor broker to execute orders for such customer, notwithstanding the regulations to prohibit the privilege of dual trading required

under this paragraph, and

ø(iv) other measures reasonably designed to accommodate unique or special characteristics of individual boards

of trade or contract markets, to address emergency or unusual market conditions, or otherwise to further the public

interest;

ø(C) shall establish procedures for the application for and

issuance of exemptions under paragraph (3) which, among

other things, shall specify the relevant data required to be submitted by the board of trade with each application;

ø(D) shall specify the methodology by which it shall determine the average daily trading volume on a contract market

for purposes of paragraph (4) based on a moving daily average

of either six or twelve months; and

ø(E) shall establish an expeditious procedure to revoke an

exemption granted under paragraph (3) providing sufficient noVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00049 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
50

tice, opportunity for hearing, and findings to assure fundamental fairness.

ø(2) As used in this section, the term ‘‘dual trading’’ means the

execution of customer orders by a floor broker during any trading

session in which the floor broker executes any trade in the same

contract market for—

ø(A) the account of such floor broker;

ø(B) an account for which such floor broker has trading discretion; or

ø(C) an account controlled by a person with whom such floor

broker is subject to trading restrictions under section 4j(d).

ø(3) The Commission shall exempt a contract market from the

regulations issued under paragraph (1), either unconditionally or

on stated conditions (including stated periods of time) relevant to

the attainment or maintenance of compliance with the standards in

subparagraphs (A) and (B), upon finding that—

ø(A) the trade monitoring system in place at the contract

market satisfies the requirements of section 5a(b) with regard

to violations attributable to dual trading at such contract market; or

ø(B)(i) there is a substantial likelihood that a dual trading

suspension would harm the public interest in hedging or price

basing at such contract market, and

ø(ii) other corrective actions, such as those described in section 8e, are sufficient and appropriate to bring the contract

market into compliance with the standard in subparagraph

(A).

ø(4)(A) The regulations issued by the Commission under paragraph (1) shall not apply to any contract market in which the Commission determines that the average daily trading volume is less

than the threshold trading level established for the contract market

under this paragraph.

ø(B) The threshold trading level shall be set initially at eight

thousand contracts.

ø(C) The Commission may, by rule or order—

ø(i) increase, or

ø(ii) at any time following the date three years after the date

of enactment of this paragraph, decrease, the threshold trading

level for specific contract markets after taking into consideration the actual or potential effects of a dual trading ban on

the public interest in hedging or price basing at the affected

contract market.

ø(D) The Commission shall provide the affected contract market

with adequate notice of any such increase or decrease.

ø(5) Before the Commission denies an application for an exemption under paragraph (3) or exempts a contract market subject to

conditions, it shall—

ø(A) provide the affected board of trade with notice of the

reason or reasons that the application was not approved as

submitted, including—

ø(i) any reason the Commission has to believe that the

trade monitoring system in place at the contract market

does not satisfy the requirements of paragraph (3)(A) and

the basis for such reason;

51

ø(ii) any corrective action or actions, such as those described in section 8e, that the Commission believes the affected contract market must take to satisfy the requirements of paragraph (3)(A), and an acceptable timetable for

such corrective action; and

ø(iii) any conditions or limitations that the Commission

proposes to attach to the exemption under paragraph (3);

ø(B) provide the affected board of trade with an opportunity

for a hearing through submission of written data, views, or arguments and, under terms set by the Commission at the request of the board of trade, through an oral presentation of

views and comments to the Commission, in order to make the

demonstration required under paragraph (3) or otherwise to

petition the Commission with respect to its application; and

ø(C) make findings, based on the information, views, and arguments placed before it in connection with the application, as

to whether—

ø(i) the standard in either paragraph (3)(A) or (3)(B) applies, and

ø(ii) any conditions or limitations which the Commission

proposes to attach under paragraph (3) are appropriate in

light of the purposes of this subsection.

The Commission shall publish in the Federal Register notice of any

exemptive petitions filed under paragraph (3) and any proposed or

final actions the Commission may take on such petitions. Unless

the Commission determines that more immediate action is appropriate in the public interest, any Commission order denying an application or exempting a contract market conditionally shall not

take effect for at least twenty days following the issuance of the

order.

ø(6) Violation of an order issued under this subsection shall be

considered a violation of an order of the Commission for purposes

of—

ø(i) establishing liability and assessing penalties against a

contract market or any director, officer, agent, or employee

thereof under section 6b or 6c; or

ø(ii) initiating proceedings under section 5b or 6(a).

ø(7) Any board of trade which has applied to the Commission to

exempt a contract market from the regulations issued under paragraph (1) may obtain judicial review of any final action of the Commission to deny such application, to issue an exemption subject to

conditions, or to revoke an exemption, only in the United States

Court of Appeals for the circuit in which the party seeking review

resides or has its principal place of business, or in the United

States Court of Appeals for the District of Columbia Circuit, under

the standards applicable to rulemaking proceedings under section

553 of title 5, United States Code.

ø(8)(A) The Commission shall issue the regulations required

under paragraph (1) not later than two hundred and seventy days

after the enactment of this section. If, prior to the effective date of

the prohibition on dual trading under such regulations, a board of

trade submits to the Commission an application for an exemption

for a contract market under paragraph (3), the Commission shall

not apply the prohibition against dual trading under paragraph (1)

52

to the contract market until the Commission has approved or denied the application.

ø(B) The Commission shall approve or deny any application for

an exemption under paragraph (3) within seventy-five days after

receipt of the application, or as soon as practicable.

ø(b) If, in addition to the regulations issued pursuant to subsection (a), the Commission has reason to believe that dual tradingrelated or facilitated abuses are not being or cannot be effectively

addressed by subsection (a), the Commission shall make a determination, after notice and opportunity for hearing, whether or not

a floor broker may trade for his own account or any account in

which such broker has trading discretion, and also execute a customer’s order for future delivery and, if the Commission determines

that such trades and such executions shall be permitted, the Commission shall further determine the terms, conditions, and circumstances under which such trades and such executions shall be

conducted: Provided, That any such determination shall, at a minimum, take into account the effect upon the liquidity of trading of

each market: And provided further, That nothing herein shall be

construed to prohibit the Commission from making separate determinations for different contract markets when such are warranted

in the judgment of the Commission, or to prohibit contract markets

from setting terms and conditions more restrictive than those set

by the Commission.

ø(c) The Commission shall within nine months after the effective

date of the Commodity Futures Trading Commission Act of 1974,

and subsequently when it determines that changes are required,

make a determination, after notice and opportunity for hearing,

whether or not a futures commission merchant may trade for its

own account or any proprietary account, as defined by the Commission, and if the Commission determines that such trades shall be

permitted, the Commission shall further determine the terms, conditions, and circumstances under which such trades shall be conducted: Provided, That any such determination, at a minimum,

shall take into account the effect upon the liquidity of trading of

each market: And provided further, That nothing herein shall be

construed to prohibit the Commission from making separate determinations for different contract markets when such are warranted

in the judgment of the Commission, or to prohibit contract markets

from setting terms and conditions more restrictive than those set

by the Commission.

ø(d)(1) Except as provided in paragraph (2), a floor broker may

not execute an order of a customer if such floor broker knows the

opposite party to the transaction to be a floor broker or floor trader

with whom such trader or broker has a relationship involving trading on such contract market as—

ø(A) a partner in a partnership;

ø(B) an employer or employee; or

ø(C) Such other affiliation as the Commission may specify by

rule.

ø(2) Paragraph (1) shall not apply—

ø(A) if the Commission has adopted rules that the Commission certifies to Congress require procedures and standards designed to prevent violations of this Act attributable to the trading described in paragraph (1); or

53

ø(B) to any contract market that has implemented rules designed to prevent violations of this Act attributable to the trading described in paragraph (1), except that, if the Commission

determines, by rule or order, that such rules are not adequate

to prevent such violations, paragraph (1) shall become effective

with respect to such contract market after a reasonable period

determined by the Commission.¿

SEC. 4øk¿j. REGISTRATION OF ASSOCIATES OF FUTURES COMMISSION

MERCHANTS, COMMODITY POOL OPERATORS, AND COMMODITY TRADING ADVISORS.

* * * * * * *

SEC. 4øl¿k. COMMODITY TRADING ADVISORS AND COMMODITY POOL

OPERATORS.

It is hereby found that the activities of commodity trading advisors and commodity pool operators are affected with a national

public interest in that, among other things—

* * * * * * *

(2) their advice, counsel, publications, writings, analyses, and

reports customarily relate to and their operations are directed

toward and cause the purchase and sale of commodities for future delivery on or subject to the rules of contract markets or

derivatives transaction execution facilities; and

(3) the foregoing transactions occur in such volume as to affect substantially transactions on contract markets or derivatives transaction execution facilities.

SEC. 4øm¿l. USE OF MAILS OR OTHER MEANS OR INSTRUMENTALITIES

OF INTERSTATE COMMERCE BY COMMODITY TRADING

ADVISORS AND COMMODITY POOL OPERATORS.

* * * * * * *

SEC. 4øn¿m. REGISTRATION OF COMMODITY TRADING ADVISORS AND

COMMODITY POOL OPERATORS.

* * * * * * *

SEC. 4øo¿n. FRAUD AND MISREPRESENTATION BY COMMODITY TRADING ADVISORS, COMMODITY POOL OPERATORS, AND ASSOCIATED PERSONS.

* * * * * * *

SEC. 4øp¿o. STANDARDS AND EXAMINATIONS.

(a) * * * The Commission may further prescribe by rules and

regulations that, in lieu of examinations administered by the Commission, futures associations registered under section 17 of this

øAct or contract markets¿ Act, contract markets, or derivatives

transaction execution facilities may adopt written proficiency examinations.

* * * * * * *

(b) The Commission shall issue regulations to require new registrants, within six months after receiving such registration, to attend a training session, and all other registrants to attend periodic

training sessions, to ensure that registrants understand their responsibilities to the public under this Act, including responsibilities

to observe just and equitable principles of trade, any rule or regulation of the Commission, any rule of any appropriate contract marVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00053 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
54

ket derivatives transaction execution facility, registered futures association, or other self-regulatory organization, or any other applicable Federal or state law, rule or regulation.

øSEC. 5. DESIGNATION OF BOARD OF TRADE AS ‘‘CONTRACT MARKET’’

øThe Commission is hereby authorized and directed to designate

any board of trade as a ‘‘contract market’’ when, and only when,

such board of trade complies with and carries out the following conditions and requirements:

ø(1) When located at a terminal market where any cash commodity of the kind specified in the contracts of sale of commodities for future delivery to be executed on such board is sold in

sufficient volumes and under such conditions as fairly to reflect

the general value of the commodity and the differences in

value between the various grades of such commodity, and

where there is available to such board of trade official inspection service approved by the Secretary of Agriculture or the

Commission for the purpose: Provided, That any board of trade

not so located shall be designated as a ‘‘contract market’’ if

such board of trade provides for the delivery of commodities on

such contracts at a delivery point or points and upon terms

and conditions approved by the Commission.

ø(2) When the governing board thereof provides for the making and filing by the board or any member thereof, as the Commission may direct, of reports in accordance with the rules and

regulations, and in such manner and form and at such times

as may be prescribed by the Commission, showing the details

and terms of all transactions entered into by the board, or the

members thereof, either in cash transactions or transactions

for future delivery consummated on or subject to the rules of

a board of trade, and when such governing board provides, in

accordance with such rules and regulations, for the keeping of

a record by the board or the members of the board of trade,

as the Commission may direct, showing the details and terms

of all cash and future transactions entered into by them, consummated on or subject to the rules of a board of trade, such

record to be in permanent form, showing the parties to all such

transactions, including the persons for whom made, any assignments or transfers thereof, with the parties thereto, and

the manner in which said transactions are fulfilled, discharged,

or terminated. Such record shall be required to be kept for a

period of three years from the date thereof, or for a longer period if the Commission shall so direct, and shall at all times

be open to the inspection of any representative of the Commission or United States Department of Justice.

ø(3) When the governing board thereof provides for the prevention of dissemination by the board or any member thereof,

of false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or

tend to affect the price of any commodity in interstate commerce.

ø(4) When the governing board thereof provides for the prevention of manipulation of prices and the cornering of any commodity by the dealers or operators upon such board.

ø(5) When the governing board thereof does not exclude from

membership in, and all privileges on, such board of trade, any

55

duly authorized representative of any lawfully formed and conducted cooperative association of producers having adequate financial responsibility which is engaged in any cash commodity

business, if such association has complied, and agrees to comply, with such terms and conditions as are or may be imposed

lawfully on other members of such board: Provided, That no

rule of a contract market shall forbid or be construed to forbid

the return on a patronage basis by such cooperative association

to its bona fide members of moneys collected in excess of the

expense of conducting the business of such association.

ø(6) When the governing board provides for making effective

the final orders or decisions entered pursuant to the provisions

of section 6(c), and the orders issued pursuant to the provisions

of section 5a of this Act, and for compliance in all other respects with the requirements applicable to such board of trade

under this Act.

ø(7) When such board of trade demonstrates that transactions for future delivery in the commodity for which designation as a contract market is sought will not be contrary to the

public interest.

ø(8) When such board of trade demonstrates that every contract market for which such board of trade is designated complies with the requirements of section 5a(b).

øSEC. 5a. DUTIES OF CONTRACT MARKETS

ø(a) Each contract market shall—

ø(1) promptly furnish the Commission copies of all bylaws,

rules, regulations, and resolutions made or issued by it or by

the governing board thereof or any committee, and of all

changes and proposed changes therein;

ø(2) keep all books, records, minutes, and journals of proceedings of such contract market, and its governing board,

committees, subsidiaries, and affiliates in a manner that will

clearly describe all matters discussed by such contract market,

governing board, committees, subsidiaries and affiliates and reveal any action taken in such matters, and allow inspection at

all times by any authorized representative of the Commission

or United States Department of Justice of all such books,

records, minutes, and journals of proceedings. Such books,

records, minutes, and journals of proceedings shall be kept for

a period of three years from the date thereof, or for a longer

period if the Commission shall so direct;

ø(3) require the operators of warehouses in which or out of

which any commodity is deliverable on any contract for future

delivery made on or subject to the rules of such contract market, to make such reports, keep such records, and permit such

warehouse visitation as the Commission may prescribe. Such

books and records shall be required to be kept for a period of

three years from the date thereof, or for a longer period if the

Commission shall so direct, and such books, records, and warehouses shall be open at all times to inspection by any representative of the Commission or United States Department of

Justice;

ø(4) when so directed by order of the Commission, provide

for a period, after trading in contracts of sale of any commodity

for future delivery in a delivery month has ceased, during

56

which contracts of sale of such commodity for future delivery

in such month may be satisfied by the delivery of the actual

cash commodity. Whenever, after due notice and opportunity

for hearing, the Commission finds that provision for such a period of delivery for any one or more commodities or markets

would prevent or tend to prevent ‘‘squeezes’’ and market congestion endangering price stability, it shall, by order, require

such period of delivery (which shall be not less than three nor

more than ten business days) applicable to such commodities

and markets as it finds will prevent or tend to prevent such

‘‘squeezes’’ and market congestion: Provided, however, that

such order shall not apply to then existing contracts;

ø(5) require the party making delivery of any commodity on

any contract of sale of such commodity for future delivery to

furnish the party obligated under the contract to accept delivery, written notice of the date of delivery at least one business

day prior to such date of delivery. Whenever, after due notice

and opportunity for hearing, the Commission finds that the

giving of longer notice of delivery is necessary to prevent or diminish unfair practices in trading in any one or more commodities or markets, it shall by order require such longer notice of

delivery (which shall be not more than ten business days) applicable to such commodities and markets as it finds will prevent or diminish such unfair practices: Provided, however,

That such order shall not apply to then existing contracts;

ø(6) require that all contracts of sale of any commodity for

future delivery on such contract market shall provide for the

delivery thereunder of commodities of grades conforming to

United States standards, if such standards shall have been officially promulgated and adopted by the Commission;

ø(7) require that receipts issued under the United States

Warehouse Act shall be accepted in satisfaction of any futures

contract, made on or subject to the rules of such contract market, without discrimination and notwithstanding that the

warehouseman issuing such receipts is not also licensed as a

warehouseman under the laws of any State or enjoys other or

different privileges than under State law: Provided, however,

That such receipts shall be for the kind, quality, and quantity

of commodity specified in such contract and that the warehouse in which the commodity is stored meets such reasonable

requirements as may be imposed by such contract market on

other warehouses as to location, accessibility, and suitability

for warehousing and delivery purposes: And provided further,

That this subsection shall apply only to futures contracts for

those commodities which may be delivered from a warehouse

subject to the United States Warehouse Act;

ø(8) enforce all bylaws, rules, regulations, and resolutions,

made or issued by it or by the governing board thereof or any

committee, that (i) have been approved by the Commission

pursuant to paragraph (12) of this section, (ii) have become effective under such paragraph, or (iii) must be enforced pursuant to any Commission rule, regulation, or order; and revoke

and not enforce any bylaw, rule, regulation, or resolution,

made, issued, or proposed by it or by the governing board

57

thereof or any committee, that has been disapproved by the

Commission;

ø(9) enforce all bylaws, rules, regulations, and resolutions

made or issued by it or by the governing board thereof or by

any committee, which provide minimum financial standards

and related reporting requirements for futures commission

merchants who are members of such contract market, and

which have been approved by the Commission;

ø(10) permit the delivery of any commodity, on contracts of

sale thereof for future delivery, of such grade or grades, at

such point or points and at such quality and locational price

differentials as will tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of such

commodity in interstate commerce. If the Commission after investigation finds that the rules and regulations adopted by a

contract market permitting delivery of any commodity on contracts of sale thereof for future delivery, do not accomplish the

objectives of this subsection, then the Commission shall notify

the contract market of its finding and afford the contract market an opportunity to make appropriate changes in such rules

and regulations. If the contract market within seventy-five

days of such notification fails to make the changes which in

the opinion of the Commission are necessary to accomplish the

objectives of this subsection, then the Commission after granting the contract market an opportunity to be heard, may

change or supplement such rules and regulations of the contract market to achieve the above objectives: Provided, That

any order issued under this paragraph shall not apply to contracts of sale for future delivery in any months in which contracts are currently outstanding and open: And provided further, That no requirement for an additional delivery point or

points shall be promulgated following hearings until the contract market affected has had notice and opportunity to file exceptions to the proposed order determining the location and

number of such delivery point or points;

ø(11) provide a fair and equitable procedure through arbitration or otherwise (such as by delegation to a registered futures

association having rules providing for such procedures) for the

settlement of customers’ claims and grievances against any

member or employee thereof: Provided, That (A) the use of

such procedure by a customer shall be voluntary, (B) the term

‘‘customer’’ as used in this paragraph shall not include another

member of the contract market, and (C) in the case of a claim

arising from a violation in the execution of an order on the

floor of a contract market, such procedure shall provide, to the

extent appropriate—

ø(i) for payment of actual damages proximately caused

by such violation. If an award of actual damages is made

against a floor broker in connection with the execution of

a customer order, and the futures commission merchant

which selected the floor broker for the execution of the customer order is held to be responsible under section 2(a)(1)

for the floor broker’s violation, such futures commission

merchant may be required to satisfy such award; and

58

ø(ii) where the violation is willful and intentional, for

payment to the customer of punitive or exemplary damages, in addition to losses proximately caused by the violation, in an amount equal to no more than two times the

amount of such losses. If punitive or exemplary damages

are awarded against a floor broker in connection with the

execution of a customer order, and the futures commission

merchant which selected the floor broker for the execution

of such order is held to be responsible under section 2(a)(1)

for the floor broker’s violation, such futures commission

merchant may be required to satisfy the award of punitive

or exemplary damages if the floor broker fails to do so, except that such requirement shall apply to the futures commission merchant only if it willfully and intentionally selected the floor broker with the intent to assist or facilitate

the floor broker’s violation.

ø(12)(A) except as otherwise provided in this paragraph, submit to the Commission for its prior approval all bylaws, rules,

regulations, and resolutions (‘‘rules’’) made or issued by such

contract market, or by the governing board thereof or any committee thereof, that relate to terms and conditions in contracts

of sale to be executed on or subject to the rules of such contract

market, as such terms and conditions are defined by the Commission by rule or regulation, except those rules relating to the

setting of levels of margin. Each contract market shall submit

to the Commission all other rules (except those relating to the

setting of levels of margin and except those that the Commission may specify by regulation) and may make such rules effective ten days after receipt of such submission by the Commission unless, within the ten-day period, the contract market requests review and approval thereof by the Commission or the

Commission notifies such contract market in writing of its determination to review such rules for approval. The determination to review such rules for approval shall not be delegable to

any employee of the Commission. At least thirty days before

approving any rules of major economic significance, as determined by the Commission, the Commission shall publish a notice of such rules in the Federal Register. The Commission

shall give interested persons an opportunity to participate in

the approval process through the submission of written data,

views, or arguments. The determination by the Commission

whether any such rules are of major economic significance

shall be final and not subject to judicial review. The Commission shall approve such rules if such rules are determined by

the Commission not to be in violation of this Act or the regulations of the Commission and the Commission shall disapprove,

after appropriate notice and opportunity for hearing, any such

rule which the Commission determines at any time to be in

violation of the provisions of this Act or the regulations of the

Commission. If the Commission institutes proceedings to determine whether a rule should be disapproved pursuant to this

paragraph, it shall provide the contract market with written

notice of the proposed grounds for disapproval, including the

specific sections of this Act or the Commission’s regulations

which would be violated. At the conclusion of such proceedings,

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the Commission shall approve or disapprove such rule. Any

disapproval shall specify the sections of this Act or the Commission’s regulations which the Commission determines such

rule has violated or, if effective, would violate. If the Commission does not approve or institute disapproval proceedings with

respect to any rule within one hundred and eighty days after

receipt or within such longer period as the contract market

may agree to, or if the Commission does not conclude a disapproval proceeding with respect to any rule within one year

after receipt or within such longer period as the contract market may agree to, such rule may be made effective by the contract market until such time as the Commission disapproves

such rule in accordance with this paragraph.

ø(B)(i) The Commission shall issue regulations to specify the

terms and conditions under which, in an emergency as defined

by the Commission, a contract market may, by a two-thirds

vote of its governing board, make a rule (hereinafter referred

to as an ‘‘emergency rule’’) effective on a temporary basis without prior Commission approval, or without compliance with the

ten-day notice requirement under subparagraph (A), or during

any period of review by the Commission, if the contract market

makes every effort practicable to notify the Commission of such

emergency rule, along with a complete explanation of the

emergency involved, prior to making the emergency rule effective. If the contract market does not provide the Commission

with such notification and explanation before making the

emergency rule effective, the contract market shall provide the

Commission with such notification and explanation at the earliest possible date. The Commission may delegate the power to

receive such notification and explanation to such individuals as

the Commission determines necessary and appropriate.

ø(ii) Within ten days of the receipt from a contract market

of notification of such an emergency rule and an explanation

of the emergency involved, or as soon as practicable, the Commission shall determine whether it is appropriate either—

ø(I) to permit such rule to remain in effect during the

pendency of the emergency, or

ø(II) to suspend the effect of such rule pending review either under the procedures of subparagraph (A) or otherwise.

The Commission shall submit a report on its determination

and the basis thereof with respect to such emergency rule to

the affected contract market, to the Committee on Agriculture

of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate. If the report is

submitted more than ten days after the Commission’s receipt

of notification of such an emergency rule from a contract market, the report shall explain why submission within such tenday period was not practicable. A determination by the Commission to suspend the effect of a rule under this subparagraph

shall be subject to judicial review on the same basis as an

emergency determination under section 8a(9). Nothing in this

paragraph shall be construed to limit the authority of the Commission under section 8a(9);

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ø(13) provide for disclosure to the contract market and the

Commission of any trade, business, or financial partnership,

cost-, profit-, or capital-sharing agreements or other formal arrangement among or between floor brokers and traders on

such contract market where such partnership agreement or arrangement is material and known to the floor broker or floor

trader;

ø(14)(A) provide for meaningful representation on the governing board of the contract market’s board of trade of a diversity of interests, including—

ø(i) futures commission merchants;

ø(ii) producers of, and consumers, processors, distributors, or merchandisers of, principal commodities traded on

the board of trade;

ø(iii) floor brokers and traders; and

ø(iv) participants in a variety of pits or principal groups

of commodities traded on the exchange.

ø(B) provide that no less than 20 percent of the regular voting members of such board be comprised of nonmembers of

such contract market’s board of trade with—

ø(i) expertise in futures trading, or the regulation thereof, or in commodities traded through contracts on the

board of trade; or

ø(ii) other eminent qualifications making such person capable of participating in and contributing to board deliberations.

ø(C) provide that no less than 10 percent of the regular voting members of such board be comprised where applicable of

farmers, producers, merchants, or exporters of principal commodities traded on the exchange;

ø(15)(A) provide on all major disciplinary committees for a

diversity of membership sufficient to ensure fairness and to

prevent special treatment or preference for any person in the

conduct of disciplinary proceedings and the assessment of penalties.

ø(B) Consistent with Commission rules, a major disciplinary

committee hearing a disciplinary matter shall include—

ø(i) a majority of qualified persons representing a trading status other than that of the subject of the proceeding;

and

ø(ii) where appropriate to carry out the purposes of this

Act, qualified persons who are not members of the exchange.

ø(C) For purposes of this paragraph, a trading status on a

contract market may include, consistent with Commission

rules, such categories as

ø(i) floor brokers and traders;

ø(ii) producers, consumers, processors, distributors, or

merchandisers of commodities;

ø(iii) futures commission merchants; and

ø(iv) members of the aforementioned categories who participate in particular contract markets or principal groups

of commodities on the board of trade.

ø(D) If a contract market takes final disciplinary action

against a member for a violation that involves the execution of

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a customer transaction and results in financial harm to such

customer, the contract market shall promptly inform the futures commission merchant identified on the records of such

contract market as having cleared such transaction, and such

futures commission merchant shall promptly inform the person

identified on its records as the owner of the account for which

such transaction was executed, of the disciplinary action and

the principal facts thereof;

ø(16) provide that no member found by the Commission, a

contract market, a registered futures association, or a court of

competent jurisdiction to have committed any violation of this

Act or any other provision of law that would reflect on the fitness of the member may serve on any contract market oversight or disciplinary panel for an appropriate period (as defined

by Commission rule); and

ø(17)(A) provide for the avoidance of conflict of interest in deliberations by the governing board and any disciplinary and

oversight committees. In order to comply with this subparagraph, each contract market shall adopt rules and procedures

to require, at a minimum, that

ø(i) any member of a governing board or a disciplinary

or other oversight committee must abstain from confidential deliberations and voting on any matter where the

named party in interest is the member, the member’s employer, the member’s employee, or any other person that

has a business, employment, or family relationship with

the member that warrants abstention by the member;

ø(ii) any member of a governing board or a disciplinary

or other oversight committee must abstain from voting on

any significant action that would not be submitted to the

Commission for its prior approval, if, as determined in accordance with regulations promulgated by the Commission, the member knowingly has a direct and substantial

financial interest in the result of the vote, based either on

positions held personally or at an affiliated firm;

ø(iii) prior to the deliberations of the governing board,

disciplinary board, or other oversight committee, acting directly or indirectly through an authorized member or contract market official, the positions of the members of such

board or committee, and positions of the firm or firms with

which such members are affiliated, are reviewed: Provided,

however, That no contract market or official, employee,

member, other than the member whose position or positions are being reviewed, or agent thereof shall be subject

to liability, except for liability in an action initiated by the

Commission, for having conducted this review and for having taken or not taken further action; and

ø(iv) the board or committee shall clearly reflect, in the

minutes of such meeting, that the review required in

clause (iii) occurred and any decisions by a member to abstain or by the board or committee whether to direct a

member or members to abstain from deliberations or voting on the matter before the board or committee.

Any member prohibited from voting on a rule pursuant to this

paragraph shall not be included in determining whether there

62

has been a two-thirds vote of members of the governing board

or committee as required by subparagraph (12).

ø(B) For the purposes of this paragraph, the term ‘‘significant action that would not be submitted to the Commission for

its prior approval’’ includes—

ø(i) any nonphysical emergency rule; or

ø(ii) any changes in margin levels designed to respond to

extraordinary market conditions that are likely to have a

substantial affect on prices in any contract traded on such

contract market, but does not include any rule not submitted for prior Commission approval because such rule is

unrelated to terms and conditions of any contract traded

on such contract market.

ø(C) Notwithstanding the provisions of subparagraph (A)(ii),

the Commission shall issue rules establishing the conditions

under which a member of a board or committee who is required to abstain from voting on a significant action, as provided in subparagraph (A)(ii), may participate in deliberations

on that action prior to such vote, where the member’s participation is consistent with the public interest.

ø(b)(1) Each contract market shall maintain and utilize a system

to monitor trading to detect and deter violations of the contract

market’s rules and regulations committed in the making of trades

and the execution of customer orders on the floor or subject to the

rules of such contract market. The system shall include—

ø(A) physical observation of trading areas;

ø(B) audit trail and recordkeeping systems able to capture

essential data on the terms, participants, and sequence of

transactions (including relevant data on unmatched trades and

out-trades);

ø(C) systems capable of reviewing, and used to review, data

on trades effectively on a regular basis to detect violations

committed in making trades and executing customer orders on

the floor or subject to the rules of such contract market,

including—

ø(i) all types of violations attributable to dual trading;

and

ø(ii) to the full extent feasible, as determined by the

Commission, all other types of violations involving the

making of trades and the execution of customer orders;

ø(D) the use of information gathered through such system on

a consistent basis to bring appropriate disciplinary actions

against violators;

ø(E) the commitment of resources to such system necessary

for such system to be effective in detecting and deterring such

violations, including adequate staff to develop and prosecute

disciplinary actions; and

ø(F) the assessment of meaningful penalties against violators

and the referral of appropriate cases to the Commission.

ø(2) The audit trail system of the contract market shall, consistent with Commission regulations, accurately record—

ø(A) the times of trades in increments of no more than one

minute in length; and

ø(B) the sequence of trades for each floor trader and broker.

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ø(3) Beginning three years after the date of enactment of this

subsection, the audit trail system of each contract market, except

as provided in paragraph (5) and except to the extent the Commission determines that circumstances beyond the control of the contract market prevent compliance despite the contract market’s affirmative good faith efforts to comply, shall—

ø(A) for all trades, record accurately and promptly the essential data on terms, participants, and times as required by the

Commission by rule, including the time of execution of such

trade, through a means that—

ø(i) records such data in a form which cannot be altered

except in a manner that will leave a complete and independent record of such alteration;

ø(ii) continually provides such data to the contract market;

ø(iii) identifies such time, to the extent practicable as determined by the Commission—

ø(I) independently of the person making the trade;

ø(II) through a mechanism that records the time

automatically when entered by the person making the

trade; or

ø(III) through such other means that will capture a

similarly reliable time; and

ø(iv) is adequately precise to determine, to the extent

practicable as determined by the Commission by rule or

order—

ø(I) the sequence of all trades by each floor trader;

and

ø(II) the sequence of all trades by each floor broker;

and

ø(B) to the extent practicable as determined by the Commission by rule or order, for customer trades, record the time that

each order is received on the floor of the board of trade, is received by the floor broker for execution (or when such order is

transmitted in an extremely rapid manner to the broker), and

is reported from the floor of the board of trade as executed,

through a means that—

ø(i) records such times in a form which cannot be altered

except in a manner that will leave a complete and independent record of such alteration;

ø(ii) continually provides such data to the contract market;

ø(iii) identifies such time—

ø(I) independently of the person making the trade or

processing the order;

ø(II) through a mechanism that records the time

automatically when entered by the person making the

trade or processing such order, as appropriate; or

ø(III) through such other means as will capture a

similarly reliable time; and

ø(iv) is adequately precise to determine—

ø(I) the sequence in which, for each futures commission merchant, floor broker, or member firm, as applicable, all orders are received on and reported from the

floor of the contract market; and

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ø(II) the sequence in which orders are received by

each floor broker for execution.

ø(4) The Commission may, by rule, establish standards under

which the audit trail systems required under paragraph (3) shall

record, to the extent practicable—

ø(A) the sequence of all trades made by all floor traders and

floor brokers; and

ø(B) the interval between the time of receipt and the time

of execution of each order by the floor broker executing the

order.

ø(5)(A) The Commission shall, by rule or order, make exemptions

from the requirements of paragraph (3)—

ø(i) for an exchange with respect to which the Commission

finds that—

ø(I) the volume of trading on such exchange is relatively

small and the exchange has demonstrated substantial compliance with the objectives of such paragraph; and

ø(II) the trade monitoring system at such exchange otherwise maintains a high level of compliance with this subsection; and

ø(ii) to the extent determined appropriate by the Commission, for categories of customer orders with respect to which

the Commission finds that such orders are transmitted to and

reported from the trading pit in an extremely rapid manner

such that substantial compliance with the objectives of paragraph (3) can be otherwise achieved.

ø(B) For purposes of subparagraph (A)(i)(I) the Commission shall

find that the volume of trading at an exchange is relatively small

if, among other things, the Commission determines that the average daily trading volume for each contract market for which the

board of trade is designated is less than the threshold trading level

established for the contract market under section 4j(a)(4).

ø(6) Any rule or order adopted by the Commission under paragraphs (4) and (5) shall become effective thirty legislative days or

ninety calendar days, whichever is later, after submission of such

rule or order to the Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate. For purposes of this paragraph, the term ‘‘legislative day’’ means any day on which either House of Congress is

in session.¿

SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.

(a) APPLICATIONS.—A board of trade applying to the Commission

for designation as a contract market shall submit an application to

the Commission that includes any relevant materials and records

the Commission may require consistent with this Act.

(b) CRITERIA FOR DESIGNATION.—

(1) IN GENERAL.—To be designated as a contract market, the

board of trade shall demonstrate to the Commission that the

board of trade meets the criteria specified in this subsection.

(2) PREVENTION OF MARKET MANIPULATION.—The board of

trade shall have the capacity to prevent market manipulation

through market surveillance, compliance, and enforcement

practices and procedures, including methods for conducting

real-time monitoring of trading and comprehensive and accurate trade reconstructions.

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(3) FAIR AND EQUITABLE TRADING.—The board of trade shall

establish and enforce trading rules to ensure fair and equitable

trading through the facilities of the contract market, and the

capacity to detect, investigate, and discipline any person that

violates the rules.

(4) TRADE EXECUTION FACILITY.—The board of trade shall—

(A) establish and enforce rules defining, or specifications

detailing, the manner of operation of the trade execution facility maintained by the board of trade, including rules or

specifications describing the operation of any electronic

matching platform; and

(B) demonstrate that the trading facility operates in accordance with the rules or specifications.

(5) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of

trade shall establish and enforce rules and procedures for ensuring the financial integrity of transactions entered into by or

through the facilities of the contract market.

(6) DISCIPLINARY PROCEDURES.—The board of trade shall establish and enforce disciplinary procedures that authorize the

board of trade to discipline, suspend, or expel members or market participants that violate the rules of the board of trade, or

similar methods for performing the same functions, including

delegation of the functions to third parties.

(7) PUBLIC ACCESS.—The board of trade shall provide the

public with access to the rules, regulations, and contract specifications of the board of trade.

(8) ABILITY TO OBTAIN INFORMATION.—The board of trade

shall establish and enforce rules that will allow the board of

trade to obtain any necessary information to perform any of the

functions described in this subsection, including the capacity to

carry out such international information-sharing agreements as

the Commission may require.

(c) EXISTING CONTRACT MARKETS.—A designated contract market

on the effective date of the Commodity Futures Modernization Act

of 2000 shall be considered to be a designated contract market

under this section.

(d) CORE PRINCIPLES FOR CONTRACT MARKETS.—

(1) IN GENERAL.—To maintain the designation of a board of

trade as a contract market, a board of trade shall comply with

the core principles specified in this subsection.

(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce compliance with the rules of the contract market, including the terms and conditions of any contracts to be

traded and any limitations on access to the contract market.

(3) CONTRACTS NOT READILY SUBJECT TO MANIPULATION.—

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

(4) MONITORING OF TRADING.—The board of trade shall monitor trading to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process.

(5) POSITION LIMITATIONS OR ACCOUNTABILITY.—To reduce

the potential threat of market manipulation or congestion, especially during trading in the delivery month, the board of trade

shall adopt position limitations or position accountability for

speculators, where necessary and appropriate.

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(6) EMERGENCY AUTHORITY.—The board of trade shall adopt

rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, where necessary

and appropriate, including the authority to—

(A) liquidate or transfer open positions in any contract;

(B) suspend or curtail trading in any contract; and

(C) require market participants in any contract to meet

special margin requirements.

(7) AVAILABILITY OF GENERAL INFORMATION.—The board of

trade shall make available to market authorities, market participants, and the public information concerning—

(A) the terms and conditions of the contracts of the contract market; and

(B) the mechanisms for executing transactions on or

through the facilities of the contract market.

(8) DAILY PUBLICATION OF TRADING INFORMATION.—The

board of trade shall make public daily information on settlement prices, volume, open interest, and opening and closing

ranges for actively traded contracts on the contract market.

(9) EXECUTION OF TRANSACTIONS.—The board of trade shall

provide a competitive, open, and efficient market and mechanism for executing transactions.

(10) TRADE INFORMATION.—The board of trade shall maintain rules and procedures to provide for the recording and safe

storage of all identifying data entry and trade information in

a manner that enables the contract market to use the information for purposes of assisting in the prevention of customer and

market abuses and providing evidence of any violations of the

rules of the contract market.

(11) FINANCIAL INTEGRITY OF CONTRACTS.—The board of

trade shall establish and enforce rules providing for the financial integrity of any contracts traded on the contract market, including rules to ensure the financial integrity of any futures

commission merchants and introducing brokers and the protection of customer funds.

(12) PROTECTION OF MARKET PARTICIPANTS.—The board of

trade shall establish and enforce rules to protect market participants from abusive practices committed by any party (including

a party acting as an agent for the participants).

(13) DISPUTE RESOLUTION.—The board of trade shall establish and enforce rules regarding and provide facilities for alternative dispute resolution as appropriate for market participants

and any market intermediaries.

(14) GOVERNANCE FITNESS STANDARDS.—The board of trade

shall establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the

board of trade, and any other persons with direct access to the

facility (including any parties affiliated with any of the persons

described in this paragraph).

(15) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce rules to minimize conflicts of interest in the

decisionmaking process of the contract market and establish a

process for resolving such conflicts of interest.

(16) COMPOSITION OF BOARDS OF MUTUALLY OWNED CONTRACT MARKETS.—In the case of a mutually owned contract

67

market, the board of trade shall provide for meaningful representation on its governing board of the diversity of interests

that trade on that contract market.

(17) RECORDKEEPING.—The board of trade shall—

(A) maintain full records of all activities related to the

business of the contract market in a form and manner acceptable to the Commission for a period of 5 years;

(B) make the records readily available during at least the

first 2-years of the 5-year period and provide the records to

the Commission during that 2-year period at the expense of

the person required to maintain the records; and

(C) keep the records open to inspection by any representative of the Commission or the Department of Justice.

(18) ANTITRUST CONSIDERATIONS.—Unless appropriate to

achieve the purposes of this Act, the board of trade shall

avoid—

(A) adopting any rule or taking any action that results in

any unreasonable restraint of trade; or

(B) imposing any material anticompetitive burden on

trading on the contract market.

SEC. 5a. DERIVATIVES TRANSACTION EXECUTION FACILITIES.

(a) IN GENERAL.—In lieu of compliance with the contract market

designation requirements of section 5, a board of trade may elect to

operate as a registered derivatives transaction execution facility if

the facility is—

(1) designated as a contract market and meets the requirements of this section; or

(2) registered as a derivatives transaction execution facility

under subsection (c).

(b) REQUIREMENTS FOR TRADING FUTURES CONTRACTS OR OTHER

DERIVATIVES TRANSACTIONS.—

(1) IN GENERAL.—A registered derivatives transaction execution facility under subsection (a) may trade any futures contract

(or option on such a contract) that is not a designated future

on a security on or through the facility only by satisfying the

requirements of this section.

(2) REQUIREMENTS FOR UNDERLYING COMMODITIES.—A registered derivatives transaction execution facility may trade any

futures contract only if—

(A) the underlying commodity has a nearly inexhaustible

deliverable supply;

(B) the underlying commodity has a deliverable supply

that is sufficiently large that the contract is highly unlikely

to be susceptible to manipulation;

(C) the underlying commodity has no cash market;

(D)(i) the underlying commodity is not an agricultural

commodity specified in section 1a(3); and

(ii) trading access to the derivatives transaction execution

facility is limited to eligible commercial participants trading for their own account; or

(E) the Commission determines, based on the market

characteristics, surveillance history, self-regulatory record,

and capacity of the facility that trading in the futures contract is unlikely to be susceptible to manipulation.

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(3) ELIGIBLE TRADERS.—To trade on a registered derivatives

transaction execution facility, a person shall—

(A) be authorized by the board of trade to trade on the

facility; and

(B)(i) be an eligible contract participant; or

(ii) be a person trading through a futures commission

merchant that—

(I) is registered with the Commission;

(II) is a member of a futures self-regulatory organization;

(III) is a clearing member of a derivatives clearing

organization; and (IV) has adjusted net capital of at least $20,000,000.

(4) TRADING BY CONTRACT MARKETS.—A board of trade that

is designated as a contract market shall, to the extent that the

contract market also operates a registered derivatives transaction execution facility—

(A) provide a physical location for the contract market

trading of the board of trade that is separate from trading

on the derivatives transaction execution facility of the board

of trade; or

(B) if the board of trade uses the same electronic trading

system for trading on the contract market and derivatives

transaction execution facility of the board of trade, identify

whether the electronic trading is taking place on the contract market or the derivatives transaction execution facility.

(c) CRITERIA FOR REGISTRATION.— (1) IN GENERAL.—To be registered as a registered derivatives

transaction execution facility, the board of trade shall demonstrate to the Commission that the board of trade meets the

criteria specified in this paragraph.

(2) DETERRENCE OF ABUSES.—The board of trade shall establish and enforce trading rules that will deter abuses and has

the capacity to detect, investigate, and enforce those rules, including means to—

(A) obtain information necessary to perform the functions

required under this section; or

(B) use technological means to—

(i) provide market participants with impartial access

to the market; and

(ii) capture information that may be used in establishing whether rule violations have occurred.

(3) TRADING PROCEDURES.—The board of trade shall establish and enforce rules or terms and conditions defining, or specifications detailing, trading procedures to be used in entering

and executing orders traded on the facilities of the board of

trade.

(4) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of

trade shall establish and enforce rules or terms and conditions

providing for the financial integrity of transactions entered on

or through the facilities of the board of trade, including rules

or terms and conditions to ensure the financial integrity of any

futures commission merchants and introducing brokers and the

protection of customer funds.

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(d) CORE PRINCIPLES FOR REGISTERED DERIVATIVES TRANS- ACTION EXECUTION FACILITIES.— (1) IN GENERAL.—To maintain the registration of a board of

trade as a derivatives transaction execution facility, a board of

trade shall comply with the core principles specified in this subsection.

(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce the rules of the facility, including any terms

and conditions of any contracts traded on or through the facility and any limitations on access to the facility.

(3) MONITORING OF TRADING.—The board of trade shall monitor trading in the contracts of the facility to ensure orderly

trading in the contract and to maintain an orderly market

while providing any necessary trading information to the Commission to allow the Commission to discharge the responsibilities of the Commission under the Act.

(4) DISCLOSURE OF GENERAL INFORMATION.—The board of

trade shall disclose publicly and to the Commission information

concerning—

(A) contract terms and conditions;

(B) trading conventions, mechanisms, and practices;

(C) financial integrity protections; and

(D) other information relevant to participation in trading

on the facility.

(5) DAILY PUBLICATION OF TRADING INFORMATION.—The

board of trade shall make public daily information on settlement prices, volume, open interest, and opening and closing

ranges for actively traded contracts on the derivatives transaction execution facility.

(6) FITNESS STANDARDS.—The board of trade shall establish

and enforce appropriate fitness standards for directors, members of any disciplinary committee, members, and any other

persons with direct access to the facility, including any parties

affiliated with any of the persons described in this paragraph.

(7) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce rules to minimize conflicts of interest in the decisionmaking process of the derivatives transaction execution facility and establish a process for resolving such conflicts of interest.

(8) RECORDKEEPING.—The board of trade shall—

(A) maintain full records of all activities related to the

business of the derivatives transaction execution facility in

a form and manner acceptable to the Commission for a period of at least 5 years;

(B) make the records readily available during at least the

first 2 years of the 5-year period and provide the records to

the Commission at the expense of the person required to

maintain the records; and

(C) keep the records open to inspection by any representative of the Commission or the Department of Justice.

(9) ANTITRUST CONSIDERATIONS.—Unless appropriate to

achieve the purposes of this Act, the board of trade shall

avoid—

(A) adopting any rule or taking any action that results in

any unreasonable restraint of trade; or

70

(B) imposing any material anticompetitive burden on

trading on the derivatives transaction execution facility.

(e) USE OF BROKER-DEALERS AND DEPOSITORY INSTITUTIONS AND

FARM CREDIT SYSTEM INSTITUTIONS AS INTERMEDIARIES.—

(1) IN GENERAL.—A registered derivatives transaction execution facility may by rule allow a broker-dealer, depository institution, or institution of the Farm Credit System that meets the

requirements of paragraph (2) to—

(A) act as an intermediary in transactions executed on

the facility on behalf of customers of the broker-dealer, depository institution or institution of the Farm Credit System; and

(B) receive funds of customers to serve as margin or security for such transactions.

(2) REQUIREMENTS.—The requirements referred to in paragraph (1) are that—

(A) a broker-dealer be in good standing with the Securities and Exchange Commission and a depository institution

or institution of the Farm Credit System be in good standing, as determined by the appropriate Federal banking

agency (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)) (including the Farm Credit

Administration), as applicable; and

(B) if a broker-dealer, depository institution, or institution of the Farm Credit System carries or holds customer

accounts or funds for transactions on the derivatives transaction execution facility for more than 1 business day, the

broker-dealer, depository institution, or institution of the

Farm Credit System is registered as a futures commission

merchant and is a member of a registered futures association.

(3) IMPLEMENTATION.—The Commission shall cooperate and

coordinate with the Securities and Exchange Commission, the

Secretary of the Treasury, and Federal banking regulatory

agencies (including the Farm Credit Administration) in adopting rules and taking any other appropriate action to facilitate

the implementation of this subsection.

(f) SEGREGATION OF CUSTOMER FUNDS.—Not later than 180 days

after the effective date of the Commodity Futures Modernization Act

of 2000, consistent with regulations adopted by the Commission, a

registered derivatives transaction execution facility may authorize a

futures commission merchant to offer any customer of the futures

commission merchant that is an eligible contract participant the

right to not segregate the customer funds of the futures commission

merchant for purposes of trading on or through the facilities of the

registered derivatives transaction execution facility.

(g) ELECTION TO TRADE EXCLUDED TRANSACTIONS.—

(1) IN GENERAL.—A board of trade that is a registered derivatives transaction execution facility may trade on the facility any

agreements, contracts, or transactions that are excluded from

this Act under subsection (c) or (d) of section 2.

(2) EXCLUSIVE JURISDICTION OF THE COMMISSION.—The Commission shall have exclusive jurisdiction over agreements, contracts, or transactions described in paragraph (1) to the extent

71

that the agreements, contracts, or transactions are traded on a

derivatives transaction execution facility.

SEC. 5b. DERIVATIVES CLEARING ORGANIZATIONS.

(a) REGISTRATION REQUIREMENT.—Except as provided in subsection (b), it shall be unlawful for a derivatives clearing organization, unless registered with the Commission, directly or indirectly to

make use of the mails or any means or instrumentality of interstate

commerce to perform the functions of a derivatives clearing organization described in section 1a(8).

(b) EXCLUSION OF DERIVATIVES CLEARING ORGANIZATIONS SUBJECT TO OTHER REGULATORY AUTHORITIES.—A derivatives clearing

organization shall not be required to register with the Commission,

and the Commission shall have no jurisdiction with respect to the

derivatives clearing organization, if the derivatives clearing

organization—

(1)(A) is registered as a clearing agency under the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.);

(B) is subject to the supervisory jurisdiction of a Federal

banking agency (as defined in section 3 of the Federal Deposit

Insurance Act (12 U.S.C. 1813)) or the National Credit Union

Administration; or

(C) is subject to the supervisory jurisdiction of a foreign regulatory authority that is recognized by the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, or the Commission as overseeing a system of consolidated supervision comparable to that provided under applicable United States law;

and

(2) does not clear a contract of sale for future delivery, option

on a contract of sale for future delivery, or option on a commodity that is not a security (unless the contract or option is

excluded under subsection (c) or (d) of section 2).

(c) VOLUNTARY REGISTRATION.—A derivatives clearing organization that is exempt from registration under subsection (b) may register with the Commission as a derivatives clearing organization.

(d) REGISTRATION OF DERIVATIVES CLEARING ORGANIZATIONS.—

(1) APPLICATION.—A person desiring to register as a derivatives clearing organization shall submit to the Commission an

application in such form and containing such information as

the Commission may require for the purpose of making the determinations required for approval under paragraph (2).

(2) CORE PRINCIPLES.—

(A) IN GENERAL.—To be registered and to maintain registration as a derivatives clearing organization, an applicant shall demonstrate to the Commission that the applicant complies with the core principles specified in this

paragraph.

(B) FINANCIAL RESOURCES.—The applicant shall demonstrate that the applicant has adequate financial, operational, and managerial resources to discharge the responsibilities of a derivatives clearing organization without

interruption in various market conditions.

(C) PARTICIPANT AND PRODUCT ELIGIBILITY.—The applicant shall establish—

72

(i) appropriate admission and continuing eligibility

standards (including appropriate minimum financial

requirements) for members of and participants in the

organization; and

(ii) appropriate standards for determining eligibility

of agreements, contracts, or transactions submitted to

the applicant.

(D) RISK MANAGEMENT.—The applicant shall have the

ability to manage the risks associated with discharging the

responsibilities of a derivatives clearing organization

through the use of appropriate tools and procedures.

(E) SETTLEMENT PROCEDURES.—The applicant shall have

the ability to—

(i) complete settlements on a timely basis under varying circumstances;

(ii) maintain an adequate record of the flow of funds

associated with each transaction that the applicant

clears; and

(iii) comply with the terms and conditions of any permitted netting or offset arrangements with other clearing organizations.

(F) TREATMENT OF FUNDS.—The applicant shall have

standards and procedures designed to protect and ensure

the safety of member and participant funds.

(G) DEFAULT RULES AND PROCEDURES.—The applicant

shall have rules and procedures designed to allow for efficient, fair, and safe management of events when members

or participants become insolvent or otherwise default on

their obligations to the derivatives clearing organization.

(H) RULE ENFORCEMENT.—The applicant shall—

(i) maintain adequate arrangements and resources

for the effective monitoring and enforcement of compliance with rules of the applicant and for resolution of

disputes; and

(ii) have the authority and ability to discipline, limit,

suspend, or terminate a member’s or participant’s activities for violations of rules of the applicant.

(I) SYSTEM SAFEGUARDS.—The applicant shall demonstrate that the applicant—

(i) has established and will maintain a program of

oversight and risk analysis to ensure that the automated systems of the applicant function properly and

have adequate capacity and security; and

(ii) has established and will maintain emergency

procedures and a plan for disaster recovery, and will

periodically test backup facilities sufficient to ensure

daily processing, clearing, and settlement of transactions.

(J) REPORTING.—The applicant shall provide to the Commission all information necessary for the Commission to

conduct the oversight function of the applicant with respect

to the activities of the derivatives clearing organization.

(K) RECORDKEEPING.—The applicant shall—

(i) maintain full records of all activities related to

the business of the applicant as a derivatives clearing

73

organization in a form and manner acceptable to the

Commission for a period of at least 5 years;

(ii) make the records readily available during at

least the first 2 years of the 5–year period and provide

the records to the Commission at the expense of the person required to maintain the records; and

(iii) keep the records open to inspection by any representative of the Commission or the Department of

Justice.

(L) PUBLIC INFORMATION.—The applicant shall make information concerning the rules and operating procedures

governing the clearing and settlement systems (including

default procedures) available to market participants.

(M) INFORMATION SHARING.—The applicant shall—

(i) enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements; and

(ii) use relevant information obtained from the agreements in carrying out the clearing organization’s risk

management program.

(N) ANTITRUST CONSIDERATIONS.—Unless appropriate to

achieve the purposes of this Act, the derivatives clearing organization shall avoid—

(i) adopting any rule or taking any action that results in any unreasonable restraint of trade; or

(ii) imposing any material anticompetitive burden on

trading on the contract market.

(3) ORDERS CONCERNING COMPETITION.—A derivatives clearing organization may request the Commission to issue an order

concerning whether a rule or practice of the applicant is the

least anticompetitive means of achieving the objectives, purposes, and policies of this Act.

(e) EXISTING DERIVATIVES CLEARING ORGANIZATIONS.—A derivatives clearing organization shall be deemed to be registered under

this section to the extent that—

(1) the derivatives clearing organization clears agreements,

contracts, or transactions for a board of trade that has been

designated by the Commission as a contract market for such

agreements, contracts, or transactions before the date of enactment of this section; and

(2) the Commission has reviewed and approved the rules of

the derivatives clearing organization before that date.

(f) APPOINTMENT OF TRUSTEE.—

(1) IN GENERAL.—If a proceeding under section 5e results in

the suspension or revocation of the registration of a derivatives

clearing organization, or if a derivatives clearing organization

withdraws from registration, the Commission, on notice to the

derivatives clearing organization, may apply to the appropriate

United States district court where the derivatives clearing organization is located for the appointment of a trustee.

(2) ASSUMPTION OF JURISDICTION.—If the Commission applies for appointment of a trustee under paragraph (1)—

(A) the court may take exclusive jurisdiction over the derivatives clearing organization and the records and assets

74

of the derivatives clearing organization, wherever located;

and

(B) if the court takes jurisdiction under subparagraph

(A), the court shall appoint the Commission, or a person

designated by the Commission, as trustee with power to

take possession and continue to operate or terminate the operations of the derivatives clearing organization in an orderly manner for the protection of participants, subject to

such terms and conditions as the court may prescribe.

(g) Linking Of Regulated Clearing Facilities.—

(1) IN GENERAL.—The Commission shall facilitate the linking

or coordination of derivatives clearing organizations registered

under this Act with other regulated clearance facilities for the

coordinated settlement of cleared transactions.

(2) COORDINATION.—In carrying out paragraph (1), the Commission shall coordinate with the Federal banking agencies and

the Securities and Exchange Commission.

SEC. 5c. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.

(a) ACCEPTABLE BUSINESS PRACTICES UNDER CORE PRINCIPLES.—

(1) IN GENERAL.—Consistent with the purposes of this Act, the

Commission may issue interpretations, or approve interpretations submitted to the Commission, of the core principles for

registered entities specified in sections 5(d), 5a(d), and 5b(d)(2)

to describe what would constitute an acceptable business practice under the core principles.

(2) TIMING.—If any person submits to the Commission a request for an interpretation or for approval of an interpretation

under paragraph (1), the Commission shall issue the interpretation or shall approve or disapprove the interpretation not later

than 45 days after receiving the request.

(3) EFFECT OF INTERPRETATION.—An interpretation issued

under paragraph (1) shall not provide the exclusive means for

complying with the core principles.

(b) DELEGATION OF FUNCTIONS UNDER CORE PRINCIPLES.—

(1) IN GENERAL.—A registered entity may comply with any

applicable core principle through delegation of any relevant

function to a registered futures association or another registered

entity.

(2) RESPONSIBILITY.—A registered entity that delegates a

function under paragraph (1) shall remain responsible for carrying out the function.

(c) NEW CONTRACTS, NEW RULES, AND RULE AMENDMENTS.—

(1) IN GENERAL.—Subject to paragraph (2), a registered entity

may elect to list for trading any new contract or other instrument, or may elect to approve and implement any new rule or

rule amendment, by providing to the Commission (and the Secretary of the Treasury, in the case of a contract, rule, or rule

amendment that relates to or affects a government security) a

written certification that the new contract, new rule, or rule

amendment complies with this Act (including regulations under

this Act).

(2) PRIOR APPROVAL.—

75

(A) IN GENERAL.—A registered entity may request that

the Commission grant prior approval to any new contract

or other instrument, new rule, or rule amendment.

(B) DEADLINE.—If prior approval is requested under subparagraph (A), the Commission shall take final action on

the request not later than 90 days after submission of the

request, unless the person submitting the request agrees to

an extension of the time limitation established under this

subparagraph.

(C) AGRICULTURAL CONTRACTS.—Notwithstanding any

other provision of this section, a designated contract market

shall submit for prior approval by the Commission each

rule amendment that materially changes a term or condition in any contract of sale of a commodity for future delivery or related option traded through the facilities of the

designated contract market, if—

(i) the commodity is specifically listed in section

1a(3); and

(ii) the rule amendment applies to contracts and delivery months that have previously been listed for trading and have open interest.

(3) APPROVAL.—The Commission shall approve any such new

contract or instrument, new rule, or rule amendment unless the

Commission finds that the new contract or instrument, new

rule, or rule amendment would violate this Act.

(d) VIOLATION OF CORE PRINCIPLES.— (1) IN GENERAL.—If the Commission determines, on the basis

of substantial evidence, that a registered entity is violating any

of the applicable core principles specified in sections 5(d), 5a(d),

and 5b(d)(2), the Commission shall—

(A) notify the registered entity of the determination; and

(B) afford the registered entity an opportunity to make

appropriate changes to bring the registered entity into compliance with the core principles.

(2) FAILURE TO MAKE CHANGES.—If, not later than 30 days

after receiving a notification under paragraph (1), a registered

entity fails to make changes that, in the opinion of the Commission, are necessary to accomplish the objectives of the core principles, the Commission may take further action in accordance

with this Act.

(e) RESERVATION OF EMERGENCY AUTHORITY.—Notwithstanding

any other provision of this section, the Commission shall retain the

full scope of its emergency powers under section 8a(9) to direct any

contract market to take emergency action in compliance with the

provisions and standards of section 8a(9).

(f) CORE PRINCIPLES FOR INTERMEDIARIES.—The Commission

shall—

(1) review the provisions of this Act relating to registered entities and intermediaries (including the regulations and interpretations applying those provisions); and

(2) to the extent appropriate and consistent with this Act, administer those provisions in a manner that is consistent with

core principles and interpretations of acceptable business practices for intermediaries as described in this section.

(g) EFFECT OF ACT.—Nothing in this Act—

76

(1) prohibits an exchange of—

(A) futures in connection with a cash commodity transaction;

(B) futures for cash commodities;

(C) transfer trades or office trades; or

(D) futures for swaps; or

(2) prohibits a futures commission merchant, acting as a

principal or agent, from entering into or confirming the execution of a contract for the purchase or sale of a commodity for

future delivery if the contract is reported, recorded, and cleared

in accordance with the rules of the contract market.

SEC. 5d. EXEMPT BOARDS OF TRADE.

(a) IN GENERAL.—Except as otherwise provided in this section, a

contract of sale (or option on such a contract) of a commodity for

future delivery traded on or through the facilities of an exempt

board of trade shall be exempt from all provisions of this Act, other

than section 2(g).

(b) CRITERIA FOR EXEMPTION.—To qualify for an exemption under

subsection (a), a board of trade shall limit trading on or through

the facilities of the board of trade to contracts of sale of a commodity for future delivery (or options on such contracts)—

(1) that have—

(A) a nearly inexhaustible deliverable supply;

(B) a deliverable supply that is sufficiently large, and a

cash market sufficiently liquid, to render any contract traded on the commodity highly unlikely to be susceptible to

manipulation; or

(C) no cash market;

(2) that are entered into only between persons that—

(A) are eligible contract participants at the time at which

the persons enter into the contract; or

(B) enter into the contract or option for the benefit only

of eligible contract participants; and

(3) that are not contracts of sale (or options on the contract)

for future delivery of any security, including any group or index

of securities or any interest in, or interest that is based on the

value of, any security.

(c) ANTI-MANIPULATION REQUIREMENTS.—A party to a futures

contract or related option that is traded on an exempt board of

trade shall be subject to sections 4b, 4o, 6(c), and 9(a)(2), and the

Commission shall enforce those provisions with respect to any such

trading.

(d) PRICE DISCOVERY.—If the Commission finds that an exempt

board of trade is a significant source of price discovery for any underlying commodity in any transaction traded on or through the facilities of the board of trade, the board of trade shall disseminate

publicly on a daily basis trading volume, opening and closing price

ranges, open interest, and other trading data as appropriate to the

market.

(e) JURISDICTION.—The Commission shall have exclusive jurisdiction over any account, agreement, or transaction involving a contract of sale of a commodity for future delivery, or related option,

to the extent that such an account, agreement, or transaction is

traded on an exempt board of trade.

77

(f) SUBSIDIARIES.—A board of trade that is designated as a contract market or registered as a derivatives transaction execution facility may operate an exempt board of trade by establishing a separate subsidiary or other legal entity and otherwise satisfying the requirements of this section.

øSEC. 5b. SUSPENSION OR REVOCATION OF DESIGNATION AS ‘‘CONTRACT MARKET’’

øThe failure or refusal of any board of trade to comply with any

of the provisions of this Act, or any of the rules, regulations, or orders of the Commission or the commission5b–1 thereunder, shall be

cause for suspending for a period not to exceed six months or revoking the designation of such board of trade as a ‘‘contract market’’ in accordance with the procedure and subject to the judicial

review provided in section 6(b) of this Act.¿

SEC. 5e. SUSPENSION OR REVOCATION OF DESIGNATION AS REGISTERED ENTITY.

The failure of a registered entity to comply with any provision of

this Act, or any regulation or order of the Commission under this

Act, shall be cause for the suspension of the registered entity for a

period not to exceed 180 days, or revocation of designation as a registered entity in accordance with the procedures and subject to the

judicial review provided in section 6(b).

SEC. 6. APPLICATION FOR DESIGNATION AS ‘‘øCONTRACT MARKET¿

REGISTERED ENTITY’’.

(a) Any øboard of trade desiring to be designated a ‘‘contract

market’’ shall make application to the Commission for such designation¿ person desiring to be designated or registered as a registered entity shall make application to the Commission for such

designation or registration and accompany the same with a showing that it complies with the øabove conditions¿ conditions set forth

in this Act, and with a sufficient assurance that it will continue to

comply with the øabove requirements¿ the requirements of this Act.

The Commission shall approve or deny an application for ødesignation as a contract market within one year¿ designation or registration as a registered entity within 180 days of the filing of the application. If the Commission notifies the øboard of trade¿ person that

its application is materially incomplete and specifies the deficiencies in the application, the running of the øone-year period¿

180-day period shall be stayed from the time of such notification

until the application is resubmitted in completed form: Provided,

That the Commission shall have not less than sixty days to approve or deny the application from the time the application is resubmitted in completed form. If the Commission denies an application, it shall specify the grounds for the denial. In the event of a

refusal to ødesignate as a ‘‘contract market’’ any board of trade

that has made application therefore, such board of trade¿ designate

or register as a registered entity any person that has made application therefore, such person shall be afforded an opportunity for a

hearing on the record before the Commission, with the right to appeal an adverse decision after such hearing to the court of appeals

as provided for in other cases in subsection (b) of this section.

(b) The Commission is authorized to suspend for a period not to

exceed six months or to revoke the ødesignation of any board of

trade as a ‘‘contract market’’ upon¿ designation or registration of

78

any registered entity on a showing that such øboard of trade¿ registered entity is not enforcing or has not enforced its rules of government made a condition of its ødesignation as set forth in section

5 of this Act¿ designation or registration as set forth in sections 5

through 5c or that such øboard of trade¿ registered entity, or any

director, officer, agent, or employee thereof, otherwise is violating

or has violated any of the provisions of this Act or any of the rules,

regulations, or orders of the Commission or the Commission thereunder. Such suspension or revocation shall only be after a notice

to the officers of the øboard of trade¿ registered entity affected and

upon a hearing on the record: Provided, That such suspension or

revocation shall be final and conclusive, unless within fifteen days

after such suspension or revocation by the Commission such øboard

of trade¿ person appeals to the court of appeals for the circuit in

which it has its principal place of business, by filing with the clerk

of such court a written petition praying that the order of the Commission be set aside or modified in the manner stated in the petition, together with a bond in such sum as the court may determine,

conditioned that such øboard of trade¿ person will pay the costs of

the proceedings if the court so directs. The clerk of the court in

which such a petition is filed shall immediately cause a copy thereof to be delivered to the Commission and file in the court the record

in such proceedings, as provided in section 2112 of title 28, United

States Code. The testimony and evidence taken or submitted before

the Commission, duly filed as aforesaid as a part of the record,

shall be considered by the court of appeals as the evidence in the

case. Such a court may affirm or set aside the order of the Commission or may direct it to modify its order. No such order of the Commission shall be modified or set aside by the court of appeals unless it is shown by the øboard of trade¿ person that the order is

unsupported by the weight of the evidence or was issued without

due notice and a reasonable opportunity having been afforded to

such øboard of trade¿ person for a hearing, or infringes the Constitution of the United States, or is beyond the jurisdiction of the

Commission.

(c) EXCLUSION OF PERSONS FROM PRIVILEGE OF ‘‘øCONTRACT

MARKETS¿ REGISTERED ENTITY; ENFORCEMENT POWERS OF COMMISSION.—If the Commission has reason to believe that any person

(other than a øcontract market¿ registered entity) is manipulating

or attempting to manipulate or has manipulated or attempted to

manipulate the market price of any commodity, in interstate commerce, or for future delivery on or subject to the rules of any øcontract market¿ registered entity, or has willfully made any false or

misleading statement of a material fact in any registration application or any report filed with the Commission under this Act, or

willfully omitted to state in any such application or report any material fact which is required to be stated therein, or otherwise is

violating or has violated any of the provisions of this Act or of the

rules, regulations, or orders of the Commission or the Commission

thereunder, it may serve upon such person a complaint stating its

charges in that respect, which complaint shall have attached or

shall contain therein a notice of hearing, specifying a day and place

not less than three days after the service thereof, requiring such

person to show cause why an order should not be made prohibiting

him from trading on or subject to the rules of any øcontract marVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00078 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
79

ket¿ registered entity, and directing that all øcontract markets¿

registered entities refuse all øtrading privileges¿ privileges to such

person, until further notice of the Commission and to show cause

why the registration of such person, if registered with the Commission in any capacity, should not be suspended or revoked. Said

hearing may be held in Washington, District of Columbia, or elsewhere, before the Commission or before an Administrative Law

Judge designated by the Commission, which Administrative Law

Judge shall cause all evidence to be reduced to writing and forthwith transmit the same to the Commission. For the purpose of securing effective enforcement of the provisions of this Act, for the

purpose of any investigation or proceeding under this Act, and for

the purpose of any action taken under section 12(f), any member

of the Commission or any Administrative Law Judge or other officer designated by the Commission (except as provided in the fifth

sentence of this subsection) may administer oaths and affirmations,

subpoena witnesses, compel their attendance, take evidence, and

require the production of any books, papers, correspondence, memoranda, or other records that the Commission deems relevant or material to the inquiry. The attendance of witnesses and the production of any such records may be required from any place in the

United States, any State or any foreign country or jurisdiction at

any designated place of hearing. A subpoena issued under this section may be served upon any person who is not to be found within

the territorial jurisdiction of any court of the United States in such

manner as the Federal Rules of Civil Procedure prescribe for service of process in a foreign country, except that a subpoena to be

served on a person who is not to be found within the territorial jurisdiction of any court of the United States may be issued only on

the prior approval of the Commission. In case of contumacy by, or

refusal to obey a subpoena issued to, any person, the Commission

may invoke the aid of any court of the United States within the

jurisdiction in which the investigation or proceeding is conducted,

or where such person resides or transacts business, in requiring

the attendance and testimony of witnesses and the production of

books, papers, correspondence, memoranda, and other records.

Such court may issue an order requiring such person to appear before the Commission or member or Administrative Law Judge or

other officer designated by the Commission, there to produce

records, if so ordered, or to give testimony touching the matter

under investigation or in question. Any failure to obey such order

of the court may be punished by the court as a contempt thereof.

All process in any such case may be served in the judicial district

wherein such person is an inhabitant or transacts business or

wherever such person may be found. Upon evidence received, the

Commission may (1) prohibit such person from trading on or subject to the rules of any øcontract market¿ registered entity and require all øcontract markets¿ registered entities to refuse such person all øtrading privileges¿ privileges thereon for such period as

may be specified in the order, (2) if such person is registered with

the Commission in any capacity, suspend, for a period not to exceed

six months, or revoke, the registration of such person, (3) assess

such person a civil penalty of not more than the higher of $100,000

or triple the monetary gain to such person for each such violation

and (4) require restitution to customers of damages proximately

80

caused by violations of such persons. Notice of such order shall be

sent forthwith by registered mail or by certified mail or delivered

to the offending person and to the governing boards of said øcontract markets¿ registered entities. After the issuance of the order by

the Commission, as aforesaid, the person against whom it is issued

may obtain a review of such order or such other equitable relief as

to the court may seem just by filing in the United States court of

appeals of the circuit in which the petitioner is doing business, or

in the case of an order denying registration, the circuit in which

the petitioner’s principal place of business listed on petitioner’s application for registration is located, a written petition, within fifteen days after the notice of such order is given to the offending

person praying that the order of the Commission be set aside. A

copy of such petition shall be forthwith transmitted by the clerk of

the court to the Commission and thereupon the Commission shall

file in the court the record theretofore made, as provided in section

2112 of title 28, United States Code. Upon the filing of the petition

the court shall have jurisdiction to affirm, to set aside, or modify

the order of the Commission, and the findings of the Commission

as to the facts, if supported by the weight of evidence, shall in like

manner be conclusive.

The first, second, and tenth sentences through the end of section

6(c) are classified to 7 U.S.C. 9. The third through the ninth sentence of section 6(c) are classified to 7 U.S.C. 15.

(d) MANIPULATIONS OR OTHER VIOLATIONS.—If any person (other

than a øcontract market¿ registered entity) is manipulating or attempting to manipulate or has manipulated or attempted to manipulate the market price of any commodity, in interstate commerce,

or for future delivery on or subject to the rules of any øcontract

market¿ registered entity, or otherwise is violating or has violated

any of the provisions of this Act or of the rules, regulations, * * *

* * * * * * *

(e) ASSESSMENT OF MONEY PENALTIES.— (1) In determining the amount of the money penalty assessed

under subsection (c), the Commission shall consider the appropriateness of such penalty to the gravity of the violation.

(2) Unless the person against whom a money penalty is assessed under subsection (c) shows to the satisfaction of the

Commission within fifteen days from the expiration of the period allowed for payment of such penalty that either an appeal

as authorized by subsection (c) has been taken or payment of

the full amount of the penalty then due has been made, at the

end of such fifteen-day period and until such person shows to

the satisfaction of the Commission that payment of such

amount with interest thereon to date of payment has been

made—

(A) such person shall be prohibited automatically from

øtrading on all contract markets¿ the privileges of all registered entities; and

(B) if such person is registered with the Commission,

such registration shall be suspended automatically.

(3) If a person against whom a money penalty is assessed

under subsection (c) takes an appeal and if the Commission

prevails or the appeal is dismissed, unless such person shows

to the satisfaction of the Commission that payment of the full

81

amount of the penalty then due has been made by the end of

thirty days from the date of entry of judgment on the appeal—

(A) such person shall be prohibited automatically from

øtrading on all contract markets¿ the privileges of all registered entities; and

(B) if such person is registered with the Commission,

such registration shall be suspended automatically.

If the person against whom the money penalty is assessed

fails to pay such penalty after the lapse of the period allowed

for appeal or after the affirmance of such penalty, the Commission may refer the matter to the Attorney General who shall

recover such penalty by action in the appropriate United

States district court.

SEC. 6a. COOPERATIVE ASSOCIATIONS AND CORPORATIONS, EXCLUSION FROM BOARD OF TRADE.

(a) No board of trade which has been designated as a ø‘‘contract market’’¿ designated or registered as a contract market or a

derivatives transaction execution facility shall exclude from membership in, and all privileges on, such board of trade, any association or corporation

* * * * * * *

(b) No rule of any board of trade ødesignated as a contract market¿ designated or registered as a contract market or a derivatives

transaction execution facility shall forbid or be construed to forbid

the payment of compensation on a commodity-unit basis, or otherwise

* * * * * * *

SEC. 6b. NONENFORCEMENT OF RULES OF GOVERNMENT OR OTHER

VIOLATIONS.

If any øcontract market¿ registered entity is not enforcing or has

not enforced its rules of government made a condition of its ødesignation as set forth in section 5 of this Act¿ designation or registration as set forth in sections 5 through 5c, or if any øcontract

market¿ registered entity, or any director, officer, agent, or employee of any contract market otherwise is violating or has violated

any of the provisions of this Act or any of the rules, regulations,

or orders of the Commission thereunder, the Commission may,

upon notice and hearing on the record and subject to appeal as in

other cases provided for in section 6(b) of this Act, make and enter

an order directing that such øcontract market¿ registered entity, director, officer, agent, or employee shall cease and desist from such

violation, and assess a civil penalty of not more than $500,000 for

each such violation. If such øcontract market¿ registered entity, director, officer, agent, or employee, after the entry of such a cease

and desist order and the lapse of the period allowed for appeal of

such order or after the affirmance of such order, shall fail or refuse

to obey or comply with such order, such øcontract market¿ registered entity, director, officer, agent, or employee shall be guilty of

a misdemeanor and, upon conviction thereof, shall be fined not

more than $500,000 or imprisoned for not less than six months nor

more than one year, or both. Each day during which such failure

or refusal to obey such cease and desist order continues shall be

deemed a separate offense. If the offending øcontract market¿ registered entity or other person upon whom such penalty is imposed,

82

after the lapse of the period allowed for appeal or after the affirmance of such penalty, shall fail to pay such penalty, the Commission shall refer the matter to the Attorney General who shall recover such penalty by action in the appropriate United States district court. In determining the amount of the money penalty assessed under this section, the Commission shall consider the gravity of the offense, and in the case of a contract market shall further

consider whether the amount of the penalty will materially impair

the øcontract market’s ability¿ the ability of the registered entity to

carry on its operations and duties.

SEC. 6c. ACTION TO ENJOIN OR RESTRAIN VIOLATIONS.

(a) Whenever it shall appear to the Commission that any øcontract market¿ registered entity or other person has engaged, is engaging, or is about to engage in any act or practice constituting a

violation of any provision of this Act or any rule, regulation, or

order thereunder, or is restraining trading in any commodity for future delivery,

* * * * * * *

SEC. 6d. JURISDICTION OF STATES.

(1) Whenever it shall appear to the attorney general of any State,

the administrator of the securities laws of any State, or such other

official as a State may designate, that the interests of the residents

of that State have been, are being, or may be threatened or adversely affected because any person (other than a øcontract market,¿ derivatives transaction execution facility, clearinghouse, floor

broker, or floor trader) has engaged in

* * * * * * *

SEC. 7. VACATION OF REQUEST OF DESIGNATION AS ‘‘øCONTRACT

MARKET¿ REGISTERED ENTITY.

Any øboard of trade¿ person that has been designated or registered a øcontract market¿ registered entity in the manner herein

provided may have such designation or registration vacated and set

aside by giving notice in writing to the Commission requesting that

its designation or registration as a øcontract market¿ registered entity be vacated, which notice shall be served at least ninety days

prior to the date named therein as the date when the vacation of

designation or registration shall take effect. Upon receipt of such

notice the Commission shall forthwith order the vacation of the

ødesignation of such board of trade as a contract market¿ designation or registration of the registered entity, effective upon the day

named in the notice, and shall forthwith send a copy of the notice

and its order to all other øcontract markets¿ registered entities.

From and after the date upon which the vacation became effective

the said øboard of trade¿ person can thereafter be ødesignated

again a contract market¿ designated or registered again a registered entity by making application to the Commission in the manner herein provided for an original application.

SEC. 8. PUBLIC DISCLOSURE.

* * * * * * *

(c) The Commission may make or issue such reports as it deems

necessary, or such opinions or orders as may be required under

83

other provisions of law, relative to the conduct of any øboard of

trade¿ registered entity or to the transactions

* * * * * * *

SEC. 8a. THE COMMISSION IS AUTHORIZED.

* * * * * * *

(1)(F) if such person is subject to an outstanding order of the

Commission denying trading privileges on any øcontract market¿ registered entity to such person, denying, suspending, or

revoking such person’s membership in any contract market or

registered futures association, or barring or suspending such

person from being associated with a registrant under this Act

or with a member of a øcontract market¿ registered entity or

with a member of a registered futures association;

* * * * * * *

(2)(F) if such person is subject to an outstanding order of the

Commission denying øtrading privileges¿ privileges on any contract market to such person, denying, suspending * * *

* * * * * * *

(J) such person is subject to an outstanding order denying,

suspending, or expelling such person from membership in a

øcontract market¿ registered entity, a registered futures association, any other self-regulatory organization, or any foreign

regulatory body that the Commission recognizes as having a

comparable regulatory program or barring or suspending such

person from being associated with any member or members of

such øcontract market¿ registered entity, association, self-regulatory organization, or foreign regulatory body;

* * * * * * *

(N) any principal, as defined in paragraph (2) of this section,

of such person has been or could be refused registration

* * * * * * *

(4) in accordance with the procedure provided for in section

6(c) of this Act, to suspend, revoke, or place restrictions upon

the registration of any person registered under this Act if

cause exists under paragraph (3) of this section which would

warrant a refusal of registration of such person, and to suspend or revoke the registration of any futures commission merchant or introducing broker who shall knowingly accept any

order for the purchase or sale of any commodity for future delivery on or subject to the rules of any øcontract market¿ ‘‘registered entity’’ from any person if such person has been denied

trading privileges on any øcontract market¿ ‘‘registered entity’’

by order of the Commission under section 6(c) of this Act and

the period of denial specified in such order shall not have expired: Provided, That such person may appeal from a decision

to suspend, revoke, or place restrictions upon registration

made pursuant to this paragraph in the manner provided in

section 6(c) of this Act;

* * * * * * *

(6) to communicate to the proper committee or officer of any

øcontract market¿ registered entity, registered futures associaVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00083 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
84

tion, or self-regulatory organization as defined in section

3(a)(26) of the Securities Exchange Act of 1934, notwithstanding the provisions of section 8 of this Act, the full facts

concerning any transaction or market operation, including the

names of parties thereto, which in the judgment of the Commission disrupts or tends to disrupt any market or is otherwise

harmful or against the best interests of producers, consumers,

or investors, or which is necessary or appropriate to effectuate

the purposes of this Act: Provided, That any information furnished by the Commission under this paragraph shall not be

disclosed by such øcontract market¿ registered entity, registered futures association, or self-regulatory organization except in any self-regulatory action or proceeding;

(7) to alter or supplement the rules of a øcontract market¿

registered entity insofar as necessary or appropriate by rule or

regulation or by order, if after making the appropriate request

in writing to a øcontract market¿ registered entity that such

øcontract market¿ registered entity effect on its own behalf

specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such øcontract market¿ registered entity has not

made the changes so required, and that such changes are necessary or appropriate for the protection of persons producing,

handling, processing, or consuming any commodity traded for

future delivery on such øcontract market¿ registered entity, or

the product or byproduct thereof, or for the protection of traders or to insure fair dealing in commodities traded for future

delivery on such øcontract market¿ registered entity. Such

rules, regulations, or orders may specify changes with respect

to such matters as—

(A) terms or conditions in contracts of sale to be executed on or subject to the rules of such øcontract market¿

registered entity;

* * * * * * *

(8) to make and promulgate such rules and regulations with

respect to those persons registered under this Act, who are not

members of a øcontract market¿ registered entity, as in the

judgment of the Commission are reasonably necessary to protect the public interest and promote just and equitable principles of trade, including but not limited to the manner, method, and place of soliciting business, including the content of

such solicitation;

(9) to direct the øcontract market¿ registered entity, whenever it has reason to believe that an emergency exists,* * *

Nothing herein shall be deemed to limit the meaning or interpretation given by a øcontract market¿ registered entity to the

terms ‘‘market emergency’’, ‘‘emergency’’, or equivalent language in its own bylaws, rules, regulations, or resolutions;

SEC. 8b. TRADING BAN VIOLATIONS.

It shall be unlawful for any person, against whom there is outstanding any order of the Commission prohibiting him from trading

on or subject to the rules of any øcontract market¿ registered entity, to make or cause to be made in contravention of such order, any

85

contract for future delivery of any commodity, on or subject to the

rules of any contract market.

SEC. 8c. DISCIPLINARY ACTIONS.

(a)(1) Any exchange or the Commission if the exchange fails to

act, may suspend, expel, or otherwise discipline any person who is

a member of that exchange, or deny any person access to the exchange. Any such action shall be taken solely in accordance with

the rules of that exchange.

(2) Any suspension, expulsion, disciplinary, or access denial procedure established by an exchange rule shall provide for written

notice to the Commission and to the person who is suspended, expelled, or disciplined, or denied access, within thirty days, which

includes the reasons for the exchange action in the form and manner the Commission prescribes. An exchange shall make public its

findings and the reasons for the exchange action in any such proceeding, including the action taken or the penalty imposed, but

shall not disclose the evidence therefor, except to the person who

is suspended, expelled, or disciplined, or denied access, and to the

Commission.

(b) The Commission may, in its discretion and in accordance with

such standards and procedures as it deems appropriate, review any

decision by an exchange whereby a person is suspended, expelled,

otherwise disciplined, or denied access to the exchange. In addition,

the Commission may, in its discretion and upon application of any

person who is adversely affected by any other exchange action, review such action.

(c) The Commission may affirm, modify, set aside, or remand any

exchange decision it reviews pursuant to subsection (b), after a determination on the record whether the action of the exchange was

in accordance with the policies of this Act. Subject to judicial review, any order of the Commission entered pursuant to subsection

(b) shall govern the exchange in its further treatment of the matter.

(d) The Commission, in its discretion, may order a stay of any

action taken pursuant to subsection (a) pending review thereof.

(e)(1) The Commission shall issue regulations requiring each

øcontract market¿ registered entity to establish and make available

to the public a schedule of major violations of any rule within the

disciplinary jurisdiction of such øcontract market¿ registered entity.

(2) The regulations issued by the Commission pursuant to this

subsection shall prohibit, for a period of time to be determined by

the Commission, any individual who is found to have committed

any major violation from service on the governing board of any

øcontract market¿ registered entity or registered futures association, or on any disciplinary committee thereof

* * * * * * *

SEC. 9. VIOLATIONS GENERALLY.

(a) It shall be a felony punishable by a fine of not more than

$1,000,000 (or $500,000 in the case of a person who is an individual) or imprisonment for not more than five years, or both, together with the costs of prosecution, for:

* * * * * * *

86

(2) Any person to manipulate or attempt to manipulate the

price of any commodity in interstate commerce, or for future

delivery on or subject to the rules of any øcontract market¿

registered entity, or to corner or attempt to corner any such

commodity or knowingly to deliver or cause to be delivered for

transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication

false or misleading or knowingly inaccurate reports concerning

crop or market information or conditions that affect or tend to

affect the price of any commodity in interstate commerce, or

knowingly to violate the provisions of section 4, section 4b, subsections (a) through (e) of subsection 4c, section 4h, øsection

4o(1)¿ section 4n(1), or section 19.

(3) Any person knowingly to make, or cause to be made, any

statement in any application, report, or document required to

be filed under this Act or any rule or regulation thereunder or

any undertaking contained in a registration statement required under this Act, or by any øcontract market¿ registered

entity or registered futures association in connection with an

application for membership or participation therein or to become associated with a member thereof, which statement was

false or misleading with respect to any material fact, or knowingly to omit any material fact required to be stated therein or

necessary to make the statements therein not misleading.

(4) Any person willfully to falsify, conceal, or cover up by any

trick, scheme, or artifice a material fact, make any false, fictitious, or fraudulent statements or representations, or make or

use any false writing or document knowing the same to contain

any false, fictitious, or fraudulent statement or entry to a øcontract market¿ registered entity, board of trade, or futures association designated or registered under this Act acting in furtherance of its official duties under this Act * * *

(f) It shall be a felony for any person—

(1) who is an employee, member of the governing board, or

member of any committee of a board of trade, øcontract market¿ registered entity, or registered futures association, in violation of a regulation issued by the Commission * * *

* * * * * * *

(2) willfully and knowingly to trade for such person’s own account, or for or on behalf of any other account, in contracts for

future delivery or options thereon on the basis of any material

nonpublic information that such person knows was obtained in

violation of paragraph (1) from an employee, member of the

governing board, or member of any committee of a board of

trade, øcontract market¿ registered entity, or registered futures

association * * *

SEC. 12. COMMISSION OPERATIONS.

* * * * * * *

(d) There are authorized to be appropriated such sums as are

necessary to carry out this Act for each of fiscal years 1995 through

ø2000¿ 2005.

(e) Nothing in this Act shall supersede or preempt—

(1) criminal prosecution under any Federal criminal statute;

87

ø(2) the application of any Federal or State statute, including

any rule or regulation thereunder, to any transaction in or involving any commodity, product, right, service, or interest (A)

that is not conducted on or subject to the rules of a contract

market, or, in the case of any State or local law that prohibits

or regulates gaming or the operation of ‘‘bucket shops’’ (other

than anti-fraud provisions of general applicability), that is not

a transaction or class of transactions that has received or is

covered by the terms of any exemption previously granted by

the Commission under subsection (c) of section 4 of this Act,

or (B) (except as otherwise specified by the Commission by rule

or regulation) that is not conducted on or subject to the rules

of any board of trade, exchange, or market located outside the

United States, its territories or possessions, or (C) that is not

subject to regulation by the Commission under section 4c or 19

of this Act; or¿

(2) the application of any Federal or State law (including any

regulation) to an agreement, contract, or transaction in or involving any commodity, product, right, service, or interest, except that this Act shall supersede and preempt—

(A) any Federal or State law (including any regulation),

in the case of any such agreement, contract, or

transaction—

(i) that is conducted on or subject to the rules of a

registered entity or exempt board of trade;

(ii) that is conducted on or subject to the rules of any

board of trade, exchange, or market located outside the

United States, or any territory or possession of the

United States (in accordance with any terms or conditions specified by the Commission by regulation); and

(iii) that is subject to regulation by the Commission

under section 4c or 19; and

(B) any State or local law that prohibits or regulates

gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of—

(i) an excluded trading facility under section 2(e); or

(ii) an agreement, contract, or transaction that—

(I) is excluded under subsection (c), (d), or (f) of

section 2; or

(II) is covered by the terms of an exemption

granted by the Commission under section 4(c) (regardless of whether any such agreement, contract,

or transaction is otherwise subject to this Act); or

(3) the application * * *

* * * * * * *

SEC. 14. COMPLAINTS AGAINST REGISTERED PERSONS.

(a)(1) Any person complaining of any violation * * *

* * * * * * *

(B) in the case of any action arising from a willful and

intentional violation in the execution of an order on the

floor of a øcontract market¿ registered entity, punitive or

exemplary damages equal to no more than two times the

amount of such actual damages. If an award of punitive or

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88

nection with the execution of a customer order, and the futures commission merchant which selected the floor broker

for the execution of the customer order is held to be responsible under section 2(a)(1) for the floor broker’s violation, such futures commission merchant may be required

to satisfy such award if the floor broker fails to do so, except that such requirement shall apply to the futures commission merchant only if it willfully and intentionally selected the floor broker with the intent to assist or facilitate

the floor broker’s violation.

(f) Unless the party against whom a reparation order has been

issued shows to the satisfaction of the Commission within fifteen

days from the expiration of the period allowed for compliance with

such order that either an appeal as herein authorized has been

taken or payment of the full amount of the order (or any agreed

settlement thereof) has been made, such party shall be prohibited

automatically from trading on all øcontract markets¿ registered entities and, if the party is registered with the Commission, such registration shall be suspended automatically at the expiration of such

fifteen-day period until such party shows to the satisfaction of the

Commission that payment of such amount with interest thereon to

date of payment has been made: Provided, That if on appeal the

appellee prevails or if the appeal is dismissed, the automatic prohibition against trading and suspension of registration shall become

effective at the expiration of thirty days from the date of judgment

on the appeal, but if the judgment is stayed by a court of competent jurisdiction, the suspension shall become effective ten days

after the expiration of such stay, unless prior thereto the judgment

of the court has been satisfied.

ø(g) The provisions of this section shall not become effective until

fifteen months after the date of its enactment: Provided, That

claims which arise within one year immediately prior to the effective date of this section may be heard by the Commission after

such 15-month period.¿

(g) PREDISPUTE RESOLUTION AGREEMENTS FOR INSTITUTIONAL

CUSTOMERS.—Nothing in this Act prohibits a registered futures

commission merchant from requiring a customer that is an eligible

contract participant, as a condition to the commission merchant’s

conducting a transaction for the customer, to enter into an

agreement—

(1) waiving the right to file a claim under this section; and

(2) otherwise agreeing to submit any claim the customer may

have against the futures commission merchant to binding arbitration pursuant to the rules and procedures of a registered entity or registered futures association or any other forum authorized to hear such claims.

øSEC. 15. THE COMMISSION¿ SEC. 15. CONSIDERATION OF COSTS AND

BENEFITS AND ANTITRUST LAWS.

(a) COSTS AND BENEFITS.—

(1) IN GENERAL.—Before promulgating a regulation under

this Act or issuing an order (except as provided in paragraph

(3)), the Commission shall consider the costs and benefits of the

action of the Commission.

(2) CONSIDERATIONS.—The costs and benefits of the proposed

Commission action shall be evaluated in light of—

89

(A) considerations of protection of market participants

and the public;

(B) considerations of the efficiency, competitiveness, and

financial integrity of futures markets;

(C) considerations of price discovery;

(D) considerations of sound risk management practices;

and

(E) other public interest considerations.

(3) APPLICABILITY.—This subsection does not apply to the following actions of the Commission:

(A) An order that initiates, is part of, or is the result of

an adjudicatory or investigative process of the Commission.

(B) An emergency action.

(C) A finding of fact regarding compliance with a requirement of the Commission.

(b) ANTITRUST LAWS.—The Commission shall take into consideration the public interest to be protected by the antitrust laws and

endeavor to take the least anticompetitive means of achieving the

objectives of this Act, as well as the policies and purposes of this

Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in

requiring or approving any bylaw, rule, or regulation of a øcontract

market¿ registered entity or registered futures association established pursuant to section 17 of this Act.

SEC. 15. ANTITRUST LAWS.

The Commission shall take into consideration the public interest

to be protected by the antitrust laws and endeavor to take the least

anticompetitive means of achieving the objectives of this Act, as

well as the policies and purposes of this Act, in issuing any order

or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving

any bylaw, rule, or regulation of a øcontract market¿ registered entities or registered futures association established pursuant to section 17 of this Act.

* * * * * * *

SEC. 17. REGISTERED FUTURES ASSOCIATIONS

* * * * * * *

(b) An applicant association shall not be registered as a futures

association unless the Commission finds, under standards established by the Commission, that

* * * * * * *

(2) the rules of the association provide that any person registered under this Act, øcontract market¿ registered entities, or

any other person designated pursuant to the rules of the Commission as eligible for membership may become a member of

such association, except such as are excluded pursuant to paragraph (3) or (4) of this subsection * * * The rules of the association may restrict membership in such association on such

specified basis relating to the type of business done by its

members, or on such other specified and appropriate basis, as

appears to the Commission to be necessary or appropriate in

the public interest and to carry out the purpose of this section.

Rules adopted by the association may provide that the associaVerDate 11-MAY-2000 11:39 Sep 20, 2000 Jkt 079010 PO 00000 Frm 00089 Fmt 6659 Sfmt 6602 E:\HR\OC\SR390.XXX pfrm08 PsN: SR390
90

tion may, unless the Commission directs otherwise in cases in

which the Commission finds it appropriate in the public interest so to direct, deny admission to, or refuse to continue in

such association any person if (i) such person, whether prior of

subsequent to becoming registered as such, or (ii) any person

associated within the meaning of ‘‘associated person’’ as set

forth in section 4k of this Act, whether prior or subsequent to

becoming so associated, has been and is suspended or expelled

from a øcontract market¿ registered entities or has been and is

barred or suspended from being associated with all members

of such øcontract market¿ registered entities, for violation of

any rule of such øcontract market¿ registered entities;

(3) * * *

(A) has been and is suspended or expelled from a registered futures association or from a øcontract market¿

registered entities or has been and is barred or suspended

from being associated with all members of such association

or from being associated with all members of such øcontract market¿ registered entities, for violation of any rule

of such association or øcontract market¿ registered entities

which prohibits any act or transaction constituting conduct

inconsistent with just and equitable principles of trade, or

requires any act the omission of which constitutes conduct

inconsistent with just and equitable principles of trade;

(B) is subject to an order of the Commission denying,

suspending, or revoking his registration pursuant to section 6(c) of this Act, or expelling or suspending him from

membership in a registered futures association or a øcontract market¿ registered entities, or barring or suspending

him from being associated with a futures commission merchant;

(C) whether prior or subsequent to becoming a member,

by his conduct while associated with a member, was a

cause of any suspension, expulsion, or order of the character described in clause (A) or (B) which is in effect with

respect to such member, and in entering such a suspension, expulsion, or order, the Commission or any such

øcontract market¿ registered entities or association shall

have jurisdiction to determine whether or not any person

was a cause thereof; or

(10) the rules of the association provide a fair, equitable, and

expeditious procedure through arbitration or otherwise for the

settlement of customers’ claims and grievances against any

member or employee thereof: Provided, That (A) the use of

such procedure by a customer shall be voluntary, (B) the term

‘‘customer’’ as used in this paragraph shall not include another

member of the association, and (C) in the case of a claim arising from a violation in the execution of an order on the floor

of a øcontract market¿ registered entities, such procedure shall

provide, to the extent appropriate—

* * * * * * *

(o)(1) The Commission may require any futures association registered pursuant to this section to perform any portion of the registration functions under this Act with respect to each member of

the association other than a øcontract market¿ registered entities

91

and with respect to each associated person of such member, in accordance with rules, notwithstanding any other provision of law,

adopted by such futures association and submitted to the Commission pursuant to section 17(j) of this Act, and subject to the provisions of this Act applicable to registrations granted by the Commission * * *

* * * * * * *

(q)(2) The regulations issued by the Commission pursuant to this

subsection shall prohibit, for a period of time to be determined by

the Commission, any member of a registered futures association

who is found to have committed any major violation from service

on the governing board of any registered futures association or

øcontract market¿ registered entities, or on any disciplinary committee thereof***

* * * * * * *

SEC. 22. PRIVATE RIGHTS OF ACTION.

(a)(1) Any person (other than a contract market, clearing organization of a øcontract market, licensed board of trade¿ registered entity, or registered futures association) who violates this Act or who

willfully aids, abets, counsels, induces, or procures the commission

of a violation of this Act shall be liable for actual damages resulting from one or more of the transactions referred to in subparagraphs (A) through (D) of this paragraph and caused by such violation to any other person***

* * * * * * *

(C) who purchased from or sold to such person or placed

through such person an order for the purchase or sale of—

(i) an option subject to section 4c of this Act (other than

an option purchased or sold on a øcontract market¿ registered entity or other board of trade);

* * * * * * *

(2) Except as provided in subsection (b), the rights of action authorized by this subsection and by øsections 5a(11)¿ ‘‘sections

5(d)(13), 5b(d)(2)(H)(i),’’, 14, and 17(b)(10) of this Act shall be the

exclusive remedies under this Act available to any person who sustains loss as a result of any alleged violation of this Act * * *

(3) In any action arising from a violation in the execution of an

order on the floor of a øcontract market¿ registered entity, the person referred to in paragraph (1) shall be liable for—

* * * * * * *

(4) CONTRACT ENFORCEMENT BETWEEN ELIGIBLE

COUNTERPARTIES.—No agreement, contract, or transaction between

eligible contract participants shall be void, voidable, or unenforceable, and no such eligible contract participant shall be entitled to

rescind, or recover any payment made with respect to, such an

agreement, contract, or transaction, under this section based solely

on the failure of the agreement, contract, or transaction to comply

with the terms or conditions of an exemption or exclusion from any

provision of this Act or regulations of the Commission.

(b)(1)(A) A øcontract market or clearing organization of a contract market¿ registered entity that fails to enforce any bylaw, rule,

regulation, or resolution that it is required to enforce by øsection

92

5a(8) and section 5a(9)¿ sections 5 through 5c of this Act, (B) a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission,

or (C) any øcontract market, clearing organization of a contract

market, or licensed board of trade¿ registered entity that in enforcing any such bylaw, rule, regulation, or resolution violates this Act

or any Commission rule, regulation, or order, shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such øcontract market or licensed board of trade¿ registered entity to the extent of such person’s actual losses that resulted from such transaction and were

caused by such failure to enforce or enforcement of such bylaws,

rules, regulations, or resolutions

* * * * * * *

(3) Any individual who, in the capacity as an officer, director,

governor, committee member, or employee of a øcontract market,

clearing organization, licensed board of trade¿ registered entity, or

a registered futures association willfully aids, abets, counsels, induces, or procures any failure by any such entity to enforce (or any

violation of the Act in enforcing) any bylaw, rule, regulation, or resolution referred to in paragraph (1) or (2) of this subsection, shall

be liable for actual damages sustained by a person who engaged in

any transaction specified in subsection (a) of this section on, or subject to the rules of, such øcontract market, licensed board of trade¿

registered entity or, in the case of an officer, director, governor,

committee member, or employee of a registered futures association,

any transaction specified in subsection (a) of this section, in either

case to the extent of such person’s actual losses that resulted from

such transaction and were caused by such failure or violation.

(4) A person seeking to enforce liability under this section must

establish that the øcontract market, licensed board of trade, clearing organization¿ registered entity, registered futures association,

officer, director, governor, committee member, or employee acted in

bad faith in failing to take action or in taking such action as was

taken, and that such failure or action caused the loss.

(5) The rights of action authorized by this subsection shall be the

exclusive remedy under this Act available to any person who sustains a loss as a result of (A) the alleged failure by a øcontract

market, licensed board of trade, clearing organization¿ registered

entity, or registered futures association or by any officer, director,

governor, committee member, or employee to enforce any bylaw,

rule, regulation, or resolution referred to inparagraph (1) or (2) of

this subsection, or (B) the taking of action in enforcing any bylaw,

rule, regulation, or resolution referred to in this subsection that is

alleged to have violated this Act, or any Commission rule, regulation, or order

* * * * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

IMPROVEMENT ACT OF 1991.

Section 402(2) of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(2)) is amended by striking

subparagraph (B) and inserting the following:

93

(B) that is registered as a derivatives clearing organization under section 5b of the Commodity Exchange Act.

Æ