International Monetary Fund – Financial Sector Assessment Program 

Self Assessment of IOSCO Objectives and Principles of Securities Regulation

UNITED STATES 

COMMODITY FUTURES 

TRADING COMMISSION

August 2009 

This self assessment has been prepared by the staff of the CFTC solely for purposes of the FSAP of the United 

States and should not be considered outside of the FSAP context. The responses contained herein are not rules, 

regulations, or statements of the CFTC. Further, the CFTC has neither approved nor disapproved these responses. 

Accordingly, any statements or responses contained herein are not binding and should not be deemed to constitute 

interpretative advice by the staff or the CFTC or be used or relied upon for legal purposes. 
INTRODUCTION

The CFTC is providing this self-assessment as part of the assessment of the United States being 

conducted by the International Monetary Fund (“IMF”) under its Financial Sector Assessment 

Program (“FSAP”). One key component of the FSAP is an evaluation of the policies, practices, 

laws, and regulations administered by the CFTC against the IOSCO Core Principles of Securities 

Regulation (“Principles”). 

The Principles represent an agreed set of high-level principles against which a jurisdiction’s 

securities1 regulatory framework can be benchmarked and assessed. IOSCO has developed an 

extensive methodology to provide an assessment process for evaluating a jurisdiction’s 

compliance with each Principle. 

In preparation for the IMF’s assessment, CFTC staff prepared a self-assessment as of August 25, 

2009, of the Commission’s compliance with the Principles, based upon IOSCO’s assessment 

methodology. This paper sets forth CFTC staff’s responses to key questions contained in the 

methodology, and is being provided by the CFTC to the IMF to facilitate review of the CFTC’s 

compliance with the Principles. 

An evaluation of compliance with the Principles must evaluate compliance at a particular point 

in time, must be governed by a regulatory agency’s statutory mandate at that point in time, and 

must be based on the Principles and methodology as currently drafted. Notwithstanding these 

inherent characteristics of the evaluation process, the CFTC recognizes that the IMF assessment 

is being conducted in the midst of the most severe financial crisis since the Great Depression. 

The U.S. financial regulatory system failed. Structural weaknesses must be examined, and 

financial regulation and supervision in the U.S. must be strengthened. The CFTC is initiating 

regulatory reform within the parameters of its enabling statute, and also is pursuing legislative 

amendments to, among other things, bring currently unregulated OTC derivatives under a 

comprehensive regulatory structure and examine potential areas for harmonization of futures and 

securities markets regulation. 

Notwithstanding the broad powers afforded the CFTC under the CEA and the CFTC’s current 

compliance with the Principles, areas of regulatory interest include the following: 

• Promoting the regulation of over-the-counter derivatives 

The CFTC is actively engaged in developing a comprehensive regulatory framework for 

OTC derivatives.

• Strengthening requirements for clearing organizations 

The CFTC is pursuing the adoption of stronger, more detailed core principles for 

derivatives clearing organizations to enhance the CEA regulatory regime for central 

 

1

 As indicated in the Principles, the term “securities” should be understood to include derivatives where the 

context permits. 

2 
counterparties (“CCPs”) and to assure that U.S. law is consistent with international 

standards for CCPs. 

• Ensuring greater transparency of the marketplace

The CFTC recently announced several initiatives designed to bring greater transparency 

to participation by non-commercial participants such as commodity index funds, swaps 

dealers, and others; positions of traders of contracts determined to perform a significant 

price discovery function; and positions for foreign contracts linked to the settlement price 

of domestic contracts. 

• Applying consistent position limits 

The CFTC recently held public hearings on whether federal speculative limits should be 

set by the Commission for commodities of finite supply, in particular energy 

commodities. The CFTC also recently requested public comment on whether a “bona 

fide hedge exemption” should continue to apply to persons using the futures markets to 

hedge risks other than risks arising from the actual use of a commodity, and CFTC staff 

is considering the extent to which swap dealers should continue to be granted exemptions 

from position limits. 

• Enhancing conditions for foreign boards of trade trading energy contracts 

To enhance its ability to conduct market surveillance and to maintain market integrity, 

the CFTC recently announced additional amendments to the terms under which a foreign 

board of trade (“FBOT”) is permitted to make its electronic trading and order matching 

system available to exchange members in the U.S. 

• Strengthening regulation of retail off-exchange commodity transactions 

The CFTC is working on legislative amendments to extend the Commission’s fraud 

authority for off-exchange retail foreign exchange transactions to transactions in other 

commodities. 

The CFTC understands that recent market events and the need for an enhanced regulatory 

framework may provide guidance for IOSCO to consider in the future when updating the 

Principles. The Commission is committed to working with other U.S. financial regulatory 

authorities and with regulators around the world to make meaningful progress on the critical 

issues facing financial markets. The CFTC also supports and is committed to IOSCO’s ongoing 

work to update the Principles, as necessary, to better reflect today’s financial markets and 

regulatory landscape. 

To assist in reviewing this self-assessment, the CEA and CFTC regulations can be found on the 

Commission’s Web site, http://www.cftc.gov/lawandregulation/index.htm. 

3 
BACKGROUND

The mission of the CFTC is to protect market users and the public from fraud, manipulation, and 

abusive practices related to the sale of commodity futures and options, and to foster open, 

competitive, and financially sound commodity futures and option markets. 

Commodity Futures Industry 

Futures contracts on agricultural commodities have been traded in the United States for more 

than 150 years and have been under Federal regulation since the 1920s. At the time the 

Commission was established in 1974, the vast majority of futures trading took place on 

commodities in the agricultural sector. These contracts gave farmers, ranchers, distributors, and 

end users of everything from corn to cattle an efficient and effective set of tools to hedge against 

price movements. 

Over the years, however, the futures industry has become increasingly diversified. While 

farmers and ranchers continue to use the futures markets as actively as ever to effectively lock in 

prices for their crops and livestock months before they come to market, highly complex financial 

contracts based on interest rates, foreign currencies, Treasury bonds, securities indices, and other 

products have far outgrown agricultural contracts in trading volume. The latest statistics show 

that approximately eight percent of on-exchange commodity futures and option trading activity 

occurs in the agricultural sector, while financial commodity futures and option contracts make up 

approximately 79 percent, and other contracts, such as those on metals and energy products, 

make up about 13 percent. Moreover, the electronic integration of cross-border markets and 

firms, as well as cross-border alliances, mergers, and other business activities, has transformed 

the futures markets and firms into a global industry. 

These trillion-dollar futures markets, with massive economic force, are expanding steadily in 

both volume and new users and their complexity is rapidly evolving with new technologies, 

cross-border activities, product innovation, and greater competition. 

How the CFTC is Organized and Functions 

The CFTC consists of five Commissioners who are appointed by the President to serve staggered 

five-year terms. All Commissioners are confirmed by the Senate. No more than three sitting 

Commissioners may be from the same political party. The President designates one of the 

Commissioners to serve as Chairman, with the advice and consent of the Senate. 

The Commission’s functions are divided between program policy and internal management. The 

Office of the Chairman oversees the Commission’s principal divisions and offices that 

administer the policies, regulations, and guidance regarding the Commodity Exchange Act, as 

amended. The Office of the Executive Director, by delegation of the Chairman, directs the 

internal management of the Commission, ensuring that funds are responsibly accounted for and 

that program performance is measured and improved effectively. 

4 
Attorneys at the Commission work on complex and novel legal issues in areas such as 

enforcement investigations and litigation, regulation, and policy development. Among other 

things, they prosecute administrative and civil enforcement proceedings; assist U.S. Attorneys in 

criminal proceedings charging futures law violations; develop regulations governing 

clearinghouses, exchanges, and intermediaries; provide a wide range of analysis, technical 

assistance, and guidance on regulatory, legislative, and supervisory issues; and provide legal 

advice to the Commission on policy and adjudicatory matters. In recognition of the globalization 

of the futures markets, attorneys represent the CFTC internationally in multilateral regulatory 

organizations, bilaterally with individual foreign regulators, and participate in country dialogues 

organized by the Treasury. 

Auditors examine records and operations of futures exchanges, clearinghouses, and firms for 

compliance with financial requirements, while futures trading specialists perform regulatory and 

compliance oversight to detect potential fraud, market manipulations, and trade practice 

violations. 

Economists evaluate filings for new futures and option contracts and amendments to existing 

contracts, to ensure they meet the Commission’s regulatory standards. Economists also analyze 

the economic effect of various Commission and industry actions and events and advise the 

Commission accordingly. In addition, economists monitor trading activity and price 

relationships in futures markets to detect and deter price manipulation and other potential market 

disruptions. 

The CFTC is headquartered in Washington, D.C. Regional offices are located in Chicago, 

Kansas City, and New York. Additional information about the Commission and its history can 

be obtained from the Commission’s Office of External Affairs or through its Web site, 

http://www.cftc.gov. 

5 
LIST OF ABBREVIATIONS

U.S. Federal Law 

APA Administrative Procedures Act 

CEA Commodity Exchange Act 

CFMA Commodity Futures Modernization Act of 2000 

CRA CFTC Reauthorization Act of 2008 

1974 Act CFTC Act of 1974 

1933 Act Securities Act of 1933 

1934 Act Securities Exchange Act of 1934 

CFTC Divisions and Offices

DCIO Division of Clearing and Intermediary Oversight 

DMO Division of Market Oversight 

DOE Division of Enforcement 

OGC Office of the General Counsel 

OHR Office of Human Resources 

U.S. Federal Departments and Agencies

CFTC or Commission Commodity Futures Trading Commission 

DOJ Department of Justice 

EPA Environmental Protection Agency 

FERC Federal Energy Regulatory Commission 

Federal Reserve Board of Governors of the Federal Reserve System 

FTC Federal Trade Commission 

SEC Securities and Exchange Commission 

Treasury Department of Treasury 

USDA Department of Agriculture 

Other Abbreviations

AML Anti-Money Laundering 

CDS Credit Default Swaps 

CME Chicago Mercantile Exchange 

CPO Commodity Pool Operator 

CTA Commodity Trading Advisor 

COT Report Commitment of Traders report 

DCM Designated Contract Market 

DCO Derivatives Clearing Organization 

DSRO Designated Self-regulatory Organization 

DTEF Derivatives Transaction Execution Facility 

ECM Exempt Commercial Market 

ECP Eligible Contract Participant 

6 
EBOT Exempt Board of Trade 

FCM Futures Commission Merchant 

GAAP Generally Accepted Accounting Principles 

IB Introducing Broker 

ICE Intercontinental Exchange 

IOSCO International Organization of Securities Commissions 

IOSCO MMOU IOSCO Multilateral Memorandum of Understanding 

NFA National Futures Association 

OTC Over-the-counter 

PWG President’s Working Group 

RER Rule Enforcement Review 

RFA Registered Futures Association 

SRO Self-regulatory Organization 

Staff Staff of the CFTC 

7 
TABLE OF CONTENTS

THE REGULATOR ..........................................................................................................................................10

PRINCIPLE 1.  THE RESPONSIBILITIES OF THE REGULATOR SHOULD BE CLEAR AND OBJECTIVELY STATED...........................................11

PRINCIPLE 2. THE REGULATOR SHOULD BE OPERATIONALLY INDEPENDENT AND ACCOUNTABLE IN THE EXERCISE OF ITS POWERS AND

FUNCTIONS .................................................................................................................................................................23

PRINCIPLE 3.  THE REGULATOR SHOULD HAVE ADEQUATE POWERS, PROPER RESOURCES AND THE CAPACITY TO PERFORM ITS FUNCTIONS

AND EXERCISE ITS POWERS .............................................................................................................................................33

PRINCIPLE 4.  THE REGULATOR SHOULD ADOPT CLEAR AND CONSISTENT REGULATORY PROCESSES ................................................38

PRINCIPLE 5.  THE STAFF OF THE REGULATOR SHOULD OBSERVE THE HIGHEST PROFESSIONAL STANDARDS INCLUDING APPROPRIATE

STANDARDS OF CONFIDENTIALITY ....................................................................................................................................43

SELF REGULATORY ORGANIZATIONS .................................................................................................................46

PRINCIPLE 6.  THE REGULATORY REGIME SHOULD MAKE APPROPRIATE USE OF SROS THAT EXERCISE SOME DIRECT OVERSIGHT

RESPONSIBILITY FOR THEIR RESPECTIVE AREAS OF COMPETENCE AND TO THE EXTENT APPROPRIATE TO THE SIZE AND COMPLEXITY OF THE

MARKETS....................................................................................................................................................................47

PRINCIPLE 7.  SROS SHOULD BE SUBJECT TO THE OVERSIGHT OF THE REGULATOR AND SHOULD OBSERVE STANDARDS OF FAIRNESS AND

CONFIDENTIALITY WHEN EXERCISING POWERS AND DELEGATED RESPONSIBILITIES ......................................................................51

ENFORCEMENT .............................................................................................................................................81

PRINCIPLE 8.  THE REGULATOR SHOULD HAVE COMPREHENSIVE INSPECTION, INVESTIGATION AND SURVEILLANCE POWERS................82

PRINCIPLE 9.  THE REGULATOR SHOULD HAVE COMPREHENSIVE ENFORCEMENT POWERS............................................................91

PRINCIPLE 10.  THE REGULATORY SYSTEM SHOULD ENSURE AN EFFECTIVE AND CREDIBLE USE OF INSPECTION, INVESTIGATION,

SURVEILLANCE AND ENFORCEMENT POWERS AND IMPLEMENTATION OF AN EFFECTIVE COMPLIANCE PROGRAM...............................96

COOPERATION ............................................................................................................................................110

PRINCIPLE 11. THE REGULATOR SHOULD HAVE THE AUTHORITY TO SHARE BOTH PUBLIC AND NON‐PUBLIC INFORMATION WITH

DOMESTIC AND FOREIGN COUNTERPARTS........................................................................................................................111

PRINCIPLE 12.  REGULATORS SHOULD ESTABLISH INFORMATION SHARING MECHANISMS THAT SET OUT WHEN AND HOW THEY WILL

SHARE BOTH PUBLIC AND NON‐PUBLIC INFORMATION WITH THEIR DOMESTIC AND FOREIGN COUNTERPARTS ................................115

PRINCIPLE 13.  THE REGULATORY SYSTEM SHOULD ALLOW FOR ASSISTANCE TO BE PROVIDED TO FOREIGN REGULATORS WHO NEED TO

MAKE INQUIRIES IN THE DISCHARGE OF THEIR FUNCTIONS AND EXERCISE OF THEIR POWERS .......................................................119

ISSUERS ........................................................................................................................................................123

PRINCIPLE 14.  THERE SHOULD BE FULL, TIMELY AND ACCURATE DISCLOSURE OF FINANCIAL RESULTS AND OTHER INFORMATION THAT IS

MATERIAL TO INVESTORS' DECISIONS..............................................................................................................................124

PRINCIPLE 15.  HOLDERS OF SECURITIES IN A COMPANY SHOULD BE TREATED IN A FAIR AND EQUITABLE MANNER..........................126

PRINCIPLE 16.  ACCOUNTING AND AUDITING STANDARDS SHOULD BE OF A HIGH AND INTERNATIONALLY ACCEPTABLE QUALITY ........129

COLLECTIVE INVESTMENT SCHEMES .....................................................................................................134

PRINCIPLE 17.  THE REGULATORY SYSTEM SHOULD SET STANDARDS FOR THE ELIGIBILITY AND THE REGULATION OF THOSE WHO WISH TO

MARKET OR OPERATE A COLLECTIVE INVESTMENT SCHEME..................................................................................................135

PRINCIPLE 18.  THE REGULATORY SYSTEM SHOULD PROVIDE FOR RULES GOVERNING THE LEGAL FORM AND STRUCTURE OF COLLECTIVE

INVESTMENT SCHEMES AND THE SEGREGATION AND PROTECTION OF CLIENT ASSETS ................................................................143

PRINCIPLE 19.  REGULATION SHOULD REQUIRE DISCLOSURE, AS SET FORTH UNDER THE PRINCIPLES FOR ISSUERS, WHICH IS NECESSARY

TO EVALUATE THE SUITABILITY OF A COLLECTIVE INVESTMENT SCHEME FOR A PARTICULAR INVESTOR AND THE VALUE OF THE INVESTOR’S

INTEREST IN THE SCHEME .............................................................................................................................................146

PRINCIPLE 20.  REGULATION SHOULD ENSURE THAT THERE IS A PROPER AND DISCLOSED BASIS FOR ASSET VALUATION AND THE PRICING

AND THE REDEMPTION OF UNITS IN A COLLECTIVE INVESTMENT SCHEME................................................................................151

MARKET INTERMEDIARIES .......................................................................................................................154

8 
PRINCIPLE 21.  REGULATION SHOULD PROVIDE FOR MINIMUM ENTRY STANDARDS FOR MARKET INTERMEDIARIES .........................155

PRINCIPLE 22.  THERE SHOULD BE INITIAL AND ONGOING CAPITAL AND OTHER PRUDENTIAL REQUIREMENTS FOR MARKET

INTERMEDIARIES THAT REFLECT THE RISKS THAT THE INTERMEDIARIES UNDERTAKE...................................................................162

PRINCIPLE 23.  MARKET INTERMEDIARIES SHOULD BE REQUIRED TO COMPLY WITH STANDARDS FOR INTERNAL ORGANIZATION AND

OPERATIONAL CONDUCT THAT AIM TO PROTECT THE INTERESTS OF CLIENTS, ENSURE PROPER MANAGEMENT OF RISK, AND UNDER WHICH

MANAGEMENT OF THE INTERMEDIARY ACCEPTS PRIMARY RESPONSIBILITY FOR THESE MATTERS..................................................170

PRINCIPLE 24.  THERE SHOULD BE A PROCEDURE FOR DEALING WITH THE FAILURE OF A MARKET INTERMEDIARY IN ORDER TO MINIMIZE

DAMAGE AND LOSS TO INVESTORS AND TO CONTAIN SYSTEMIC RISK......................................................................................178

SECONDARY MARKETS ..............................................................................................................................185

PRINCIPLE 25.  THE ESTABLISHMENT OF TRADING SYSTEMS INCLUDING SECURITIES EXCHANGES SHOULD BE SUBJECT TO REGULATORY

AUTHORIZATION AND OVERSIGHT ..................................................................................................................................186

PRINCIPLE 26.  THERE SHOULD BE ONGOING REGULATORY SUPERVISION OF EXCHANGES AND TRADING SYSTEMS, WHICH SHOULD AIM TO

ENSURE THAT THE INTEGRITY OF TRADING IS MAINTAINED THROUGH FAIR AND EQUITABLE RULES THAT STRIKE AN APPROPRIATE BALANCE

BETWEEN THE DEMANDS OF DIFFERENT MARKET PARTICIPANTS ...........................................................................................228

PRINCIPLE 27.  REGULATION SHOULD PROMOTE TRANSPARENCY OF TRADING........................................................................236

PRINCIPLE 28.  REGULATION SHOULD BE DESIGNED TO DETECT AND DETER MANIPULATION AND OTHER UNFAIR TRADING PRACTICES 246

PRINCIPLE 29.  REGULATION SHOULD AIM TO ENSURE THE PROPER MANAGEMENT OF LARGE EXPOSURES, DEFAULT RISK AND MARKET

DISRUPTION ..............................................................................................................................................................252

ANNEX: MEMORANDA OF UNDERSTANDING ......................................................................................269

COOPERATIVE ENFORCEMENT ......................................................................................................................................270

INFORMATION SHARING FOR SUPERVISORY, PRUDENTIAL, AND RISK ASSESSMENT PURPOSES AND REGULATION OF CROSS‐BORDER

FUTURES ACTIVITY .....................................................................................................................................................273

FINANCIAL INFORMATION SHARING...............................................................................................................................275

INFORMATION SHARING RELATED TO TECHNICAL ASSISTANCE.............................................................................................276

MULTILATERAL ARRANGEMENTS AND INFORMATION SHARING WITH US GOVERNMENT AGENCIES............................................277

9 
THE REGULATOR

PRINCIPLES 1-5

10 
Principle 1. The responsibilities of the regulator should be clear and 

objectively stated

Assessment: Fully Implemented 

1) Are the regulator’s responsibilities, powers and authority: 

a) Clearly defined and transparently set out, preferably by law, and in the case of 

powers and jurisdiction, enforceable? 

Yes. The CFTC is an independent federal agency established pursuant to the CEA. The 

responsibilities, powers and authority of the CFTC are clearly defined and transparently 

set forth in the CEA and CFTC regulations promulgated thereunder.2 In particular, the 

jurisdiction of the CFTC is established under Section 2(a) of the CEA while the powers 

of the CFTC are set forth in Section 8a of the CEA. 

It is the mission of the CFTC to protect the public interest by providing a means for 

managing and assuming price risks, discovering prices and/or disseminating pricing 

information through trading in liquid, fair and financially secure trading facilities. In 

order to foster the public interest, consistent with the CEA, the CFTC endeavors to detect 

and prevent price manipulation or any other disruptions to market integrity; to protect all 

market participants from fraudulent or other abusive sales practices and misuses of 

customer assets; and to promote responsible innovation. 

The CEA vests the CFTC with exclusive jurisdiction over futures and commodity option 

transactions.3

 Subject to certain exceptions, and to the CFTC’s authority to exempt 

certain transactions or categories of transactions from most provisions of the CEA, all 

 

2 See 7 U.S.C. 1, et seq., and 17 C.F.R. 1, et seq. 

3

 Section 2(a)(1)(A) of the CEA, 7 U.S.C. 2(a)(1)(A), grants the CFTC exclusive jurisdiction with respect to 

“accounts, agreements (including any transaction which is of the character of . . . an “option” . . . ) and “transactions 

involving contracts of sale of a commodity for future delivery, traded or executed on a contract market designated or 

derivatives transaction execution facility registered pursuant to section 7 or 7a of this title or any other board of 

trade, exchange, or market, and transactions subject to regulation by the Commission pursuant to section 23 of this 

title.” Section 1a(4) of the CEA defines the term “commodity” to mean wheat, cotton, rice, corn, oats, barley, rye, 

flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils 

(including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, 

cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, 

and all other goods and articles, except onions as provided in section 13–1 of this title, and all services, rights, and 

interests in which contracts for future delivery are presently or in the future dealt in. The CEA specifically excepts 

from the CFTC’s exclusive jurisdiction security futures products and the setting of margin levels for stock index 

futures contracts. In addition, certain financial products such as OTC derivatives, swap agreements and hybrid 

instruments are largely left outside of the CFTC’s jurisdiction under the CEA. 

11 
transactions in commodity futures contracts and all commodity option transactions are 

required to occur on or subject to the rules of DCMs or DTEFs. Certain transactions, 

agreements and/or contracts may be traded on exempt markets that are exempt from 

substantive regulation by the CFTC. These markets, however, are generally subject to 

the CFTC’s anti-fraud and anti-manipulation authority.4

Security Futures. Section 2(a)(1)(D) of the CEA,5

 and related securities laws, allocate 

jurisdiction over certain derivative products between the CFTC and the SEC. The SEC 

has authority to regulate options on securities, on groups and indices of securities, on 

certificates of deposit and on foreign currencies when traded on a national securities 

exchange.6

 The CFTC has exclusive jurisdiction over futures trading on government 

securities, foreign currency7

 and on certain non-narrow-based groups or indices of 

securities,8 and over options on such futures.9 In addition, security futures products—

futures on individual stocks and narrow-based securities indexes—are subject to the joint 

jurisdiction of the CFTC and SEC.10 Security futures products may be traded on any 

DCM or DTEF that also is notice registered with the SEC as a national securities 

exchange.11 Security futures products may also be traded on any SEC-registered national 

securities exchange, national securities association, or alternative trading system that is 

notice designated as a DCM by the CFTC.12

Dealer/Trade Options. “Dealer options” are certain off-exchange options on physical 

commodities granted by persons domiciled in the U.S. who on May 1, 1978 were in the 

business of granting options on a physical commodity and in the business of buying, 

selling, producing, or otherwise using that commodity. “Trade options” are off-exchange 

commodity options which can be offered only to a commercial person or entity solely for 

purposes related to that person’s commercial business. 

Although the CEA regulatory framework generally contemplates that transactions in 

commodity options will take place on DCMs and DTEFs, CFTC regulations have made 

dealer/trade options exempt from most CEA regulatory provisions.13 

 

4 See infra, section entitled Trading Organizations. 

5

 7 U.S.C. 2. 

6 See Section 9(g) of the 934 Act, 15 U.S.C. 78i. Section 4c(f) of the CEA, 7 U.S.C. 6c(f), provides that the CEA is 

inapplicable “to any transaction in an option on foreign currency traded on a national securities exchange.” 

7

 CEA 2(c)(1) and 2(c)(2)(A), 7 U.S.C. 2(c)(1) and 2(c)(2)(A). 

8

 CEA 2 (a)(1)(c)(ii), 7 U.S.C. 2(a)(1)(c)(ii). 

9 Id.

10 See Title II of the CFMA, Public Law 106-554 (December 21, 2000). 

11 See SEC, Securities Exchange Act Release No. 44692 (August 13, 2001), 66 FR 43721 (August 20, 2001). 

12 See 17 C.F.R. 41, 140; 66 FR 44960 (August 27, 2001). 

13 See Section 4c(d) of the CEA and Part 32 of the CFTC Regulations, 17 C.F.R. 32 (permitting off-exchange 

options that are offered and sold to commercial counterparties). 

12 
Treasury Amendment. Section 2(c)(1) of the CEA specifically excludes from the 

operation of the CEA transactions in foreign currency, government securities, security 

warrants, security rights, resale or installment loan contracts, repurchase transactions in 

excluded commodities, or mortgages, unless conducted on an organized exchange. The 

1974 Act originally exempted from the CFTC’s jurisdiction, among other things, 

contracts based on foreign currency and Treasury securities so long as the transactions 

did not involve the sale of a futures contract (or option thereon) or commodity options 

executed or traded on a futures exchange. This provision has been the subject of legal 

and regulatory uncertainty resulting in amendments through the CFMA14 and the CRA.15 

As a result, the Treasury Amendment has been clarified so that the CFTC retains 

jurisdiction to regulate transactions in futures contracts (and options thereon) and 

commodity options based on Treasury Amendment instruments to the extent that such 

transactions occur on a DCM or DTEF. Certain OTC markets for Treasury Amendment 

instruments are accordingly excluded from regulation by the CFTC under the CEA. 

However, as set forth below,16 the CRA has further detailed the CFTC’s jurisdiction 

relating to off-exchange retail foreign currency transactions. 

Foreign Currency Transactions. The CFTC has jurisdiction over foreign currency 

futures or options on foreign currencies (unless traded on a national securities exchange) 

entered into by persons who are not ECPs,17 unless the counterparty is a bank, brokerdealer, FCM, or other specified regulated entity.18 In addition, any agreement, contract 

or transaction in foreign currency that is offered on a leveraged or margined basis t

someone who is not an ECP is subject to the CFTC’s antifraud provisions as if the 

foreign currency contracts were “futures contracts.”

o 

 

19 However, the CFTC does not have 

jurisdiction over retail forex transactions that are entered into by a financial institution 

(except an FCM), a registered broker-dealer, an insurance company, a financial holding 

company or an investment bank holding company. In addition, the CFTC does not have 

jurisdiction over transactions that (1) result in actual delivery of the foreign currency in 

two days or less, or (2) create an enforceable obligation to deliver between a buyer and a 

seller who can effectuate such delivery in their line of business. 

Hybrid Instruments. A “hybrid instrument” is defined in Section 1a(21) of the CEA to 

mean a security having one or more payments indexed to the value, level or rate of, or 

providing for the delivery of one or more commodities. The CFTC is not permitted to 

regulate hybrid instruments that are predominantly securities.20 This provision enacted 

14 Public Law 106-554 (December 21, 2000). 

15 Public Law 110-246 (June 18, 2008). 

16 See infra, section entitled Foreign Currency Transactions. 

17 ECP is defined in Section 1a(12) of the CEA, 7 U.S.C. 1a(12), to included financial institutions, insurance 

companies, registered investment companies, highly-capitalized commodity pools, entities and employee benefit 

plans, governmental entities, certain broker-dealers, FCMs and floor brokers/traders and high net worth individuals. 

18 See Section 2(c)(2)(B) of the CEA, 7 U.S.C. 2(c)(2)(B). 

19 See Section 2(c)(2)(C)(iv) of the CEA, 7 U.S.C. 2(c)(2)(C)(iv). 

20 See Section 2(f) of the CEA, 7 U.S.C. 2(f). 

13 
as part of the CFMA effectively expanded the exemption provided by the CFTC’s 17 

C.F.R. 34 hybrid exemption.21 A hybrid instrument is deemed to be predominantly a 

security and thus excluded from regulation under the CEA if: the issuer receives full 

payment of the purchase price of the instrument substantially contemporaneously with 

delivery of the instrument; the purchaser is not required to make any payment to the 

issuer in addition to the purchase price during the life of the instrument; the issuer is not 

subject, under the terms of the instrument, to mark-to-market margining requirements; 

and the hybrid is not marketed as a futures contract. 

DCMs. DCMs are boards of trade that operate under the regulatory oversight of the 

CFTC, pursuant to Section 5 of the CEA, 7 U.S.C. 7.22 DCMs are traditional futures 

exchanges that permit access to their facilities by all types of traders, including retail 

customers. DCMs may list for trading futures or options contracts based on any 

underlying commodity, index or instrument. 

To obtain and maintain its designation, a DCM must comply with the following 

Designation Criteria established in Section 5(b) of the CEA, 7 U.S.C. 7(b), and Part 38 of 

the CFTC’s Regulations: 

• General demonstration of adherence to Designation Criteria; 

• Prevention of market manipulation; 

• Fair and equitable trading; 

• Enforcement of rules on the trade execution facility; 

• Financial integrity of transactions; 

• Disciplinary procedures; 

• Public access to information on the contract market; and 

• Ability of the contract market to obtain trading information. 

To obtain and maintain its designation, a DCM must also comply with 18 core principles 

established in Section 5(d) of the CEA, 7 U.S.C. 7(d), and Part 38 of the CFTC's 

regulations. Specifically, DCMs must comply on an initial and continuing basis with the 

following core principles: (1) general matters; (2) compliance with rules; (3) contracts not 

readily subject to manipulation; (4) monitoring of trading; (5) position limits or 

accountability rules; (6) emergency authority; (7) availability of general information; (8) 

daily publication of trading information; (9) execution of transactions; (10) trade 

information; (11) financial integrity of contracts; (12) protection of market participants; 

(13) dispute resolution; (14) governance fitness standards; (15) conflicts of interest; (16) 

composition of boards of mutually owned markets; (17) record keeping and (18) antitrust 

considerations. 

 

21 CFTC Regulation 34.2(a), adopted prior to the CFMA, defines “hybrid instrument” to mean an equity or debt 

security or depository instrument with one or more commodity-dependent components that have payment features 

similar to commodity futures or commodity options contracts or combinations thereof. 

22 Part 38 of the CFTC’s regulations, 17 C.F.R. 38, details the procedures and requirements for operating a DCM. 

14 
DCMs may implement new rules or rule amendments or list new products by filing 

with the CFTC a certification that the rule or rule amendment complies with the CEA 

and CFTC Regulations and policies and/or by requesting approval from the CFTC. 

DTEFs. DTEFs are trading facilities that limit access primarily to institutional or 

otherwise eligible traders and limit the products traded.23 DTEFs, therefore, are able 

to operate under a lower level of regulation than a DCM. Two types of DTEF markets 

are provided for by Section 5a of the CEA, 7 U.S.C. 7a: regular DTEFs (or eligible 

participant DTEFs) and commercial DTEFs (or eligible commercial entity DTEFs). 

All registered DTEFs must meet specified requirements set forth in Section 5a of the 

CEA and must adhere to 9 core principles on an ongoing basis: (1) general matters; (2) 

compliance with rules; (3) monitoring of trading; (4) disclosure of general information; 

(5) daily publication of trading information; (6) fitness standards; (7) conflicts of interest; 

(8) recordkeeping and (9) antitrust consideration. 

Regular DTEFs. Regular DTEFs must limit the products that are traded. However, 

access is available to all eligible traders. Participants eligible to trade on a regular DTEF 

are generally limited to institutional traders and non-institutional traders trading through 

certain highly capitalized FCMs. Products eligible for listing on a regular DTEF are 

specified in Section 5a of the CEA, 7 U.S.C. 7a, which provides that DTEFs may list 

contracts based on underlying products that: have a nearly inexhaustible deliverable 

supply; have a deliverable supply that is sufficiently large that the contract is highly 

unlikely to be susceptible to the threat of manipulation; have no cash market;24

 are 

security futures products and the registered DTEF is a national securities exchange 

registered under the 1934 Act; or are futures and option contracts on commodities that the 

Commission may determine, on a case-by-case basis, are highly unlikely to be 

susceptible to the threat of manipulation, based upon characteristics of the market and the 

trading facility on which the product would be traded. 

Exempt commodities25 (e.g., metals, energy products, and other nonagricultural 

commodities) would be eligible to trade on a regular DTEF, only as determined by the 

Commission. 

Commercial DTEFs. Commercial DTEFs are available only to eligible commercial 

entities, as defined in Section 1a(11) of the CEA, 7 U.S.C. 1a(11), trading for their own 

accounts. The futures and option contracts eligible for trading on a commercial DTEF 

may be based on any commodity other than the enumerated agricultural commodities set 

 

23 Section 5a of the CEA, 7 U.S.C. 7a, and Part 37 of the CFTC’s Regulations, 17 C.F.R. 37, set forth the 

requirements and procedures governing both types of DTEFs. 

24 The CFTC has determined that the commodities described in this bullet are defined as “excluded commodities” 

under Section 1a(13) of the CEA, 7 U.S.C. 1a(13). Section 1a(13) defines an “excluded commodity” to mean, 

among other things, an interest rate, exchange rate, currency, credit risk or measure, debt instrument, measure of 

inflation, or other macroeconomic index or measure. 

25 See Section 1a(14) of the CEA, 7 U.SC. 1a(14). 

15 
forth in Section 1a(4) of the CEA. Participants eligible to trade on a commercial DTEF 

include “eligible commercial entities,” as defined in Section 1a(11) of the CEA, 7 U.S.C. 

1a(11), trading for their own accounts, as well as registered floor brokers or floor traders 

trading for their own accounts whose trading obligations are guaranteed by a registered 

FCM. 

Exempt Markets. Exempt markets are exempted from most regulatory requirements 

of the CEA and the CFTC regulatory framework. There are two kinds of exempt 

markets—ECMs and EBOTs. 

Exempt markets are not registered with, or designated, recognized, licensed or 

approved by the CFTC. To be exempt from most CFTC regulatory oversight, the 

exempt market must satisfy the conditions for the exemption, including a requirement 

to notify the CFTC of the market’s intention to rely on the exemption. If the exempt 

market is performing a price discovery function, the market must provide certain 

pricing information to the public. 

ECMs. Agreements, contracts, and transactions in exempt commodities that are traded 

on a principal-to-principal basis on electronic trading facilities between eligible 

commercial entities may be traded on an ECM and be exempt from regulation.26 ECMs 

transactions are generally not subject to the CFTC’s enforcement jurisdiction, except for 

fraud and manipulation authority. 

Although ECMs trading exempt commodities are generally exempt from regulation, 

Section 2(h)(7) of the CEA, 7 U.S.C. 2(h)(7), recently enacted as part of the CRA, does 

provide CFTC regulation and oversight relating to significant price discovery contracts 

(“SPDCs”)27 that may be traded on ECMs. The CFTC will determine whether a 

particular contract is a SPDC based on the following factors: price linkage, arbitrage, 

material price reference and material liquidity.28 If a contract is determined to be a 

SPDC, the ECM must show it complies with 9 core principles, which provide that any 

ECM, with regard to SPDCs traded on that ECM, shall: (1) list only SPDCs that are not 

readily susceptible to manipulation; (2) monitor trading in SPDCs to prevent market 

manipulation, price distortion and disruptions of the delivery or cash-settlement process; 

(3) establish and enforce rules that allow the ECM to obtain any necessary information to 

maintain regulatory compliance; (4) adopt position limits or position accountability for 

speculators in SPDCs; (5) adopt rules to provide for the exercise of emergency authority; 

(6) make public daily information on price, trading volume and other trading data to the 

extent appropriate for SPDCs; (7) monitor and enforce compliance with the rules of the 

 

26 See Section 2(h) of the CEA, 7 U.S.C. bgate.access.gpo.gov/the CFTC Regulations.

27 A “SPDC” is an agreement, contract or transaction that is traded or effected on an ECM and which exhibits 

certain characteristics indicating that it serves a significant price discovery function. 

28 See Section 2(h)(7) of the CEA, 7 U.S.C. 2(h)(7) and CFTC Regulation 36.3 and Appendix A to Part 36. CFTC 

Regulation 36.3 sets forth the process of determining whether a particular contract is a SPDC. See also CFTC, 17 

C.F.R. Parts 15, 16, 17, 18, 19, 21, 36 and 40, Significant Price Discovery Contracts on Exempt Commercial 

Markets, 74 FR 12178 (March 23, 2009). 

16 
ECM; (8) establish and enforce rules to minimize conflicts of interest in the decisionmaking process of the ECM; and (9) avoid adopting any rules or taking any actions that 

result in any unreasonable restraints of trade. 

EBOTs. Transactions by ECPs in a certain narrow list of selected commodities may be 

conducted on an EBOT and be exempt from regulation if such commodities have a nearly 

inexhaustible deliverable supply; have a deliverable supply that is sufficiently large that 

the contract is highly unlikely to be susceptible to the threat of manipulation; or have no 

cash market.29 EBOT transactions that meet the requirements for the Section 5d 

exemption are not subject to the CFTC’s regulatory or enforcement jurisdiction except 

for certain limited fraud and manipulation authority.

Commodity Pools. The solicitation of funds for investment in a commodity pool30

constitutes the offer of a “security” that necessitates compliance with certain provisions 

of the 1933 Act and the 1934 Act.31 Separately, the CFTC maintains jurisdiction over the 

operation of commodity pools and has issued regulations mandating, among other things, 

certain required disclosures in connection with the offer of a pool.32 As a practical 

matter, public offers for commodity pools generally are made by one prospectus that 

complies with both the securities laws and the CFTC’s commodity pool regulations. 

Although the majority of all commodity pools are private placements, and therefore, only 

subject to CFTC substantive regulation,33 increasingly, issuers of exchange-traded funds 

(“ETFs”) have launched commodity-based ETFs for trading on national securities 

exchanges. As a result, these funds are subject to “dual” regulation by both the CFTC 

and SEC consisting of CPO registration and regulation, disclosure requirements under 

both the CEA and federal securities laws and securities exchange regulation. 

CFTC Regulation 4.5, 17 C.F.R. 4.5, excludes from the definition of CPO, and therefore 

application of the CEA and CFTC regulations related to pools and their related advisors, 

certain collective investment vehicles that are otherwise regulated entities, such as 

registered investment companies, insurance company separate accounts, banks and trust 

companies and certain defined benefit (pension) plans. CFTC Regulation 4.13, 17 C.F.R. 

4.13, also provides exemptions from CPO registration for CPOs that meet specified 

criteria, including small or family pools, pools that engage in minimal futures trading, or 

those that limit participation to certain sophisticated investors. The CFTC, pursuant to 

Regulation 4.12, 17 C.F.R. 4.12, also can exempt entities from the application of Part 4 of 

the CFTC’s regulations in appropriate cases. 

 

29 See Section 5d of the CEA, 7 U.S.C. 7a-3. 

30 Although the CEA does not define the term “commodity pool,” CFTC Regulation 4.10(d)(1) defines “pool” to 

mean any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity 

interests. 

31 See Section 4(m) of the CEA. 

32 See CFTC Regulations 4.21, 4.24, 4.25 and 4.26, 17 C.F.R. 4.21, 4.24, 4.25 and 4.26. 

33 The SEC, however, does retain anti-fraud and anti-manipulation authority over the securities of such commodity 

pool offerings. 

17 
Intermediaries. The CFTC regulates the following categories of intermediaries: 

• “FCM” is defined as any person who solicits or accepts orders to buy or sell 

futures or options contracts, and who, in connection with the order, accepts any 

money or other property (or extends credit) to margin, guarantee, or secure the 

contracts resulting from the order. 

• “IB” is any person who solicits or accepts orders to buy or sell futures or option 

contracts, but who does not accept any money or property (or extend credit) to 

margin, guarantee or secure the contracts. 

• “Agricultural trade option merchant” is any person that is in the business of 

soliciting, offering, confirming or maintaining a position in off-exchange option 

contracts in certain enumerated agricultural commodities. 

• “Floor trader” is a person who trades contracts on DCMs and/or DTEFs for his 

own account. 

• “Floor broker” is a person who trades contracts on DCMs and/or DTEFs for the 

account of others. 

• “Foreign futures and options broker” is any non-U.S. person that is a member of a 

non-U.S. exchange or SRO and subject to regulation in such foreign jurisdiction. 

Also included are foreign affiliates of U.S. firms that are licensed and subject to 

regulation in such non-U.S. jurisdiction. 

• “CTA” is defined as any person who, for compensation or profit, is engaged in the 

business of providing commodity interest advisory services to others. 

• “CPO” is defined as any person who solicits funds from others for the purpose of 

pooling the funds for use in investing in commodity interests. As noted above, pools 

also may be regulated by the SEC if publicly offered or under the Investment 

Company Act of 1940, under certain circumstances, if not excluded under CFTC 

Regulation 4.5. 

The CEA and CFTC Regulations impose requirements related to licensing, conduct of 

business, mandatory firm capital and custodianship of customer assets. In addition, the 

CEA requires the officers of the above registered entities and persons who solicit funds or 

supervise such persons within such registered entities to register as “associated persons.” 

In addition to the standards established by the American Institute of Certified Public 

Accountants (“AICPA”), and the Financial Accounting Standards Board (“FASB”),34

 

34 The FASB, a private sector organization, authorizes and establishes the uniform financial accounting and 

reporting standards and guidelines of the United States under the auspices of the SEC. 

18 
CFTC regulations establish requirements pertaining to independent public accountants 

who audit CFTC registrants. For example, under CFTC Regulation 1.16, 17 C.F.R. 1.16, 

the CFTC will recognize only a licensed CPA or licensed public accountant who is in 

good standing under the laws of the place of his or her residence or principal place of 

business and an “accountant’s report” that has been prepared consistent with the 

requirements of CFTC Regulation 1.16. The CFTC also has worked with AICPA to 

provide guidance on the application of accounting standards to CFTC registrants. 

Foreign Brokers. Part 30 of the CFTC Regulations govern the offer and sale of foreign 

futures and options contracts to customers located in the U.S. As set forth in CFTC 

Regulation 30.4, any domestic or foreign person engaged in activities like those of an 

FCM, IB, CPO or CTA must register in the appropriate capacity or seek an exemption 

from registration under CFTC Regulations 30.5 or 30.10. 

CFTC Regulation 30.5 provides an exemption from registration for any person located 

outside of the U.S. who is required to be registered with the CFTC under Part 30 other 

than a person required to be registered as an FCM. A foreign futures or options broker in 

such case is required to consent to the jurisdiction of the U.S. courts and the CFTC with 

respect to dealings with U.S. customers, and engage in all transactions subject to 

regulation under Part 30 through a registered FCM or foreign broker who has received 

confirmation of exemption from registration as an FCM under CFTC Regulation 30.10. 

CFTC Regulation 30.10 permits a person affected by any of the requirements contained 

in Part 30 of the Commission’s regulations to petition the Commission for an exemption 

from such requirements. If the CFTC determines that compliance with the foreign 

jurisdiction’s regulatory program would offer “comparable” protection to persons located 

in the U.S. and there is an information sharing agreement between the Commission and 

the firm’s home country regulator, the CFTC will consider issuance of an order to the 

foreign regulator or SRO granting general relief, subject to certain conditions. 

Margin Authority. Section 2(a)(1)(C)(v) of the CEA requires any DCM or DTEF that 

trades stock index futures contracts (or options thereon) to file with the Federal Reserve 

any rule establishing or changing the levels of margin (initial and maintenance) for that 

contract and authorizes the Federal Reserve to set the margin levels. Under the authority 

of that section, the Federal Reserve delegated such margin authority to the CFTC in 1993, 

subject to an annual reporting requirement to the Federal Reserve. 

Dual Registration. Securities broker-dealers registered with the SEC may also dually 

register in the above-referenced CFTC categories. In cases of such dual registration as an 

FCM, CFTC Regulation 1.17 (a)(1)(i)(C), 17 C.F.R. 1.17 (a)(1)(i)(C), recognizes 

compliance with the SEC net capital rule as satisfaction of the CFTC’s minimum 

financial requirements (although the minimum requirement is the higher of the CFTC or 

SEC rule in any given case). Banks typically establish subsidiaries due to the 

requirements of banking regulators, as well as the liquidity requirements of CFTC capital 

rules. FCM subsidiaries of bank holding companies are subject to Federal Reserve 

examination and certain other requirements. 

19 
Swap Agreements. Swap agreements35 on all commodities other than agricultural 

commodities are generally excluded from regulation by the CFTC if the agreement is 

entered into between ECPs, is subject to individual negotiation by the parties, and is not 

executed or traded on a trading facility.36 Swap agreements on agricultural commodities 

are allowed under the terms of Part 35 of the Commission’s regulations. 

 

b) If the regulator can interpret its authority, are the criteria for interpretation clear 

and transparent? 

Yes. The CFTC can interpret how to apply the authority granted to it by the CEA. The 

CEA also grants the CFTC broad exemptive authority under Section 4(c) as well as broad 

rulemaking authority under Section 8a(5). 

The criteria for interpreting the CFTC’s authority are clear and transparent. The CFTC 

largely interprets the CEA based on the plain meaning of the statute and available 

legislative history as related to relevant markets and market participants. CFTC 

rulemaking is employed to administer and implement various provisions of the CEA as 

provided for in Section 8a(5) of the CEA. The rulemaking process is governed by the 

APA and other various statutes that prescribe the manner in which the CFTC may adopt 

rules and regulations. As set forth below in 1.1(c), this process is fully transparent with 

CFTC rule proposals and adoptions, concept releases and interpretations published in the 

Federal Register. CFTC staff may also provide guidance to market participants and 

practitioners on a variety of legal and regulatory matters. Although not legally binding 

on the CFTC, these staff interpretations provide guidance on a host of CEA and related 

issues. 

c) Is the interpretative process transparent enough to preclude situations in which an 

abuse of discretion can occur? 

Yes. 5 U.S.C. 553 of the APA requires agencies to incorporate a concise general 

statement of the basis and purpose for adopted rules. Generally, all CFTC Orders, 

Exemption Letters and Advisories contain written explanations of the basis for such 

actions. These CFTC actions are publicly disclosed in the Federal Register and/or the 

CFTC’s Web site at http://www.cftc.gov. Parties affected by any such CFTC actions may 

also seek judicial review by the federal courts. 

2) When more than one domestic authority is responsible: 

a) Does the legislation ensure that any division of responsibility avoids gaps or 

inequities in regulation?

 

35 See Section 206A of the Gramm-leach-Bliley Act, Pub. L. 106-102, 15 U.S.C. 78c note. 

36 See Section 2(g) of the CEA, 7 U.S.C. 2(g). 

20 
President Barack Obama called on the SEC and CFTC to recommend changes to their 

statutes and regulations that would eliminate differences with respect to similar types of 

financial instruments so that the agencies’ regulations are harmonized. To ensure 

regulatory harmonization between the CFTC and SEC, the agencies will hold joint 

meetings on September 2-3, 2009 to seek input from the public. The discussion from 

these meetings will contribute to a report from the CFTC and SEC to the US Congress 

that will identify existing conflicts in each agency’s statutes and regulations. The Report 

will also explain why certain statutory and regulatory differences should be retained to 

achieve underlying policy objectives, or recommend changes that would eliminate the 

differences. 

Foreign Currency Transactions. Unlike most other financial products, the regulation 

of off-exchange retail forex transactions depends upon the entity offering the product. 

The CFTC has jurisdiction over such transactions where the counterparty is an FCM, but 

transactions with other permissible counterparties such as banks, broker-dealers and 

insurance companies are overseen by their respective regulators. There are no unifying 

standards for forex trading activities across regulators, leading to possible inconsistencies 

in the regulation of the counterparties. 

b) Is substantially the same type of conduct generally subject to consistent regulatory 

requirements? 

Yes. See supra, response to Principle 1, Question 2(a). 

3) When more than one domestic authority is responsible: 

a) Are there effective arrangements for cooperation and communication of 

information between responsible authorities through appropriate channels? 

b) Are responsible authorities required to cooperate and communicate in areas of 

shared responsibility? 

c) Are cooperation and communication occurring between responsible authorities 

without significant limitations? 

Yes, to all of the above. Domestically, the CFTC participates in the PWG, a key forum 

for the coordination of regulation across financial markets. It brings together the leaders 

of the federal financial regulatory agencies, including the Secretary of the Treasury and 

the chairmen of the Federal Reserve, CFTC, and SEC. Meetings of the principals also 

include the heads of the National Economic Council, Council of Economic Advisors, 

Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and 

Federal Reserve Bank of New York. 

Staff also works through various established intergovernmental partnerships to share 

information and to consult on issues of importance both to the CFTC and to other 

financial regulators. Meetings are typically held among the CFTC, SEC, Treasury, 

21 
Federal Reserve, the New York Federal Reserve Bank, Department of Energy, USDA 

and FERC. Other meetings are event driven.

The working relationships with federal law enforcement entities are also fundamental to 

an effective law enforcement effort. The CFTC coordinates its enforcement efforts with 

agencies such as DOJ, the Federal Bureau of Investigation, FTC, SEC, the U.S. Postal 

Inspection Service and FERC. Enforcement efforts are coordinated with state authorities 

as well, including state commissions responsible for the regulation of corporations, 

securities, insurance and banking. 

 

The CFTC also is represented on several interagency task forces designed to keep 

participants abreast of new developments in financial crimes and to coordinate the 

government’s response. In this area, the CFTC participates in the Money Laundering 

Working Group (“MLWG”), a forum for discussing money laundering issues among 

relevant US governmental agencies, chaired by Treasury and DOJ and attended by US 

banking, securities and futures regulators and state and federal law enforcement agencies. 

Through the MLWG, the CFTC also lends advice to Treasury’s Financial Crimes 

Enforcement Network regarding the work undertaken by the Financial Action Task Force 

(“FATF”), an international organization created to formulate recommendations for 

combating money laundering. 

Section 12(g) of the CEA, 7 U.S.C. 16, requires the CFTC to cooperate with the Office of 

the United States Trade Representative, Treasury, the Department of Commerce, and the 

Department of State to remove any trade barriers that may be imposed by a foreign nation 

on the international use of electronic trading systems. 

Cooperation with other government agencies also is mandated by the CEA. See infra, 

response to Principle 2, Question 2. 

22 
Principle 2. The regulator should be operationally independent and 

accountable in the exercise of its powers and functions 

Assessment: Fully Implemented 

 1) Does the securities regulator have the ability to operate on a day-to-day basis without: 

a) External political interference? 

Yes. The 1974 Act established the CFTC as an independent regulatory commission of 

the U.S. Government (i.e., the CFTC does not operate as a division of any Executive 

Branch department or other agency). Also, as noted below in response to Principle 2, 

Question 5, the CEA mandates that no more than three CFTC Commissioners may be 

members of the same political party. However, the CFTC is accountable to, and subject 

to the oversight of, the U.S. Congress. 

b) Interference from commercial or other sectoral interests? 

 Yes. As set forth below in response to Principle 2, Question 7, interested parties may 

comment on various CFTC rulemaking proposals. In this manner, persons that may be 

affected by adoption of new or amended regulations by the CFTC may provide input and 

voice any concerns. 

2) Where particular matters of regulatory policy require consultation with, or even 

approval by, a government minister or other authority: 

a) Is the consultation process established by law? 

 Yes. Section 2(a)(9)(B)(ii) of the CEA, 7 U.S.C. 2(a)(9)(B)(ii), requires the CFTC to 

deliver a copy of any application by a board of trade for designation or registration as a 

DCM or DTEF to trade futures based on any security issued or guaranteed by the U.S. or 

any agency thereof to Treasury and the Federal Reserve. In addition, Sections 2(a)(9)(A) 

and (B)(i) of the CEA, 7 U.S.C. 2(a)(9), require the CFTC to maintain a liaison with 

USDA, and to maintain communications with Treasury, the Federal Reserve, and SEC 

for the purpose of keeping such agencies fully informed of CFTC activities that relate to 

the responsibilities of those agencies and for considering the relationships between the 

volume and nature of investment and trading in futures contracts and in securities and 

financial instruments under the jurisdiction of those agencies. 

Section 2(a)(9)(B)(ii), 7 U.S.C. 2(a)(9)(B)(ii), prohibits the CFTC from designating or 

registering a board of trade as a DCM or DTEF in U.S. government issued or guaranteed 

securities until forty-five days after the CFTC provides a copy of the application to 

23 
Treasury and the Federal Reserve or until the CFTC receives comments from those 

agencies, whichever period is shorter. This section requires the CFTC to take into 

account any comments received from those agencies, not only in designation decisions 

but also in refusing, suspending, or revoking the designation of a contract market trading 

futures contracts based on U.S. government issued or guaranteed securities. 

Security futures products may be traded either on a national securities exchange, national 

securities association, alternative trading system, DCM or DTEF (collectively, 

“Exchanges”), however, in each case, the entity must become registered with both the 

CFTC and SEC solely for the purpose of trading security futures. This additional 

registration for a national securities exchange, national securities association or 

alternative trading system is accomplished through an immediately effective notice filing 

pursuant to CFTC Regulation 41.31, 17 C.F.R. 41.31.37 Comparatively, a DCM or 

DTEF would submit its notice filing with the SEC pursuant to SEC Rule 19b-7, 17 

C.F.R. 240.19b-7. Thus, a facility that lists security futures for trading must be registered

with the SEC as a national securities exchange, national securities association or 

alternative trading system and be designated by the CFTC as a DCM or registered with 

the CFTC as a DTEF. In addition, Exchanges trading security futures are required to file 

with the SEC and the CFTC proposed rule changes relating to higher margin lev

or manipulation, recordkeeping, reporting, listing standards, decimal pricing, sales 

practices for security futures products or rules effectuating such SRO’s obligation to 

enforce the securities laws. A DCM or DTEF that is “notice-registered” with the SEC 

would submit such proposed rule changes with the SEC pursuant to Rule 19b-7 under 

1934 Act while at the same time filing with the CFTC under Regulation 41.24, 17 C.F.

41.24 (rule amendments), and/or Regulation 41.23, 17 C.F.R. 41.23 (listing of new 

security futures products). Alternatively, a national securities exchange, national 

securities association or alternative trading system that is “notice-registered” with the 

CFTC would submit proposed rule changes with the SEC under Rule 19b-4 under the 

1934 Act and concurrently provide a notice filing with the CFTC under Regulation 41.3

17 C.F.

els, fraud 

the 

R. 

2, 

R. 41.32. 

 

A clearing agency that is associated with a DCM for security futures and that would be 

required to register as a clearing agency under Section 17A(b)(1) of the 1934 Act only 

because it performs clearing functions for security futures products is exempt from 

registration as a clearing agency under the 1934 Act. However, DCOs regulated by the 

CFTC through their association with DCMs for security futures products (other than 

cash-settled contracts) that are national securities exchanges for trading of security 

futures products must have arrangements in place with a registered clearing agency to 

effect payment and delivery of the securities underlying the security futures product. 

Further, any clearing agency for security futures products must develop linkages with all 

other clearing agencies for security futures products to permit the product to be purchased 

37 A national securities exchange, national securities association or alternative trading system subject to Regulation 

ATS under the 1934 Act that only lists and trades security futures products may be designated as a contract market 

in security futures pursuant to Section 5f of the CEA by filing a notice with the CFTC. 

24 
on one market and offset on another. SEC-registered clearing agencies are exempted 

from registration by the CFTC as DCOs. 

FCMs, IBs, floor brokers and floor traders engaging in security futures transactions are 

subject to periodic and special examinations by the CFTC. However, Section 

2(a)(1)(D)(iv) of the CEA requires that the CFTC provide the SEC with notice of such 

examinations for the purpose of coordinating efforts. 

Pursuant to an MOU between the CFTC and SEC regarding Coordination in Areas of 

Common Regulatory Interest (dated March 11, 2008), the agencies in connection with 

the review of “novel” derivative products have agreed to (i) recognize their mutual 

regulatory interests and encourage innovation, competition, and legal certainty, (ii) 

share information relating to novel derivative products and act on any related requests 

in a timely manner, (iii) permit the trading of novel derivative products (for products 

that implicate overlapping areas of regulatory concern) in either or both a CFTC- or 

SEC-regulated environment in a manner consistent with each agency’s regulatory 

structure, and (iv) meet on a quarterly basis to discuss particular regulatory matters 

and novel derivative products. As a result of this MOU, the listing and trading of the 

streetTracks ® Gold Trust Shares (symbol: GLD) as both an options contract on the 

options exchanges regulated by the SEC and as a single stock futures contract on 

OneChicago, LLC commenced in mid-2008. 

In connection with the establishment of centralized clearing for CDSs, the Federal 

Reserve, CFTC and SEC entered into an MOU on November 14, 2008. The MOU 

establishes a framework for consultation and information sharing on issues related to 

CDS central counterparties and reflects the agencies’ intent to cooperate, coordinate and 

share information. 

The CFTC and FERC also executed an MOU on October 12, 2005 for the purpose of 

sharing information relating to the regulation of energy markets. The CFTC has 

exclusive jurisdiction, among other things, over futures and options contracts based on 

natural gas, electricity or any other energy products,38 while FERC also has jurisdiction 

over the transportation and sale of natural gas and electricity.39 Congress directed the 

agencies to enter into this MOU as part of the Energy Policy Act of 2005. 

In 2007, Congress also directed the FTC to adopt an anti-manipulation rule for the 

physical, wholesale, crude oil, gasoline and other petroleum distillates markets as part of 

the Energy Independence and Security Act of 2007 (“EISA”). Section 811 of EISA 

specifically provides: 

 

38 See Section 2(a)(1)(A) of the CEA, 7 U.S.C. 2(a)(1)(A). 

39 See Section 1 of the Natural Gas Act, 15 U.S.C. 717; Section 601(a) of the Natural Gas Policy Act of 1978 

(“NGPA”), 15 U.S.C. 3431(a); Section 311 of the NGPA, 15 U.S.C. 3371; and Section 201 of the Federal Power 

Act, 16 U.S.C. 824. 

25 
“It is unlawful for any person, directly or indirectly, to use or 

employ, in connection with the purchase or sale of crude oil 

gasoline or petroleum distillates at wholesale, any manipulative or 

deceptive device or contrivance, in contravention of such rules and 

regulations as the FTC may prescribe as necessary or appropriate in 

the public interest or for the protection of United States citizens.”40

In addition to its exclusive jurisdiction over futures trading on regulated exchanges, the 

CFTC also has anti-manipulation authority over cash markets as set forth in Section 

9(a)(2) of the CEA, 7 U.S.C. 13(a)(2). As a result, the CFTC and FTC each have 

concurrent jurisdiction over the underlying cash petroleum markets while the CFTC 

retains its exclusive jurisdiction over futures trading set forth in Section 2(a)(1)(A) of the 

CEA, 7 U.S.C. 2(a)(1)(A). It is expected that the agencies will closely coordinate efforts 

to efficiently deter and prosecute illegal activity in petroleum markets consistent with 

each agencies’ statutory mandate. 

Federal agencies also must comply with certain general rulemaking requirements such as 

the Regulatory Flexibility Act (“RFA”) (that requires agencies to take into account the 

impact of proposed rules on small businesses), and the Paperwork Reduction Act 

(“PRA”) (that requires agencies to review rules to evaluate the information collection 

burden such rules would impose on the public), and with the Congressional Review of 

Agency Rulemaking Act (“CRARA”) (which requires agencies to submit rules to 

Congress and the General Accounting Office with a report that includes a cost-benefit 

analysis). See also the PRA, 44 U.S.C. 3501 et seq., the RFA, 5 U.S.C. 601-611, and the 

CRARA, 5 U.S.C. 804(2). 

b) Do the circumstances, in which consultation is required, exclude decision making on 

day-to-day technical matters? 

Yes. Consultation with other appropriate federal agencies and bodies, as described in 

responses to Principle 2, Question 2(a) and (c), is narrowly-tailored to specific issues of 

concurrent or shared jurisdiction. 

c) Are the circumstances in which such consultation or approval is required or 

permitted clear and the process sufficiently transparent, or the failure to observe 

procedures and the regulatory decision or outcome subject to sufficient review, to 

safeguard its integrity?

Yes. See supra, response to Principle 2, Question 2(a). Regarding the PRA and RFA, 

federal agencies submit certain filings to the Office of Management and Budget (“OMB”) 

(regarding the PRA) and to the General Services Administration (regarding the RFA) that 

 

40 The FTC has proposed such an anti-manipulation rule that has not yet been adopted. See FTC, 16 C.F.R. Part 

317, Prohibitions on Market Manipulation in Subtitle B of Title VIII of The Energy Independence and Security Act 

of 2007, 74 FR 18304 (April 22, 2009). Similar to the anti-manipulation rule found under Section 10(b) of the 1934 

Act (Rule 10b-5), the FTC proposal prohibits fraudulent and deceptive practices which may include “intentional acts 

that obstruct or impair wholesale petroleum markets.” Proof that fraudulent or deceptive conduct actually had an 

effect on the market is not required under the proposed FTC rule. 

26 
essentially document compliance with the requirements of those statutes. Before an 

agency rule can take effect, the CRARA requires federal agencies to submit to each 

House of Congress and to the Comptroller General a report containing a copy of the rule, 

a concise statement relating to the rule (including a cost-benefit analysis, including 

whether it is a major rule), and the proposed effective date. A “non-major” rule becomes 

effective as proposed by an agency if Congress and the GAO receive the required report. 

A “major” rule will generally become effective 60 days after Congressional receipt of an 

agency’s report. 

 

In addition, as set forth above in response to Principle 1, Question 3, the CFTC as a 

member of the PWG consults with other federal financial regulators regarding significant 

issues of intermarket coordination. Recent work includes a review of the recent financial 

crisis and proposed regulatory responses. CFTC staff also works with other US agencies 

on an as-needed basis and has commented on various financial stability initiatives of the 

Treasury Department. 

As noted above, the regulatory decisions and outcomes of the CFTC are subject to 

judicial review in the federal courts. 

3. Does the securities regulator have a stable and continuous source of funding sufficient 

to meet its regulatory and operational needs? 

Yes. Section 2(a)(10)(A) of the CEA, 7 U.S.C. 2(a)(10), requires that whenever the 

CFTC submits any budget request to the President or OMB (the agency within the office 

of the President which analyzes and makes recommendations to the President on budget 

matters), the CFTC shall concurrently transmit copies of the request to the House and 

Senate Appropriations Committees and the House Committee on Agriculture and the 

Senate Committee on Agriculture, Nutrition and Forestry. The CFTC’s initial budget 

request may be revised during its consideration by OMB and then, after submission to 

Congress, by the appropriate House and Senate committees (which may hold hearings, 

request additional testimony by CFTC Commissioners or staff, or request additional 

documentation). The specific vehicle to authorize the CFTC’s budget funds is through 

the adoption by the Congress of a specific bill authorizing and funding the CFTC’s 

operations (as part of the President’s budget). 

Determinations regarding the sufficiency of the CFTC’s requested resources are made by 

the U.S. Congress during its consideration of the CFTC’s formal budget request. 

Information regarding specific needs of the CFTC is communicated by the formal budget 

document and related written submissions, direct testimony by the Chairman and/or 

CFTC Commissioners to Congress and by CFTC and Congressional staff 

communications and meetings. 

4) Are the regulatory authority, the head and members of the governing body of the 

regulatory authority, as well as its staff, accorded adequate legal protection for the bona 

fide discharge of their governmental, regulatory and administrative functions and powers? 

27 
Yes. The Federal Employees Liability Reform and Tort Compensation Act of 198841

provides federal employees with immunity from individual liability for torts committed 

in the scope of their employment. In order to insulate CFTC staff from individual 

liability for possible violation of constitutional or statutory duties that are not shielded by 

the Federal Liability Reform and Tort Compensation Act of 1988, the CFTC adopted 

indemnification rules.42

5) Are the head and governing board of the regulator subject to mechanisms intended to 

protect independence, such as: procedures for appointment; terms of office; and criteria 

for removal?

Yes. Section 2(a)(2)(A) of the CEA, 7 U.S.C. 2(a)(2)(A), provides that each of the five 

commissioners of the CFTC are to be appointed by the President of the United States, by 

and with the advice and consent of the United States Senate. Each CFTC Commissioner 

holds office for a term of five years. The terms of the Commissioners are staggered due 

to the CEA’s initial requirement that the first Commissioners’ terms were to expire one, 

two, three, four and five years from the date the CFTC began operations on April 21, 

1975. Not more than three Commissioners may be members of the same political party. 

The President of the United States appoints, by and with the advice and consent of the 

Senate, a member of the CFTC as Chairman, who serves as Chairman at the pleasure of 

the President. The President may appoint at any time, with the advice and consent of the 

Senate, a different Chairman, and the CFTC Commissioner previously appointed as 

Chairman may complete his or her term as a CFTC Commissioner. 

6) With reference to the system of accountability for the regulator’s use of its powers and 

resources: 

a) Is the regulator accountable to the legislature or another government body on an 

ongoing basis?

Yes. The CFTC is accountable for its conduct to the U.S. Congress. The House 

Committee on Agriculture and its Subcommittee on Risk Management and Specialty 

Crops, and the Senate Agriculture, Nutrition and Forestry Committee and its 

Subcommittee on Research, Nutrition and General Legislation have the principal 

responsibility for oversight of the CFTC. In general, these Committees handle, in the 

first instance, the reauthorization, budget and funding decisions for the CFTC, as well as 

bills affecting the CEA. 

Section 8(i) of the CEA requires the Comptroller General of the United States to conduct 

reviews and audits of the CFTC and make reports thereon. Section 8(i) of the CEA 

directs the CFTC to make available to the Comptroller General (generally through its 

OMB) any information regarding the powers, duties, organization, transactions, 

 

41 28 U.S.C. 2671. 

42 17 C.F.R. 142. 

28 
operations and activities of the CFTC, as well as access to any books and records (subject 

to confidentiality requirements), as the Comptroller General may require. 

b) Is the regulator required to be transparent43 in its way of operating and use of 

resources and to make public its actions that affect users of the market and regulated 

entities, excluding confidential or commercially sensitive information? 

Yes. Section 8(h) of the CEA requires the CFTC to submit to Congress a written report 

within 120 days after the end of each fiscal year detailing the operations of the CFTC 

during that fiscal year. The CFTC is required to include in this annual report such 

information, data and legislative recommendations as it deems advisable with respect to 

the administration of the CEA and its powers and functions under the CEA. Section 

18(b) of the CEA requires that the annual report contain plans and findings regarding 

implementation of Section 18(a) of the CEA, which mandates certain research and 

information programs. See infra, response to Principle 4, Question 2. 

c) Is the regulator’s receipt and use of funds subject to review or audit? 

Yes. Externally, the CFTC’s budget and available resources are subject to oversight by 

the U.S. Congress through the exercise of its authorization and funding procedures. In 

addition, the Comptroller General of the U.S. periodically audits the CFTC. See supra, 

response to Principle 2, Question 6(a-b). 

Internally, the CFTC Office of the Executive Director and the Office of Financial 

Management oversee the use of resources provided to the CFTC by Congress and report 

directly to the Office of the Chairman. In particular, the Office of Financial Management 

manages the CFTC’s financial and budget programs by coordinating development of the 

CFTC’s strategic plan, annual performance plan and annual performance report; 

formulates and executes the CFTC’s budget; provides contracting and purchasing of 

services; ensures proper use of, and accounting for, agency resources; and manages the 

CFTC’s travel services. 

In addition, the operations of the CFTC are subject to ongoing review by an independent 

Office of the Inspector General (“OIG”) with offices in the CFTC headquarters. OIG 

was established in April 1989 and conducts and supervises audits and investigations of 

programs and operations of the CFTC and reviews existing and proposed legislation and 

regulations. OIG recommends policies to promote economy, efficiency, and 

effectiveness in CFTC programs and operations, and to prevent and detect fraud and 

abuse. OIG keeps the Chairman of the CFTC and Congress informed about any 

problems, deficiencies and the progress of corrective action in programs and operations.

 

43 The regulator must be accountable as a matter of law; The regulator may be considered to be “required” to be 

transparent, if, as a general principle of administrative law, procedure or practice, its use of its powers and resources 

generally is transparent. 

29 
7) Are there means for natural or legal persons adversely affected by a regulator’s 

decisions or exercise of administrative authority ultimately to seek review in a court, 

specifically: 

a) Does the regulator have to provide written reasons for its material decisions? 

Yes. CFTC rulemaking must comply with the procedural requirements of the APA, 

which are intended to provide public notice and opportunity for public comment in the 

rulemaking. 5 U.S.C. 553 (subject to certain exceptions) specifically requires Federal 

administrative agencies such as the CFTC to publish a Notice of Proposed Rulemaking in 

the Federal Register and to provide interested persons an opportunity to participate in the 

rulemaking through submission of written data, views or arguments with or without an 

opportunity for oral presentations. 5 U.S.C. 553 requires agencies to incorporate in the 

rules adopted a concise general statement of their basis and purpose. 

b) Does the decision-making process for such decisions include sufficient procedural 

protections to be meaningful? 

Yes. See supra, response to Principle 2, Question 7(a). 

Part 147 of the CFTC’s regulations, 17 C.F.R. 147, implements the open meetings 

requirement of the Government in the Sunshine Act, 5 U.S.C. 552b, which mandates the 

conditions under which CFTC Commissioners must conduct open meetings. As stated in 

rule 147.1(b), “among the primary purposes of these rules is the CFTC’s desire to inform 

the public to the fullest extent possible of its activities as an aid to its properly carrying 

out its responsibility for administering and enforcing the CEA . . .” 

 

The CFTC also has adopted regulations that provide objective due process procedures to 

ensure that various aspects of its programs are conducted with fairness and impartiality. 

Se infra, response to Principle 5, Question 1. 

As previously noted (see supra, response to Principle 2, Question 2(a)), Federal agencies 

such as the CFTC also must comply with certain general rulemaking requirements (e.g., 

the RFA that requires agencies to take into account the impact of proposed rules on small 

businesses, and the PRA that requires agencies to review rules to evaluate the information 

collection burden such rules would impose on the public). 

c) Are affected persons permitted to make representations prior to such a decision 

being taken by a regulator in appropriate cases? 

Yes. See infra, response to Principle 4, Question 2. 

d) Are all such decisions taken by the regulator subject to a sufficient, independent 

review process, ultimately including judicial review? 

Yes. Aggrieved parties may challenge agency actions under the APA (5 U.S.C. 702) in 

U.S. Federal District Court. 

30 
8) Where accountability is through the government or some other external agency, is 

confidential and commercially sensitive information subject to appropriate safeguards to 

prevent inappropriate use or disclosure? 

Yes. 

Use. Section 2(a)(8) of the CEA, 7 U.S.C. 2(a)(8), prohibits any CFTC Commissioner or 

employee of the CFTC from accepting employment or compensation from any person, 

exchange, or clearinghouse subject to regulation by the CFTC and from participating, 

directly or indirectly, in any contract market operations or transactions of a character 

subject to CFTC regulation. 

Section 9(c) of the CEA, 7 U.S.C. 13(c), makes it a felony punishable by a fine of not 

more than $500,000 or imprisonment for up to 5 years, or both, for a CFTC employee or 

CFTC Commissioner to trade commodity futures and options or to participate directly or 

indirectly in any investment transaction in an actual commodity if nonpublic information 

is used in the transaction or if prohibited by CFTC regulations. CFTC Regulation 

140.735-2 provides, subject to very limited exceptions, that no member or employee of 

the CFTC may participate directly or indirectly in any transaction involving commodity 

futures and commodity options, among other things. Section 9(d) of the CEA, 7 U.S.C. 

13(d), similarly makes it a punishable felony for a CFTC employee or CFTC 

Commissioner to pass on or otherwise benefit from information such employee or 

Commissioner receives in the course of employment which may affect or tend to affect 

the price of commodities. 

Disclosure. Section 8(a)(1) of the CEA, 7 U.S.C. 12(a), provides that except as otherwise 

specified in the CEA, the CFTC may not publish data and information that would separately 

disclose market position, business transactions, trade secrets or names of customers (i.e.,

“Section 8 Material”), and that the CFTC may withhold from public disclosure any data or 

information concerning or obtained in connection with any pending investigation of any 

person. Section 8(a)(1) of the CEA also furnishes protection from compelled disclosure for 

confidential information received from foreign futures authorities. The effect of this 

provision is to eliminate the possibility that confidential information provided to the CFTC 

under an MOU would be disclosed in response to a request under the Freedom of 

Information Act of the United States, 5 U.S.C. 552, or third party subpoena. 

CFTC Regulation 145.5, 17 C.F.R. 145.5, provides that the CFTC may decline to publish or 

make available to the public any “non-public” records as defined in Regulation 145.5(a)-(i). 

In general, this type of information concerns trade secrets, national defense or foreign policy 

concerns, personal privacy, various financial statement forms and pending investigations. In 

addition, Regulation 145.9 outlines the procedures by which a person submitting 

information to the CFTC may request confidential treatment of that information. 

Part 146 of the CFTC rules, 17 C.F.R. 146, implements the Privacy Act of 1974, which 

provides protections for information concerning an individual. Among the primary 

purposes of these rules are to permit individuals to determine whether information about 

31 
them is contained in Government files and, if so, to obtain access to that information; to 

establish procedures whereby individuals may have inaccurate and incomplete 

information corrected; and to restrict access by unauthorized persons to that information. 

Sanctions. CEA 9(f)(1), 7 U.S.C. 13(f), makes it a felony for any person who is an 

employee, member of the governing board, or member of any committee of a board of 

trade, contract market or registered futures association, in violation of a regulation issued 

by the CFTC, willfully and knowingly to trade for such person’s own account, or for or 

on behalf of any other account in futures contracts or options thereon, on the basis of, or 

willingly and knowingly to disclose for any purpose inconsistent with the performance of 

such person’s official duties, any material nonpublic information obtained through 

special access related to the performance of duties. Violations are punishable by a fine of 

up to $500,000 in the case of an individual plus the amount of any gains realized from 

such trading or disclosures and/or prison of up to five years. 

CEA 9(a)(5), 7 U.S.C. 13(a), makes it a felony, punishable by a fine of up to $500,000 in 

the case of an individual and/or prison of up to five years, for any person willfully to 

violate any other provision of the CEA, or any rule or regulation thereunder. 

Permissible Disclosures. The CEA specifies the circumstances for the permissible 

disclosure of information. CEA Section 8(a) also contains a provision that explicitly sets 

forth certain permissible disclosures of confidential information (referred to as "Section 8 

Material"). This provision includes reference to confidential information received from a 

foreign futures authority. This explicit list is necessary because, under the CEA, Section 8 

Material may not be disclosed by the CFTC "except as otherwise specifically authorized in 

this Act." 

Specifically, the CEA provides, in relevant part, that nothing in CEA 8(a) shall: 

[P]revent the CFTC from disclosing publicly any information or data 

obtained by the CFTC from a foreign futures authority when such disclosure 

is made in connection with a congressional proceeding, an administrative or 

judicial proceeding commenced by the United States or the CFTC, in any 

receivership proceeding commenced involving a receiver appointed in a 

judicial proceeding by the United States or the CFTC, or any proceeding 

under title 11 of the United States Code in which the CFTC has intervened or 

in which the CFTC has the right to appear and be heard. Nothing in this 

subsection shall be construed to authorize the CFTC to withhold information 

or data from Congress. 

32 
Principle 3. The regulator should have adequate powers, proper resources 

and the capacity to perform its functions and exercise its powers 

Assessment: Broadly Implemented 

1) Are the powers and authorities of the regulator sufficient, taking into account the 

nature of a jurisdiction’s markets and a full assessment of these Principles to meet the 

responsibilities of the regulator(s) to which they are assigned?

Yes. The mission of the CFTC is to protect market users and the public from fraud, 

manipulation, and abusive practices related to the sale of commodity futures and options, 

and to foster open, competitive, and financially sound commodity futures and option 

markets. 

The CFTC has the power to conduct direct surveillance of those markets and financial 

institutions that fall within its regulatory jurisdiction.44 The CFTC also can obtain certain 

information on unregulated affiliates of FCMs or affiliates of FCMs subject to regulation 

by other authorities such as the SEC, the banking regulators, and the relevant foreign 

authorities.45 In addition, the CFTC has the power to obtain information regarding 

regulated markets, institutions, financial products, customers and parties to transactions.46

Section 8a(6) of the CEA, 7 U.S.C. 12(a)(6), authorizes the CFTC to communicate to the 

proper committee or officer of any DCM, RFA, or SRO as defined in Section 3(a)(26) of 

the 1933 Act, notwithstanding Section 8 of the CEA, the full facts concerning any 

transaction or market operation, including the names of parties thereto, which in the 

judgment of the CFTC 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 to 

effectuate the purposes of the CEA. Section 8a(6) of the CEA further provides that any 

information so provided must not be disclosed except in any self-regulatory proceeding 

or action.47 

The CFTC has the power to conduct investigations.48 The CFTC has the power to 

sanction violations of the CEA. Administrative sanctions may include orders suspending, 

denying, revoking, or restricting registration and exchange trading privileges and 

imposing civil monetary penalties and orders of restitution (CEA Section 6(c), 7 U.S.C. 

 

44 See Sections 4g and 4n of the CEA, 7 U.S.C. 6g and 6n. 

45 See Section 4f(c) of the CEA, 7 U.S.C. 6f(c). 

46 See Sections 4g and 4n of the CEA, 7 U.S.C. 6g and 6(n). 

47 See also CFTC Regulation 140.72, 17 C.F.R. 140.72 (delegating such authority to certain Staff). 

48 See Section 8(a)(1) of the CEA. 

33 
9, 15) as well as cease and desist orders (CEA Section 6(d), 7 U.S.C. 13(b)). The CFTC 

also may obtain temporary restraining orders and preliminary and permanent injunctions 

in federal court for violations, as well as to impose civil monetary penalties (CEA Section 

6c, 7 U.S.C. 13a-1). Other relief may include appointment of a receiver, the freezing of 

assets, restitution, and disgorgement of unlawfully acquired benefits. 

The CEA also provides that the CFTC may obtain certain temporary relief on an ex parte

basis (that is, without notice to the other party) including restraining orders preserving 

books and records, freezing assets, and appointing a receiver.49 When those enjoined 

violate court orders, the CFTC may seek to have the offenders held in contempt. 

The CFTC has the power to direct “registered entities”50 to alter or supplement their rules 

and to take such action as it deems to be necessary to maintain or restore orderly trading. 

See Section 2(h)(7) of the CEA, 7 U.S.C. 2(h)(7), and Sections 8a(7) and (9) of the CEA, 

7 U.S.C. 12(a)(7), 12(a)(9). CEA Section 5e, 7 U.S.C. 7b, authorizes the CFTC to 

suspend or revoke the designation of a contract market, DTEF or DCO based on a failure 

or refusal to comply with any of the provisions of the CEA, CFTC regulations or CFTC 

orders. 

Section 8(e) of the CEA, 7 U.S.C. 12(e), provides that “upon the request of any 

department or agency of any State or any political subdivision thereof, acting within the 

scope of its jurisdiction, any foreign futures authority, or any department or agency of 

any foreign government or any political subdivision thereof, acting within the scope of its 

jurisdiction, the CFTC may furnish to such foreign futures authority, department or 

agency any information in the possession of the CFTC obtained in connection with the 

administration of this Act.” 

Section 12(a) of the CEA, 7 U.S.C. 16(a), provides that the CFTC “may cooperate with 

any department or agency of the Government, any State, territory, district, or possession, 

or department, agency, or political subdivision thereof, any foreign futures authority, any 

department or agency of a foreign government or political subdivision thereof, or any 

person.” 

Section 12(f)(1) of the CEA, 7 U.S.C. 16(f), authorizes the CFTC to provide investigative 

assistance upon request from a foreign futures authority. 

Despite these significant powers and authorities, the recent financial crisis has illustrated 

the need to modernize consumer and investor protection requirements, expand those 

requirements to previously unregulated areas, and establish structural mechanisms to 

ensure that gaps are addressed as soon as new products are developed. 

 

49 See Section 6c of the CEA. 50 The term “registered entity” is defined in Section 1a(29) of the CEA, 7 U.S.C. 1a(29), to mean (i) a board of trade 

designated as a contract market under Section 5; (ii) a DTEF registered under Section 5a; (iii) a DCO registered 

under Section 5b; (iv) a board of trade designated as a contract market under Section 5f; and (v) with respect to a 

contract that the Commission determines is a SPDC, any electronic trading facility on which the contract is executed 

or traded. 

34 
OTC Derivatives. Section 2(d) of the CEA, 7 U.S.C. 2(d), excludes, from CFTC 

jurisdiction, agreements, contracts or transactions in an “excluded commodity” entered 

into by ECPs (“OTC Derivatives”). Excluded commodities consist of interest rates, 

exchange rates, currencies, securities, security indices, credit risks or measures, and other 

indices based solely on commodities that have no cash market or on prices, rates, values, 

or levels that are not within the control of any party to the relevant transaction.51 In 

addition, Section 2(d)(2) further provides an exclusion from CFTC jurisdiction over 

electronic trading facilities that execute OTC Derivatives traded on a principal-toprincipal basis between ECPs. 

Although this section discloses the current state of jurisdiction of the CFTC, recent 

developments in the financial markets suggest that changes to the CFTC’s jurisdiction 

may be forthcoming.52 Treasury, on June 17, 2009, issued a plan to reform the U.S. 

financial regulatory system that directly encompasses swaps, OTC derivatives and hedge 

funds.53 On August 11, 2009, Treasury released draft legislation, the “Over the Counter 

Derivatives Markets Act of 2009,” based on this plan.54

Strengthening requirements for clearing organizations. The CFTC is pursuing the 

adoption of stronger, more detailed core principles for DCOs to enhance the CEA 

regulatory regime for central counterparties (“CCPs”) and to assure that U.S. law is 

consistent with international standards for CCPs. 

Ensuring greater transparency of the marketplace. The CFTC recently announced 

several initiatives designed to bring greater transparency to participation by noncommercial participants such as commodity index funds, swaps dealers, and others; 

positions of traders of contracts determined to perform a significant price discovery 

function; and positions for foreign contracts linked to the settlement price of domestic 

contracts. 

Applying consistent position limits. The CFTC recently held public hearings on 

whether federal speculative limits should be set by the Commission for commodities of 

finite supply, in particular energy commodities. The CFTC also recently requested public 

comment on whether a “bona fide hedge exemption” should continue to apply to persons 

using the futures markets to hedge risks other than risks arising from the actual use of a 

commodity, and CFTC staff is considering the extent to which swap dealers should 

continue to be granted exemptions from position limits. 

 

51 See 1a(13) of the CEA, 7 U.S.C. 1a(13). 

52 See letter from Timothy F. Geithner, Secretary of the Treasury, to the Honorable Nancy Pelosi, Harry Reid, Mitch 

McConnell and John Boehner (May 13, 2009). 

53 See Treasury, “Financial Regulatory Reform: A New Foundation Rebuilding Financial Supervision and 

Regulation” (June 17, 2009). 

54 http://www.financialstability.gov/docs/regulatoryreform/titleVII.pdf. See also, Treaury Web site section on 

Financial Regulatory Reform, available at http://www.ustreas.gov/initiatives/regulatoryreform/.

35 
Enhancing conditions for foreign boards of trade trading linked energy contracts. 

To enhance its ability to conduct market surveillance and to maintain market integrity, 

the CFTC recently announced additional amendments to the terms under which a foreign 

board of trade (“FBOT”) is permitted to make its electronic trading and order matching 

system available to exchange members in the U.S. 

Strengthening regulation of retail off-exchange commodity transactions. The CFTC 

is working on legislative amendments to extend the Commission’s fraud authority for offexchange retail foreign exchange transactions to transactions in other commodities. 

2) With regards to funding: 

a) Does the regulator’s funding reflect the needs of the regulator in supervising a given 

market, taking into account the size, complexity and types of functions subject to its 

regulation, supervision or oversight?

Determinations regarding the sufficiency of the CFTC’s requested resources are made by 

the U.S. Congress during its consideration of the CFTC’s formal budget request. 

Information regarding specific needs of the CFTC is communicated by the formal budget 

document and related written submissions, direct testimony by the Chairman and/or 

CFTC Commissioners to Congress and by CFTC and Congressional staff 

communications and meetings. 

The CFTC currently employs roughly 500 career staff. This is a decline from the 

CFTC’s peak staffing levels, reached in the late 1990s. In the last ten years, the agency 

has shrunk more than 20% in head count while the markets grew five-fold and the 

number of contracts grew six-fold. Working with Congress, the CFTC has received 

funding for FY2009 to allow it to return to its headcount-level in 1999. For FY 2009, the 

CFTC received a budgetary increase to $146 million. However, given expanded 

responsibilities, President Obama recognized that this budgetary increase was 

insufficient. The President’s budget recommends $160.6 million for the CFTC for FY 

2010, and the CFTC is seeking $177.7 million. 

b) Can the regulator affect the operational allocation of resources once funded? 

An allocation request is submitted by the CFTC to Congress. The request contains a 

specific breakdown of resource allocation within the CFTC. The final allocation may be 

revised as part of discussions between the Congress and the CFTC. The final allocation 

is established when the Congress adopts the bill funding the CFTC’s operations. 

c) Does the level of resources recognize the difficulty of attracting and retaining 

experienced and skilled staff? 

 Section 12 of the CEA authorizes the CFTC to employ personnel and obtain necessary 

technical resources; Section 12(b)(1) of the CEA authorizes the CFTC to employ such 

investigators, special experts, Administrative Law Judges, clerks and other employees as 

it may from time to time find necessary for the proper performance of its duties and as 

36 
may be from time to time appropriated by Congress; Section 12(b)(2) of the CEA 

authorizes the CFTC to employ experts and consultants; and Section 12(b)(3) of the CEA 

authorizes the CFTC to make and enter into contracts with respect to all matters which in 

the judgment of the CFTC are necessary and appropriate to effectuate the purposes of the 

CEA. Section 2(a)(7) of the CEA, 7 U.S.C. 2(a)(7), permits the CFTC to provide 

additional compensation and benefits to employees “if the same type of compensation or 

benefits are provided by any agency referred to in section 1206(a) of the Financial 

Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 1833b(a), or 

could be provided by such an agency under applicable provisions of law (including rules 

and regulations).” In effect, Section 2(a)(7) of the CEA enables the CFTC to maintain 

comparative compensation and benefits in relation to other federal financial regulators for 

the purpose of retaining and attracting employees. 

OHR manages the CFTC’s personnel recruitment and development functions, pursuant to 

the direction of the Chairman. Specifically, OHR develops and implements the CFTC’s 

human resources policies, programs and procedures; provides recruitment, staffing, pay 

and classification services; advises on issues of performance management, employees 

and labor relations; offers employees development and training services; and administers 

the CFTC’s employee benefits and payroll functions. 

3) Does the regulator ensure that its staff receives adequate ongoing training? 

Yes. Throughout the year, OHR and the Training Advisory Group provide a series of 

educational/training seminars keyed to the primary mission of the CFTC. These training 

seminars are focused on the financial and legal aspects of the futures/options markets as 

well as various OTC derivatives markets. Technical and computer skills are also 

provided to employees as needed. In addition, employees may also use various on-line, 

web-based and in-house educational materials to maintain and increase proficiency. Offsite educational seminars provided by third parties (such as continuing legal education) 

are also made available. 

37 
Principle 4. The regulator should adopt clear and consistent regulatory 

processes 

Assessment: Fully Implemented 

1) Is the regulator subject to reasonable procedural rules and regulations? 

 Yes. The CFTC is subject to the APA. In addition, the CEA and CFTC Regulations also 

provide various procedural rules in connection with, among other things, disciplinary 

proceedings and the reparations program. See infra, response to Principle 4, Question 3. 

2) Does the regulator: 

a) Have a process for consultation with the public, or a section of the public, including 

those who may be affected by the policy, for example, by publishing proposed rules for 

public comment, circulating exposure drafts or using advisory committees or informal 

contacts? 

b) Publicly disclose and explain its policies, not including enforcement and 

surveillance policies, in important operational areas, such as through interpretations of 

regulatory actions, setting of standards, or issuance of opinions stating the reasons for 

regulatory actions? 

c) Publicly disclose changes and reasons for changes in rules or policies? 

Yes, to all of the above. CFTC rulemaking must comply with the procedural 

requirements of the APA, which are intended to provide public notice and opportunity for 

public comment in the rulemaking. 5 U.S.C. 553 generally requires Federal 

administrative agencies such as the CFTC to publish a notice of proposed and final 

rulemaking in the Federal Register and to provide interested persons an opportunity to 

participate in the rulemaking through submission of written data, views or arguments 

with or without an opportunity for oral presentations. The CFTC sometimes holds open 

forums to permit public oral communication of views on proposed rules of particular 

significance. 

As noted previously, CFTC Regulation 140.98 requires that all interpretative legal advice 

with respect to the CEA or any rule, regulation or order issued or adopted by the CFTC 

under such authority, a statement by staff that staff would not recommend that the CFTC 

take enforcement action (i.e., no-action letters) or an exemption from the provisions of 

the CEA must be made available for inspection and copying by any person. 

As noted, the APA requires an agency to give its rationale and policy purpose in 

proposing or adopting a rule. In addition, the CFTC generally articulates the rationale 

38 
for all interpretations, exemptions, orders or policy changes. See infra, response to 

Principle 4, Question 4(d), regarding the types of communications published by the 

CFTC that explain the CFTC’s program. 

The CFTC has from time to time created various advisory committees as a mechanism 

for public consultation with interested members of the commodities industry and users of 

the futures markets. Such advisory committees include: (i) an Agricultural Advisory 

Committee with 25 member organizations representing a major portion of the American 

agricultural community; (ii) a Global Markets Advisory Committee with 30 members 

representing futures exchanges, self-regulators, financial intermediaries, traders and 

market users; (iii) a Technology Advisory Committee with 28 individuals representing 

electronic markets, electronic communication systems, U.S. futures exchanges, an SRO, 

financial intermediaries, market users and traders; and (iv) an Energy and Environmental 

Markets Advisory Committee consisting of 33 members representing industry 

professionals, futures exchanges, market participants, academics, consumer advocates 

and environmental organizations. The CFTC also holds informal roundtables and formal 

public hearings on issues from time to time. 

d) Have regard, in the formulation of policy, to the costs of compliance with 

regulation? 

Yes. Section 15(a) of the CEA requires the Commission to consider the costs and benefits 

of its action before issuing a new Regulation or certain Orders under the Act. By its 

terms, Section 15(a) does not require the Commission to quantify the costs and benefits 

of a new regulation or to determine whether the benefits of the proposed regulation 

outweigh its costs. Rather, Section 15(a) simply requires the Commission to ‘‘consider 

the costs and benefits’’ of its action in light of five broad areas of market and public 

concern: protection of market participants and the public; efficiency, competitiveness, 

and financial integrity of futures markets; price discovery; sound risk management 

practices; and other public interest considerations. 

e) Make all rules and regulations available to the public? 

Yes. All CFTC regulations are published in the U.S. Code of Federal Regulations, 17 

C.F.R. Part 1 et. seq. and available at http://www.gpoaccess.gov. 

f) Make its rulemaking procedures readily available to the public? 

Yes. See supra, response to Principle 4, Question 2(a-c). 

3) In assessing procedural fairness: 

a) Are there rules in place for dealing with the regulator that are intended to ensure 

procedural fairness? 

39 
CFTC rulemaking must comply with the procedural requirements of the APA, which are 

intended to provide public notice and opportunity for public comment in the rulemaking. 

5 U.S.C. 553 (subject to certain exceptions) specifically requires Federal administrative 

agencies such as the CFTC to publish a Notice of Proposed Rulemaking in the Federal 

Register and to provide interested persons an opportunity to participate in the rulemaking 

through submission of written data, views or arguments with or without an opportunity 

for oral presentations. 

Part 147 of the CFTC’s rules, 17 C.F.R. 147, implements the open meetings requirement 

of the Government in the Sunshine Act, 5 U.S.C. 552b, which mandates the conditions 

under which CFTC Commissioners must conduct open meetings. As stated in Rule 

147.1(b), “among the primary purposes of these rules is the CFTC’s desire to inform the 

public to the fullest extent possible of its activities as an aid to its properly carrying out 

its responsibility for administering and enforcing the CEA . . .” 

The CFTC also has adopted regulations that provide objective due process procedures to 

ensure that various aspects of its programs are conducted with fairness and impartiality. 

See infra, response to Principle 5, Question 1(d). 

As previously noted (see infra, response to Principle 2, Question 2(a)), Federal agencies 

such as the CFTC also must comply with certain general rulemaking requirements (e.g., 

the RFA that requires agencies to take into account the impact of proposed rules on small 

businesses, and the PRA that requires agencies to review rules to evaluate the information 

collection burden such rules would impose on the public). 

b) Is the regulator required to give reasons in writing for its decisions that affect the 

rights or interests of others?

Yes. 5 U.S.C. 553 requires agencies to incorporate in the rules adopted a concise general 

statement of their basis and purpose. 

c) Are all material actions of the regulator in applying its rules subject to review? 

Yes. Procedural challenges to agency actions under the APA may be brought by 

aggrieved parties in U.S. Federal District Courts. 

d) Are such decisions subject to judicial review where they adversely affect legal or 

natural persons? 

Yes. See supra, response to Principle 4, Question 3(c). 

e) Are the general criteria for granting, denying, or revoking a license made public, 

and are those affected by the licensing process entitled to a hearing with respect to the 

regulator’s decision to grant, deny, or revoke a license? 

Yes. The general criteria for granting the various categories of registration (i.e.,

registration as an FCM, IB, CTA, CPO, leverage transaction merchant, agricultural trade 

40 
option merchant, floor trader and floor broker) are made public in Part 3 of the CFTC’s 

regulations, 17 C.F.R. 3. 

The general criteria for the denial, conditioning or revocation of a registration, as well as 

conditions concerning the opportunity for a hearing, are contained in Section 8a(2), (3) 

and (4) of the CEA, 7 U.S.C. 12a and in Subpart C, Part 3 of the CFTC regulations, 17 

C.F.R. 3. 

Section 5e of the CEA, 7 U.S.C. 7b, authorizes the CFTC to suspend or revoke the 

designation of a registered entity based on a failure to comply with any of the provisions 

of the CEA or any rules, regulations or orders of the CFTC. 

Section 17(l) authorizes the CFTC, after notice and opportunity for a hearing, to suspend 

or revoke the registration of a registered futures association55 if the CFTC finds, among 

other enumerated reasons, that the association violated the CEA or CFTC rules. 

4) If applicable, are procedures for making reports on investigations public consistent 

with the rights of individuals, including confidentiality and data protection? 

Yes. See supra, response to Principle 2, Questions 7 and 8. 

5) Does the regulator play an active role in promoting education in the interest of 

protecting investors?

Yes. The CFTC (Commissioners and staff including the Office of External Affairs) 

communicates with the news media, producer and market user groups, educational 

groups, and the general public. The CFTC provides information about the regulatory 

mandate of the CFTC, the economic role of the futures markets, new market instruments, 

market regulation, international regulatory developments and cooperative initiatives, 

enforcement actions, customer protection issues, the CFTC's Web site, and the diverse 

functions of the CFTC. 

In addition to issuing press releases and advisories covering the CFTC's regulatory and 

enforcement activities, the CFTC’s Web site at http://www.cftc.gov provides an 

Education Center. The Education Center highlights and explains important policy issues 

and initiatives and salient aspects of the CFTC's regulatory mandate. 

The CFTC publishes brochures and educational materials about the CFTC, the futures 

industry, and the futures and option markets. The CFTC conducts research and publishes 

reports from time to time on major policy issues facing the futures markets. Information 

is posted on the CFTC's Web site, including speeches by the Chairman and CFTC 

 

55 NFA is the only registered futures association. The NFA is the SRO for the futures industry that regulates every 

firm or individual who conducts futures trading business with public customers, subject to CFTC oversight. FCMs, 

IBs, CPOs, CTAs and associated persons are generally required, unless otherwise exempt, to be registered with the 

CFTC. However, the CFTC has delegated the registration function to the NFA so that FCMs, IBs, CPOs, CTAs and 

their associated persons submit their registration applications to NFA and NFA approves/denies registration, subject 

to CFTC oversight. Section 17 of the CEA, 7 U.S.C. 21, and Part 170 of CFTC Regulations govern registered 

futures associations. 

41 
Commissioners, biographies of the CFTC Commissioners, press releases, a summary of 

exemptive, no-action and interpretative letters and a glossary of industry terms. 

CFTC staff conducts briefing sessions for foreign authorities, exchange officials, market 

professionals, market users, academic representatives, and foreign-based media 

representatives to acquaint them with the CFTC's functions, regulatory responsibilities, 

and mandate. Staff also conducts briefings for media representatives on proposed and 

final rules, regulations, and enforcement activities, as well as other ongoing and technical 

issues. 

As part of its ongoing efforts to support the CFTC's customer education effort, the CFTC 

informs the general public and potential customers of the availability of current CFTC 

enforcement and disciplinary information on its Web site at 

http://www.cftc.gov/customerprotection/disciplinaryhistory/index.htm. The CFTC’s Web 

site provides disciplinary history relating to reparations sanctions and administrative 

sanctions. Information regarding the registration status and disciplinary history of CFTC 

registrants may be accessed by visiting the NFA’s Web site at 

http://www.nfafutures.org/basicnet. In addition, the CFTC publishes a Proceedings 

Bulletin on its Web site providing information about CFTC enforcement actions and 

statutory disqualification proceedings. 

The CFTC also provides Technical Assistance to other jurisdictions upon request. 

6) Are the regulator’s exercise of its powers and discharge of its functions consistently 

applied?

Yes. See supra, response to Principle 4, Question 3. 

42 
Principle 5. The staff of the regulator should observe the highest professional 

standards including appropriate standards of confidentiality 

Assessment: Fully Implemented 

1) Are the staff of the regulator required to observe legal requirements or a "Code of 

Conduct" or other written guidance, pertaining to: 

a) The avoidance of conflicts of interest?

Yes. Subpart C of Part 140 of the CFTC’s regulations, 17 C.F.R. 140, establishes 

general ethical standards of conduct for CFTC employees and CFTC Commissioners. 

Regulation 140.735-2 restricts business and financial transactions and interests; 

Regulation 140.735-3 restricts non-governmental employment and outside activities; 

Regulation 140.735-4 restricts the receipt and disposition of foreign gifts and decorations; 

Regulation 140.735-5 prohibits the disclosure of non-public commercial, economic or 

official information to any unauthorized person; and Regulation 140.735-6 restricts the 

scope of former CFTC employees to practice or otherwise represent a person before the 

CFTC. 

Regulations issued by the U.S. Office of Government Ethics, 5 C.F.R. 2635, also apply to 

CFTC employees and cover the following areas: basic obligations of public trust; gifts 

from outside sources; gifts between employees; conflicting financial interests; 

impartiality in performing official duties; seeking other employment; misuse of position; 

and outside activities. 

Executive Order #12674 (dated April 12, 1989) issued by the President of the United 

States also mandates high principles of ethical conduct for government employees. 

While greatly detailed, in substance all of these ethical requirements establish that public 

service is a public trust and that all government employees must avoid both explicit 

conflicts of interests as well as even the appearance of impropriety in the conduct of their 

official business. 

See supra, response to Principle 2, Question 8, regarding penalties for CFTC employees 

and Commissioners trading on inside information and/or misusing insider information. 

b) Restrictions on the holding or trading in securities subject to the jurisdiction of the 

regulatory authority and/or requirements to disclose financial affairs or interests?

Yes. See supra, response to Principle 5, Question 1(a). 

43 
c) Appropriate use of information obtained in the course of the exercise of powers and 

the discharge of duties? 

Yes. The regulations cited in response to Principle 5, Question 1(a), above, also would 

prohibit the inappropriate use of information obtained in the course of employment at the 

CFTC. See, in particular, the prohibitions on use of non-public information by CFTC 

employees in Section 9 of the CEA. 

d) Observance of confidentiality and secrecy provisions and the protection of personal 

data?

Yes. Except as otherwise provided in the CEA, Section 8(a) of the CEA prohibits the 

CFTC from disclosing publicly data and information that would separately disclose the 

business transactions, or market positions of any person and trade secrets or names of 

customers. Section 9(a)(5) makes it a felony punishable by a fine of up to $500,000 for 

an individual and/or imprisonment up to five years if any person willfully violates any 

other provision of the CEA. 

Part 145 of the CFTC rules, 17 C.F.R. 145, contains recordkeeping and access 

requirements, including requirements governing the handling and protection of nonpublic 

information. In order to prevent a clearly unwarranted invasion of personal privacy, 

CFTC Regulation 145.4 authorizes the CFTC to delete identifying details when it makes 

available “public records” as defined in 145.0. CFTC Regulation 145.5 authorizes the 

CFTC to withhold from public disclosure any “nonpublic records, including: records 

specifically exempted from disclosure by statute such as data and information which 

would separately disclose the business transactions or market positions of any person and 

trade secrets or names of customers; any data or information concerning or obtained in 

connection with any pending investigation of any person; trade secrets and commercial or 

financial information obtained from a person and privileged or confidential; and certain 

enumerated sections of financial reports required to be submitted to the CFTC. 

Part 146 of the CFTC rules, 17 C.F.R. 146, implements the Privacy Act of 1974, which 

provides protections for information concerning an individual. Among the primary 

purposes of these rules is to permit individuals to determine whether information about 

them is contained in Government files and, if so, to obtain access to that information; to 

establish procedures whereby individuals may have inaccurate and incomplete 

information corrected; and to restrict access by unauthorized persons to that information. 

e) Observance by staff of procedural fairness in performance of their functions? 

Yes. As discussed in response to Principle 4, Question 3, above, the APA imposes 

mandatory procedures (notice and public comment) on the CFTC to ensure procedural 

fairness in the proposal and adoption of rules. The APA also establishes procedures in 

the adjudicatory context. 

In addition, the CFTC has adopted rules of procedure addressing various aspects of the 

CFTC’s program. For example: 

44 
• 17 C.F.R. 9 procedural regulations relating to the review of exchange disciplinary, 

access denial or other adverse actions; 

• 17 C.F.R. 10 regulations of practice that are generally applicable to adjudicatory 

proceedings before the CFTC under the CEA (such as denial, suspension, revocation, 

conditioning, restricting or modifying registration, the issuance of cease and desist 

orders, the denial of trading privileges, the assessment of civil penalties, the issuance 

of restitution orders) and any other proceeding where the CFTC declares them to be 

applicable; 

• 17 C.F.R. 11 regulations relating to investigatory proceedings conducted by the 

CFTC or its staff; 

• 17 C.F.R. 12 regulations relating to reparation applications (i.e., claims against 

registrants for violations of the CEA and CFTC regulations resolved by 

administrative law judges or hearing officers) pursuant to Section 14 of the CEA; 

• 17 C.F.R. 14 regulations relating to the suspension or disbarment of persons from 

appearance and practice before the CFTC as an attorney or accountant; 

• 17 C.F.R. 147 regulations specifying the conditions for conduct of CFTC 

business, with a presumption of open CFTC meetings; and 

• 17 C.F.R. 171 procedures applicable to the review of NFA decisions. 

2) Are there: 

a) Processes to investigate and resolve allegations of violations of the above standards?

Yes. See supra, response to Principle 5, Question 1(e). 

b) Legal or administrative sanctions for failing to adhere to these standards? 

As noted above in response 5.1(a) above, the CFTC has adopted ethics regulations. 

Annual seminars and/or the dissemination of printed materials or films communicate 

such ethical standards to employees. As further noted in response to Principle 5, 

Question 1(a), above, criminal penalties attach to certain ethical violations. 

45 
SELF REGULATORY 

ORGANIZATIONS 

PRINCIPLES 6-7 

46 
Principle 6. The regulatory regime should make appropriate use of SROs that 

exercise some direct oversight responsibility for their respective areas of 

competence and to the extent appropriate to the size and complexity of the 

markets 

Assessment: Fully Implemented 

1) Are there organizations that: 

a) Establish rules of eligibility that must be satisfied in order for individuals or firms 

to participate in any significant securities activity? 

Yes. There are several categories of organizations authorized by the CFTC which have 

self-regulatory responsibilities: futures exchanges (e.g., DCMs and DTEFs), DCOs, and 

registered futures associations (e.g., NFA). CFTC Regulation 1.3(ee) defines the term 

self-regulatory organization as a contract market or a registered futures association. 

DCMs (futures exchanges). In order to trade futures contracts (the regulated activity), a 

market must be designated as a “contract market” under Section 5 of the CEA. DCMs 

are subject to continuing statutory self-regulatory obligations. 

A DCM designs the terms and conditions of futures contracts (consistent with CFTC 

Guideline 1), and determines the mechanism and terms of trading and execution, clearing 

and settlement and approved depositories. A DCM must also carry out surveillance of the 

operation of its market. 

Current DCMs: 

• CBOE Futures Exchange 

• Chicago Climate Futures Exchange 

• Chicago Mercantile Exchange 

• Chicago Board of Trade 

• COMEX Division of New York Mercantile Exchange 

• ELX Futures 

• North American Derivatives Exchange, Inc. 

• ICE Futures U.S. 

• Kansas City Board of Trade 

• Minneapolis Grain Exchange 

• Nasdaq OMX Futures Exchange 

• New York Mercantile Exchange 

47 
• NYSE Liffe Futures Exchange 

• OneChicago, LLC 

• U.S. Futures Exchange 

Currently there are no DTEFs. 

NFA. Section 17 of the CEA establishes a framework for one or more registered futures 

associations to exist under the oversight of the CFTC. Part 170 of the CFTC’s 

regulations addresses such registered futures associations. As mentioned previously, the 

NFA is the only existing registered futures association. Section 17(m) of the CEA 

provides that the CFTC may approve rules that require persons eligible for membership 

to become members of at least one registered futures association. Under CFTC 

Regulation 170.15, most FCMs (the type of financial intermediary for U.S. commodity 

futures transactions that is permitted to hold customer funds) are required to be members 

of a registered futures association. 

Under Part 3 of CFTC regulations, registration functions for most commodity futures 

intermediaries under the CEA and CFTC regulations are delegated to be performed by 

NFA on behalf of the CFTC. 

Under CFTC Regulation 1.52, certain examination and monitoring functions (for 

members’ compliance with financial and reporting requirements) may be performed 

under agreement of certain SROs to reduce duplicative/multiple monitoring and auditing 

for compliance. DCMs and the NFA are participants in the existing Joint Audit 

Agreement that has been approved by the CFTC. The CEA provides Designation Criteria 

for DCMs, including that such a contract market establish trading rules, discipline 

violators, and ensure the financial integrity of transactions and member intermediaries. 

Through the Joint Audit Agreement, DCMs and the NFA divide up primary SRO 

responsibility for monitoring the financial condition and rule compliance of joint 

members. 

Registered futures associations and DCMs fulfill all of (a)-(c) and perform SRO functions 

under the U.S. statutory and regulatory scheme governing commodity futures transactions 

and intermediaries. 

Consistent with its obligations under Section 17 of the CEA and Part 170 of the CFTC’s 

regulations, NFA has promulgated rules fulfilling its statutory and regulatory 

requirements. See NFA’s Member Rules, available at 

http://www.nfa.futures.org/nfamanual/NFAManual.aspx. 

Overview of NFA. The CFTC has delegated certain responsibilities to the NFA, which 

became a “registered futures association” in 1981. This delegation includes requiring 

NFA to: adopt rules establishing training standards and proficiency testing for persons 

involved in the solicitation of transactions subject to the CEA, supervisors of such 

persons, and all persons for whom it has registration responsibilities and to create a 

program to audit and enforce compliance with such standards; establish minimum capital, 

segregation, and other financial requirements applicable to its members for whom such 

48 
requirements are imposed by the CFTC and to implement a program to audit and enforce 

compliance with such requirements; establish minimum standards governing the sales 

practices of its members and members’ associated persons; and establish special 

supervisory guidelines to protect the public interest relating to the solicitation by 

telephone of new futures or options accounts. 

NFA has incorporated into its rules, by reference, the CFTC’s segregation, 

recordkeeping, and related reporting requirements for FCMs, CPOs, IBs, and CTAs. In 

addition, NFA has adopted net capital rules for FCMs and IBs which, as required by the 

CEA, are no less stringent than those of the CFTC. NFA’s member audit program 

primarily applies to registrants that are not members of a DCM. 

The CFTC has delegated to NFA registration processing functions and the authority to 

take adverse action, such as to revoke or to deny registration, against registrants and 

applicants for registration based upon disqualifying conduct set forth in Sections 8a(2) 

and (3) of the CEA. The CFTC also retains authority to take such actions. The NFA also 

has certain delegated functions with respect to ethics training required of registrants. 

In addition, the CFTC delegated to NFA the responsibility generally to review CPO and 

CTA Disclosure Documents as well as certain other tasks related to activities in the 

foreign futures and foreign options area and functions concerning agricultural trade 

option merchants and their associated persons; authorized NFA to revoke, after 30 days 

written notice, the confirmation of Regulation 30.10 relief for any firm that fails to 

comply with the terms and conditions upon which relief was confirmed; and authorized 

NFA to withdraw the confirmation of Regulation 30.10 relief from any firm that notifies 

NFA of its decision to forfeit such relief. Regulation 30.10 permits certain market 

professionals to conduct business in the U.S. based on substantial compliance with the 

rules of their home jurisdiction. 

The CFTC has general oversight responsibility for all NFA functions and full access to 

information it maintains and obtains to ensure compliance with the CEA and rules 

thereunder and assure that these functions are carried out fairly and effectively. The 

CFTC also monitors NFA for enforcement of its own rules and by-laws. 

In performing its delegated authority, the NFA “stands in the shoes” of the CFTC and is 

subject to all relevant confidentiality requirements applicable to the CFTC. 

b) Establish and enforce binding rules of trading or business conduct for individuals 

or firms engaging in securities activities?

Yes. See response to Principle 7, Question 1(a) and (c). 

c) Establish disciplinary rules and/or conduct disciplinary proceedings, which have the 

potential to impose enforceable fines, or other penalties, or to bar or suspend a legal or 

natural person from participating in securities activities or professional activities 

related to securities activities? 

49 
Yes. See response to Principle 7, Question 1(f).

50 
Principle 7. SROs should be subject to the oversight of the regulator and 

should observe standards of fairness and confidentiality when exercising 

powers and delegated responsibilities 

Assessment: Fully Implemented 

1) As a condition to authorization, does the legislation or the regulator require the SRO to 

demonstrate that it: 

a) Has the capacity to carry out the purposes of governing laws, regulations and SRO 

rules consistent with the responsibility delegated to the SRO, and to enforce compliance 

by its members and associated persons subject thereto those laws, regulations and 

rules? 

Exchanges. Yes. Generally, as a condition to designation, CEA Section 5 and CFTC 

Regulation 38.3 require the applicant to demonstrate that it complies with eight 

Designation Criteria (set forth in CEA Section 5(b)) and 18 core principles (set forth in 

CEA Section 5(d)), with which all DCMs must comply. Additionally, DCM Designation 

Criterion 1, set forth in Section 5(b) of the CEA, requires a board of trade to demonstrate 

to the Commission that the board of trade meets initially and on an on-going basis the 

criteria specified in Section 5(b). Moreover, DCM Core Principle 1, set forth in Section 

5(d) of the CEA, requires a board of trade, in order to maintain designation, to comply 

with the core principles specified in Section 5(d). 

Furthermore, DCM Core Principle 2–Compliance with Rules, set forth in Section 5(d) of 

the CEA, requires a DCM to 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. DCM Designation Criterion 4—Trade 

Execution Facility, set forth in Section 5(b) of the CEA, requires a DCM to establish and 

enforce rules defining the manner of operations of the trade execution maintained by the 

DCM, and to demonstrate that the trade execution facility operates in accordance with the 

rules of the DCM. 

Criteria for Designation as a DCM. The criteria for designation as a contract market 

are set forth in Section 5(b) of the CEA and Part 38 of the CFTC's regulations. The 

criteria relate to the following standards: 

(1) General Demonstration of Adherence to Designation Criteria; 

(2) Prevention of Market Manipulation; 

51 
(3) Fair and Equitable Trading; 

(4) Enforcement of Rules on the Trade Execution Facility; 

(5) Financial Integrity of Transactions; 

(6) Disciplinary Procedures; 

(7) Public Access to Information on the Contract Market; and 

(8) Ability of the Contract Market to Obtain Information. 

Appendix A to Part 38 provides more specific information on these designation 

requirements as well as guidance to applicants seeking to become DCMs. 

Ongoing compliance with core principles. A DCM must comply, on a continuing 

basis, with the following 18 core principles. Appendix B to Part 38 provides additional 

information and guidance to applicants on how DCMs can remain in compliance with 

these core principles. 

1. In general 7. Availability of 

general 

information 

13. Dispute 

resolution 

2. Compliance with 

rules 

8. Daily 

publication of 

trading 

information 

14. Governance 

fitness standards 

3. Contracts not 

readily subject to 

manipulation 

9. Execution of 

transactions 

15. Conflicts of 

interest 

4. Monitoring of 

trading 

10. Trade 

information 

16. Composition of 

boards of mutually 

owned markets 

5. Position limits or 

accountability 

11. Financial 

integrity of 

contracts 

17. Record-keeping 

6. Emergency 

authority 

12. Protection of 

market 

participants 

18. Antitrust 

considerations 

See also CFTC Regulation 1.52, 17 C.F.R. 1.52, (SRO adoption and auditing of 

minimum financial and related reporting requirements). 

 

52 
NFA. Yes. Section 17(b)(1) of the CEA requires that the ongoing RFA demonstrate 

through the documentation submitted to the CFTC that it is in the public interest, that it 

will be able to comply with the provisions of Section 17 and the rules and regulations 

promulgated by the CFTC thereunder, and that it will be able to fulfill the purposes of 

Section 17. Section 17(b)(8) of the CEA requires that the prospective RFA demonstrate 

that the rules of the association provide that its members and persons associated with its 

members shall be appropriately disciplined, by expulsion, suspension, fine, censure, or 

being suspended or barred from being associated with all members, or any other fitting 

penalty, for any violation of its rules. Similarly Designation Criteria under core 

principles for DCMs (Section 5 of the CEA) and application guidance published by the 

CFTC in Part 38 of its regulations require the demonstration to the CFTC in its 

application, and on an ongoing oversight and review basis, of a DCM’s ability to meet 

such core principles. 

b) Treats all members of the SRO, applicants for membership and similarly situated 

market participants subject to its rules in a fair and consistent manner? 

Yes. DCM Designation Criteria 3—Fair and Equitable Trading, establishes that boards 

of trade must establish and enforce 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. See also response to Principle 7, Question 3(a) on 

Procedural Fairness. Application Guidance for DCMs under Appendix B to Part 38 of 

CFTC regulations references “clear and fair standards” with respect to the DCM’s 

authority and ability to discipline, limit or suspend activities of members or terminate 

membership. In addition, there are specific core principles for DCMs with respect to 

minimizing conflicts of interest and anti-trust considerations which have bearing on the 

fairness and consistency with which a DCM interacts with members. 

Regarding the NFA, fairness and consistency of treatment of members is established by 

operation of the following requirements. Section 17(b)(2) of the CEA mandates that the 

prospective RFA submit rules that provide that any person registered under the CEA, a 

registered entity, or any other person designated pursuant to the regulations of the CFTC 

as eligible for membership may become a member of such association. That section also 

states that the rules of the association may restrict membership in such association on the 

basis of the type of business conducted by its members. Further, section 17(b)(5) of the 

CEA requires that the prospective RFA demonstrate that its rules assure a fair 

representation of its members in the adoption of any rule of the association or amendment 

thereto, the selection of its officers and directors, and in all other phases of the 

administration of its affairs. Consistent with the provisions of the CEA, CFTC 

Regulation 170.3 provides for the fair and equitable representation of members with 

respect to the governing board of the association. In particular, the Regulation provides 

that no single class or group of members may dominate or otherwise exercise 

disproportionate influence on the governing board. 

c) Develops rules that are designed to set standards for its members and to promote 

investor protection? 

53 
Exchanges. Yes. Trade practice, handling of customer funds, reporting, recordkeeping 

and other business standards for commodity professionals, many of whom constitute the 

class of exchange membership, are established in the first instance by CEA Sections 5(b) 

and (d), CFTC regulations (Part 38), DCM rules, and, as explained below, by NFA 

requirements. 

DCMs must initially and on an ongoing basis demonstrate compliance with DCM Core 

Principle 12 of Section 5(d) of the CEA, and DCM Designation Criterion 3 of Section 

5(b) of the CEA. DCM Core Principle 12—Protection of Market Participants, establishes 

that boards of trade must establish and enforce rules to protect market participants from 

abusive practices committed by any party acting as an agent for the participants. DCM 

Designation Criteria 3—Fair and Equitable Trading, establishes that boards of trade must 

establish and enforce 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. Core Principle 11 for DCMs provides that the DCM shall establish and 

enforce rules to ensure the financial integrity of FCMs and IBs and the protection of 

customer funds. 

NFA. Yes. Section 17(b)(3) of the CEA requires the rules of an RFA to provide that 

membership must be denied to certain firms and individuals, including those subject to an 

order by the CFTC suspending, denying or revoking registration. Section 17(b)(4) of the 

CEA requires that the RFA rules provide that applicants for membership conform with 

specific and appropriate standards with respect to the training, experience and such other 

qualifications as the RFA deems necessary or desirable, including the financial 

responsibility of members. Section 17(p) of the CEA further requires each RFA to 

establish rules that require the association to: 

• Establish training standards and proficiency testing for persons involved in the 

solicitation of transactions, supervisors of such persons and all persons for which it 

has registration responsibilities, and a program to audit and enforce compliance with 

such standards; 

• Establish minimum capital, segregation, and other financial requirements 

applicable to its members for which such requirements are imposed by the CFTC and 

implement a program to audit and enforce compliance with such requirements; 

• Establish minimum standards governing sales practices of its members and 

persons associated therewith for transactions subject to provisions of the CEA; and 

• Establish supervisory guidelines to protect the public interest relating to the 

solicitation of new futures and options accounts and make such guidelines applicable 

to those members determined to require such guidelines in accordance with standards 

established by the CFTC. 

In addition, the NFA and DCMs must monitor and enforce compliance with CFTC 

regulations establishing standards for intermediaries, such as CFTC minimum 

financial and reporting requirements, and requirements for the protection of customer 

54 
funds and communications with customers pursuant to CFTC Regulation 1.52 and 

Financial and Segregation Interpretations 4-1, as amended, and 4-2. 

Common to SROs. CFTC Regulation 1.59, 17 C.F.R. 1.59, prohibits certain trading on 

material, inside information by SRO members and by members of SRO governing boards 

and committees. See infra, response to Principle 7, Question 3(b). 

d) Submits to the regulator its rules, and any amendments thereto, for review and/or 

approval, as the regulator deems appropriate, and ensures that the rules of the SRO are 

consistent with the public policy directives established by the regulator? 

Yes. 

Rules and rule amendments by certification. A DCM may implement most new 

rules and rule amendments by filing with the CFTC a certification that the amended 

rule complies with the CEA and CFTC regulations and policies. Self-certification of 

amendments to terms and conditions of contracts based on enumerated agricultural 

commodities is not permitted when the amendments are material and the contract has 

any open interest. 

The CFTC’s requirements and procedures for self-certification filings for listing new 

products and for implementing rule amendments are set forth in CFTC regulations 

40.2 and 40.6, respectively. See infra, section entitled Rule Approval by SelfCertification. 

Section 5c(c) of the CEA sets forth that registered entities including DCMs may 

approve and implement new rules by providing the CFTC with written certification 

that such rule complies with the CEA, but may also submit such rules for prior 

approval and must do so in certain circumstances. Such rules must comply with the 

CEA, and under Section 5c(d), if the CFTC determines that a DCM is violating core 

principles, it will provide notice to the entity in writing of such determination and 

afford the registered entity an opportunity to make appropriate changes to come into 

compliance, after which the CFTC may take further steps, including 

suspension/revocation of certification. 

Voluntary approval of products and rules. A contract market may request CFTC 

approval of its futures or option products under the provisions of CFTC Regulation 

40.3. Product approval requests may be submitted concurrently with the filing of a 

contract under self-certification procedures or any time later. A contract market also 

may request CFTC approval of its rules under the provisions of CFTC Regulation 

40.5. 

The requirements for approval of a product are contained in the CFTC's "Guideline No. 

1" (Appendix A to Part 40). This guideline provides exchanges with more specific 

information regarding initial and continued compliance with the CEA and the CFTC's 

regulations and policies for listing contracts.

55 
See infra, response to Principle 25, Question 4(a). 

NFA. Yes. Section 17(a)(2) of the CEA requires an applicant for RFA status to provide 

the CFTC with copies of its constitution, charter or articles of incorporation or 

association, along with all bylaws. Section 17(j) of the CEA states that an RFA must file 

with the CFTC copies of any changes or additions to the RFA rules. Section 17(j) further 

provides that the RFA may make any proposed change or addition effective ten days after 

the receipt of such a filing by the Commission unless the RFA requests that the 

Commission review and approve the submission or the Commission informs the RFA of 

its intention to do so. If the Commission decides that it will review the rules for 

approval, the Commission must determine whether such change or addition is consistent 

with the requirements of Section 17 of the CEA and is not in violation of any other 

provision of the CEA. If the Commission disapproves the change or addition as 

inconsistent with the CEA, the Commission must provide the RFA with notice and 

opportunity to be heard. Further, if the Commission does not approve or institute 

disapproval proceedings with respect to a rule within 180 days after the receipt of such a 

rule, or if the Commission does not conclude disapproval proceedings within one year 

after the receipt of such rule, the RFA may implement the submitted rule until the 

Commission concludes the disapproval process. 

e) Cooperates with the regulator and other domestic SROs to investigate and enforce 

applicable laws, regulations and rules? 

Yes. The CEA, CFTC regulations and interpretative advisories establish a general 

obligation on the SROs to cooperate with the CFTC and with other SROs to investigate 

and enforce applicable laws and regulations. 

CEA Section8(a)(1) provides that for the efficient execution of the provisions of the 

CEA, and in order to provide information for the use of Congress, the CFTC may make 

such investigations as it deems necessary to ascertain facts regarding the operations of 

boards of trade and other persons subject to the CEA. CEA Section 5b authorizes the 

CFTC to suspend or revoke the designation of any board of trade which fails or refuses to 

comply with any of the provisions of the CEA or any of the rules, regulations or orders 

issued by the CFTC thereunder. 

The CFTC’s rules contemplate cooperation among exchanges. CFTC Regulation 1.52 

authorizes any two or more SROs to file with the CFTC a plan for delegating to a 

designated SRO (including a registered futures association), the responsibility of 

monitoring and auditing for compliance with the minimum financial and related reporting 

requirements adopted by such SROs. Among other things, Regulation 1.52(d) authorizes 

such SROs to establish programs among themselves to provide access to any necessary 

financial or related information. 

Cooperation with other SROs is not required for authorization to act as an SRO, and 

participation in the Joint Audit Agreement is not mandatory, however, all current SROs 

do participate. Under Regulation 1.52, SROs with FCM members in common may 

establish joint audit plans, and, pursuant to such plans, delegate the responsibility to audit 

56 
and conduct financial surveillance of an FCM to one of the SROs as the DSRO. With 

respect to an FCM that is not a member of any exchange, NFA is the FCM’s DSRO. The 

Commission requires that DSROs ensure that each FCM is subject to an on-site 

examination within nine to 18 months of the “as of” date of the previous examination by 

the DSRO. The Joint Audit Committee (JAC), which consists of representatives of the 

DSROs that are signatories to a joint audit plan under Regulation 1.52, has established 

uniform procedures for such on-site examinations. Cooperation with the CFTC is not a 

specified Designation Criteria, although it is expected, based on the delegations and 

authority being provided to the SROs, and can be enforced through the CFTC’s ability to 

monitor and remove the authority of the SROs. 

Additionally, DCM Designation Criteria 8—Ability of the Contract Market to Obtain 

Information, under CEA Section 5(b), requires the board of trade to 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. 

f) Imposes appropriate sanctions for non-compliance with its own rules? 

Exchanges. Yes. DCM Core Principle 2–Compliance with Rules, requires a DCM to 

monitor and enforce compliance with the rules. See also CFTC Regulation 1.52(a), 17 

C.F.R. Section 1.52(a). 

Also, DCM Designation Criteria 6—Disciplinary Procedures of Section 5(b) of the CEA 

requires the board of trade to establish and enforce disciplinary proceedings 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. See (d) and (e) 

above regarding DCMs. Further, Designation Criteria under the CEA requires that a 

DCM demonstrate that it shall establish and enforce disciplinary procedures for 

violations of its rules (Section 5(b)(6) of the CEA) and ongoing core principles for DCMs 

require monitoring and enforcing compliance with rules. 

NFA. Yes. Section 17(b)(8) of the CEA requires that an RFA develop rules that provide 

for the appropriate discipline of its members, whether by expulsion, suspension, fine, 

censure, or any other fitting penalty, for any violation of its rules. Section 17(i) provides 

that the CFTC may review the disciplinary action taken by an RFA. The review would 

identify the rules of the RFA violated by the person in question and confirm whether such 

rules were applied in a manner consistent with the purposes of the CEA. Pursuant to this 

authority, the CFTC also may, having found that a penalty is excessive or oppressive, 

cancel, reduce or require remission of the penalty. NFA’s bylaws and rules provide for 

the imposition of sanctions on members and associates of members for non-compliance 

with NFA’s rules. See NFA’s Bylaws and Manual at 

http://www.nfa.futures.org/nfamanual/NFAManual.aspx. 

g) Where applicable, e.g., a mutual organization, assures a fair representation of 

members in selection of its board of directors and administration of its affairs? 

57 
Exchanges. Yes. DCM Core Principle 16—Composition of Mutually Owned Contract 

Markets, under Section 5(d) of the CEA, requires that in the case of a mutually owned 

contract market, the board of trade shall ensure that the composition of the governing 

board reflects market participants. 

DCM Core Principle 14—Governance Fitness Standards, under Section 5(d) of the CEA, 

requires boards of trade to establish and enforce appropriate fitness standards for 

directors, members of any disciplinary committee, members of contract market and any 

other persons with direct access to the facility. 

DCM Core Principle 15—Conflicts of Interest, under Section 5(d) of the CEA, 

requires the board of trade to establish and enforce rules to minimize conflicts of 

interest in the decision making process of the contract market and establish a process 

for resolving such conflicts of interest. The Commissions guidance in Part 38, 

Appendix B details: 

(a) Application guidance. The means to address conflicts of interest in decisionmaking of a contract market should include methods to ascertain the presence of 

conflicts of interest and to make decisions in the event of such a conflict. In 

addition, the Commission believes that the contract market should provide for 

appropriate limitations on the use or disclosure of material non-public information 

gained through the performance of official duties by board members, committee 

members and contract market employees or gained through an ownership interest 

in the contract market. 

(b) Acceptable Practices. All DCMs bear special responsibility to regulate 

effectively, impartially, and with due consideration of the public interest, as 

provided for in Section 3 of the CEA. Under DCM Core Principle 15, they are 

also required to minimize conflicts of interest in their decision-making processes. 

To comply with this DCM Core Principle, contract markets should be particularly 

vigilant for such conflicts between and among any of their self-regulatory 

responsibilities, their commercial interests, and the several interests of their 

management, members, owners, customers and market participants, other industry 

participants, and other constituencies. Acceptable Practices for minimizing 

conflicts of interest shall include the following elements: 

(1) Board Composition for Contract Markets 

(i) At least thirty-five percent of the directors on a contract market's board 

of directors shall be public directors; and 

(ii) The executive committees (or similarly empowered bodies) shall be at 

least thirty-five percent public. 

(2) Public Director 

58 
(i) To qualify as a public director of a contract market, an individual must 

first be found, by the board of directors, on the record, to have no material 

relationship with the contract market. A “material relationship” is one that 

reasonably could affect the independent judgment or decision making of 

the director. 

(ii) In addition, a director shall not be considered “public” if any of the 

following circumstances exist: 

(A) The director is an officer or employee of the contract market or a 

director, officer or employee of its affiliate. In this context, “affiliate” 

includes parents or subsidiaries of the contract market or entities that 

share a common parent with the contract market; 

(B) The director is a member of the contract market, or a person 

employed by or affiliated with a member. “Member” is defined 

according to Section 1a(24) of the CEA and CFTC Regulation 1.3(q). 

In this context, a person is “affiliated” with a member if he or she is an 

officer or director of the member, or if he or she has any other 

relationship with the member such that his or her impartiality could be 

called into question in matters concerning the member; 

(C) The director, or a firm with which the director is affiliated, as 

defined above, receives more than $100,000 in combined annual 

payments from the contract market, any affiliate of the contract 

market, or from a member or any person or entity affiliated with a 

member of the contract market. Compensation for services as a 

director does not count toward the $100,000 payment limit, nor does 

deferred compensation for services prior to becoming a director, so 

long as such compensation is in no way contingent, conditioned, or 

revocable; 

(D) Any of the relationships above apply to a member of the director's 

“immediate family,” i.e., spouse, parents, children, and siblings. 

(iii) All of the disqualifying circumstances described in subsection (2)(ii) 

shall be subject to a one-year look back. 

(iv) A contract market's public directors may also serve as directors of the 

contract market's parent company if they otherwise meet the definition of 

public in this Section (2). 

(v) A contract market shall disclose to the Commission which members of 

its board are public directors, and the basis for those determinations. 

(3) Regulatory Oversight Committee 

59 
(i) A board of directors of any contract market shall establish a Regulatory 

Oversight Committee (“ROC”) as a standing committee, consisting of 

only public directors as defined in Section (2), to assist it in minimizing 

actual and potential conflicts of interest. The ROC shall oversee the 

contract market's regulatory program on behalf of the board. The board 

shall delegate sufficient authority, dedicate sufficient resources, and allow 

sufficient time for the ROC to fulfill its mandate. 

(ii) The ROC shall: 

(A) Monitor the contract market's regulatory program for sufficiency, 

effectiveness, and independence; 

(B) Oversee all facets of the program, including trade practice and 

market surveillance; audits, examinations, and other regulatory 

responsibilities with respect to member firms (including ensuring 

compliance with financial integrity, financial reporting, sales practice, 

recordkeeping, and other requirements); and the conduct of 

investigations; 

(C) Review the size and allocation of the regulatory budget and 

resources; and the number, hiring and termination, and compensation 

of regulatory personnel; 

(D) Supervise the contract market's chief regulatory officer, who will 

report directly to the ROC; 

(E) Prepare an annual report assessing the contract market's selfregulatory program for the board of directors and the Commission, 

which sets forth the regulatory program's expenses, describes its 

staffing and structure, catalogues disciplinary actions taken during the 

year, and reviews the performance of disciplinary committees and 

panels; 

(F) Recommend changes that would ensure fair, vigorous, and 

effective regulation; and 

(G) Review regulatory proposals and advise the board as to whether 

and how such changes may impact regulation. 

(4) Disciplinary Panels 

All contract markets shall minimize conflicts of interest in their 

disciplinary processes through disciplinary panel composition rules that 

preclude any group or class of industry participants from dominating or 

exercising disproportionate influence on such panels. Contract markets 

60 
can further minimize conflicts of interest by including in all disciplinary 

panels at least one person who would qualify as a public director, as 

defined in subsections (2)(ii) and (2)(iii) above, except in cases limited to 

decorum, attire, or the timely submission of accurate records required for 

clearing or verifying each day's transactions. If contract market rules 

provide for appeal to the board of directors, or to a committee of the 

board, then that appellate body shall also include at least one person who 

would qualify as a public director as defined in subsections (2)(ii) and 

(2)(iii) above. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

NFA. Yes. Section 17(b)(5) of the CEA requires that an RFA’s rules assure a fair 

representation of its members in the adoption of any rule of the association, the selection 

of its officers and directors, and in all other phases of the administration of its affairs. 

Section 17(b)(11) also requires that an RFA must provide for meaningful representation 

on the governing board of such an association a diversity of membership interests and 

provides that no less than 20 percent of the regular voting members of such board be 

comprised of qualified nonmembers of or persons who are not regulated by such 

association. Section 17(b)(12) requires that the RFA 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. Consistent with the provisions of the CEA, CFTC 

Regulation 170.3 provides for the fair and equitable representation of members with 

respect to the governing board of the association. In particular, the Regulation provides 

that no single class or group of members may dominate or otherwise exercise 

disproportionate influence on the governing board. Additionally, CFTC Regulation 

170.6 mandates a fair and orderly procedure with respect to disciplinary actions brought 

against association members or persons associated with members. 

h) Avoids rules that may create anti-competitive situations as defined in the 

Explanatory Note? 

Yes. DCM Core Principle 18 of Section 5(d) of the CEA provides that: 

Unless necessary or appropriate to achieve the purposes of this Act, the board of 

trade shall endeavor to avoid—(A) adopting any rules or taking any actions that 

result in any unreasonable restraints of trade; or (B) imposing any material 

anticompetitive burden on trading on the contract market. 

Appendix B to Part 38 of the CFTC’s regulations provides the following Commission 

guidance: 

(a) Application guidance. An entity seeking designation as a contract market may 

request that the Commission consider under the provisions of Section 15(b) of the 

61 
CEA any of the entity's rules, including trading protocols or policies, and 

including both operational rules and the terms or conditions of products listed for 

trading, at the time of designation or thereafter. The Commission intends to apply 

Section 15(b) of the CEA to its consideration of issues under this Core Principle 

in a manner consistent with that previously applied to contract markets. 

(b) Acceptable practices. [Reserved] 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

Additionally, Section 15 of the CEA requires the CFTC to take into consideration the 

public interest to be protected by the antitrust laws and endeavour to take the least 

anticompetitive means of achieving the objectives of the CEA in, among other things, 

issuing any order or in approving any rule of a contract market or a registered futures 

association. CFTC Regulation 170.9 requires that an applicant to become an RFA must 

demonstrate, among other things, that the association will promote fair and open 

competition among its members and will conduct its affairs consistent with the public 

interest to be protected by the antitrust laws.

i) Avoids using the oversight role to allow any market participant unfairly to gain an 

advantage in the market? 

Yes. See infra, response to Principle 7, Question 4. 

DCM Designation Criterion 2—Prevention of Market Manipulation, under Section 5(b) 

of the CEA, provides that 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. 

DCM Core Principle 4—Monitoring of Trading, under Section 5(d) of the CEA, provides 

that the board of trade shall monitor trading to prevent manipulation, price distortion, and 

disruptions of the delivery or cash-settlement process. 

DCM Core Principle 12—Protection of Market Participants, under Section 5(d) of the 

CEA, provides that the board of trade shall establish and enforce rules to protect market 

participants from abusive trade practices committed by any party acting as an agent for 

the participants. 

Core Principle 15 for DCMs provides that a DCM shall establish and enforce rules to 

minimize conflicts of interest in the decision making process of the DCM, and 

application guidance includes managing such conflicts through the use of a Regulatory 

Oversight Committee of the Board of Directors, as well as maintaining a certain number 

of Public (disinterested) directors. Core Principle 12, requiring DCMs to establish rules 

62 
to protect market participants from abusive practices, should also apply to prohibit 

abusive practices by the DCM itself. 

2) Does the regulator: 

a) Have in place an effective on-going oversight program of the SRO, which may 

include: 

i) Inspection of the SRO; 

ii) Periodic reviews; 

iii) Reporting requirements; 

iv) Review and revocation of SRO governing instruments and rules; and 

v) The monitoring of continuing compliance with the conditions of authorization or 

delegation. 

Yes, to all of the above. The CFTC's regulatory scheme is based upon the assumption of 

self-regulatory responsibilities by the exchanges following their designation under Section 5 

of the CEA and by an RFA following registration under Section 17 of the CEA. Essentially, 

the CFTC's exchange oversight programs attempt to ascertain whether the exchange SROs 

are in compliance with their self-regulatory responsibilities. DCM Core Principle 4–

Monitoring of Trading, requires a DCM to monitor trades to prevent manipulation; DCM 

Core Principle 12–Protection of Market Participants, requires a DCM to establish and 

enforce rules to protect markets from abusive practices. 

DCMs. Among other things, each contract market is required to adopt and submit for 

CFTC approval, rules prescribing minimum financial and related reporting requirements for 

its members.56 Additionally, DCM Designation Criterion 1—In General—set forth in 

Section 5(b) of the CEA, requires a board of trade to demonstrate to the Commission that 

the board of trade meets initially and on an ongoing basis the criteria specified in Section 

5(b). Furthermore, DCM Core Principle 1, set forth in Section 5(d) of the CEA, requires 

a board of trade, in order to maintain designation, to comply with the core principles 

specified in Section 5(d). 

Criteria for Designation as a DCM. The criteria for designation as a contract market 

are set forth in Section 5(b) of the CEA and Part 38 of the CFTC's regulations. The 

criteria relate to the following standards: 

(1) General Demonstration of Adherence to Designation Criteria; 

(2) Prevention of Market Manipulation; 

(3) Fair and Equitable Trading; 

(4) Enforcement of Rules on the Trade Execution Facility; 

 

56 17 C.F.R. Section 1.52. 

63 
(5) Financial Integrity of Transactions; 

(6) Disciplinary Procedures; 

(7) Public Access to Information on the Contract Market; and 

(8) Ability of the Contract Market to Obtain Information. 

Appendix A to Part 38 provides more specific information on these designation 

requirements as well as guidance to applicants seeking to become DCMs. 

Ongoing compliance with core principles. A DCM must comply, on a continuing 

basis, with the following 18 core principles. Appendix B to Part 38 provides additional 

information and guidance to applicants on how DCMs can remain in compliance with 

these core principles. 

1. In general 7. Availability of 

general 

information 

13. Dispute 

resolution 

2. Compliance with 

rules 

8. Daily 

publication of 

trading 

information 

14. Governance 

fitness standards 

3. Contracts not 

readily subject to 

manipulation 

9. Execution of 

transactions 

15. Conflicts of 

interest 

4. Monitoring of 

trading 

10. Trade 

information 

16. Composition of 

boards of mutually 

owned markets 

5. Position limits or 

accountability 

11. Financial 

integrity of 

contracts 

17. Record-keeping 

6. Emergency 

authority 

12. Protection of 

market 

participants 

18. Antitrust 

considerations 

US futures markets’ transactions are cleared either through clearing organizations that are a 

division of the exchange or through separately incorporated organizations. Regardless of the 

type of organization, all such clearing organizations are required to be registered as DCOs. 

Relevant DCO operations are subject to review within the context of Staff’s overall financial 

compliance program (discussed below) for DCMs. 

CFTC Audit Program. The CFTC's audit and review functions with respect to DCMs fall 

into two general areas: (1) Reviews of exchange market surveillance, audit trail, trade 

64 
practice surveillance and disciplinary action programs; and (2) reviews of exchange 

financial and sales practice compliance programs. 

DCM Core Principle 10—Trade Information requires a DCM to maintain rules and 

procedures to provide for the recording and safe storage of all identifying 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. 

In addition, DCM Core Principle 17—Recordkeeping requires a DCM to maintain 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. 

DMO’s Market Compliance Section conducts regular reviews (about every two to three 

years) of each DCM’s ongoing compliance with core principles through the selfregulatory programs operated by the exchange in order to enforce its rules, prevent 

market manipulation and customer and market abuses, and ensure the recording and safe 

storage of trade information. These reviews are known as rule enforcement reviews 

(“RERs”). 

Periodic RERs normally examine a DCM’s audit trail, trade practice surveillance, 

disciplinary, and dispute resolution programs for compliance with the relevant DCM core 

principles, which include DCM Core Principle 10—Trade Information, and DCM Core 

Principle 17—Recordkeeping, with respect to audit trail programs; DCM Core Principle 

2—Compliance With Rules, and DCM Core Principle 12—Protection of Market 

Participants, with respect to trade practice surveillance and disciplinary programs; and 

DCM Core Principle 13—Dispute Resolution, with respect to dispute resolution 

programs. 

Other periodic RERs usually examine a DCM’s market surveillance program for 

compliance with DCM Core Principle 4—Monitoring of Trading, and DCM Core 

Principle 5— Position Limitations or Accountability. On some occasions, these two types 

of RERs may be combined in a single RER. Market Compliance can also conduct 

horizontal RERs of the compliance of multiple exchanges in regard to particular core 

principles. 

For further information, see http://www.cftc.gov/industryoversight. 

Rule Enforcement Reviews of Exchange Market Surveillance, Audit Trail, Trade 

Practice Surveillance and Disciplinary Action Programs. DCM Core Principle 2—

Compliance with Rules requires a DCM to 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. 

Objectives. RERs are designed to assess an exchange's overall compliance capabilities for 

a given "target period" under review. Such reviews do not necessarily cover all elements of 

an exchange's program, but instead target specific areas for in-depth analysis. Reviews are 

65 
tailored to specific exchanges at specific times and evolve over time with changes at the 

exchanges and in the futures industry. Upon completion of a review, a report is issued and 

submitted to the CFTC for approval for issuance to the exchange. These reports also are 

made available to the general public. The published reports are designed to report on all of 

the staff’s findings since the prior published report. Any serious findings that are discovered 

by the staff during an interim review basis are shared immediately with the SRO. 

Review of Exchange Financial and Sales Practice Compliance Programs. DCM 

Core Principle 11—Financial Integrity of Contracts, requires a DCM to establish 

and enforce rules providing for the financial integrity of any contracts traded on the 

contract market, and rules to ensure the financial integrity of any FCMs and IBs and 

the protection of customer funds. 

Objectives. CFTC staff examines the design and implementation of an exchange's financial 

and sales practice compliance program for a target period. In addition to assessing the 

overall effectiveness of such programs, Staff's reviews are also intended to identify specific 

deficiencies or areas that could be improved or enhanced. 

"Financial compliance" refers generally to the examination of a contract market for 

compliance with its obligations to adopt and submit to the CFTC regulations prescribing 

minimum financial and related reporting requirements for all of its member FCMs57 (see

CFTC Regulation 1.52(a)), and to 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 FCMs which are 

members of such contract market (see CFTC Regulation 1.52(b)) and ongoing financial 

surveillance, including steps taken in connection with “major market moves.” 

"Sales practice compliance" refers to the examination of the books and records kept by 

contract market members relating to their business of dealing in commodities, insofar as 

such business relates to their dealings on such contract market. Such books and records 

include but are not limited to promotional and advertising materials including information 

relative to performance representations; disclosure and other account opening documents; 

records of customers' orders; confirmations and account statements. 

The CFTC’s Division of Trading and Markets, Financial and Segregation Interpretation No. 

4-1 provides the SROs with minimum standards for carrying out their surveillance of 

compliance by FCMs with applicable financial and related reporting requirements.58 

 

57 Since many FCMs are members of more than one SRO, the CFTC has allowed the SROs to agree among themselves 

which of the SROs will be the designated self-regulatory organization ("DSRO") for the purpose of auditing and maintaining ongoing financial and sales practice surveillance over member FCMs. The SROs have entered into such 

allocation agreements among themselves and have established a Joint Audit Committee ("JAC"), discussed above, to 

coordinate the activities of the SROs. JAC has designated NFA as the SRO responsible for periodically advising the 

CFTC of changes in the allocation of DSRO responsibility (see Regulation 1.52(c)-(i)). 

58 Comm. Fut. L. Rep. (CCH) Section7114A (July 1985). It does not address the SRO's responsibilities with regard to 

option sales practice examinations of branch offices, guaranteed introducing brokers and commodity trading advisors. 

66 
Addendum A to Interpretation 4-1 sets forth an SRO’s responsibilities with respect to sales 

practice and compliance audits of member FCMs, and Addendum B to Interpretation 4-1 

addresses the coordination by commodity and securities industry SROs of audit and 

financial surveillance activities conducted over FCMs registered with both the CFTC and 

the SEC. 59 Financial and Segregation Interpretation No. 4-2 amended Interpretation 4-1 

and Addendum A to permit risk-based auditing.60

Interpretation 4-1 generally requires each designated SRO (DSRO) to conduct, at least once 

every two years, a full scope financial audit of each member FCM that carries customer 

accounts. This schedule may, however, be modified under the risk-based auditing 

procedures set forth in Interpretation 4-2.61 In those years in which a full scope audit is not 

performed, a DSRO must make an examination of sufficient scope to satisfy itself that the 

FCM is in compliance with applicable segregation, recordkeeping, and reporting 

requirements (a “limited scope” examination). Addendum A requires each DSRO to audit 

FCMs carrying customer funds routinely for applicable sales practice and compliance 

matters. The scope of the sales practice/compliance audit is determined by the DSRO after 

taking into account information available on the FCM, including information related to the 

number of complaints, results of past audits, adequacy of the systems of internal control, and 

the general nature of the FCM’s business. The sales practice compliance audit is performed 

by the DSRO in conjunction with the biennial full scope audit. 

CFTC staff also may conduct direct examinations of selected registrants to ensure 

maintenance of high quality work by an SRO. 

These formal reviews, which result in a written report submitted to the CFTC, constitute 

only one aspect of the CFTC’s broader on-going oversight program. 

The CFTC market surveillance program is structured to detect and prevent price 

manipulation in futures and option markets. The principal goals of market surveillance are to 

spot adverse situations in these markets and to pursue appropriate remedial actions, in 

coordination with the involved exchange, to avoid market disruption. To accomplish these 

 

59 Addendum to Financial and Segregation Interpretation No. 4-1 (Self Regulatory Organizations Sales Practice 

Audit and Compliance Responsibilities), and Addendum B to Financial and Segregation Interpretation No. 4-1 

(Coordinating Financial Rule Enforcement Programs Conducted by Self-Regulatory Organizations Over DuallyRegistered Firms). 

60 Financial and Segregation Interpretation 4-2 permits the frequency and scope of the examination to be determined 

based upon the DSRO’s overall assessment of the financial and operational risks posed by an FCM. The DSRO’s 

assessment would include on-site evaluation and testing of the FCM’s systems of internal controls and an 

assessment of the FCM’s financial and compliance history by exchange personnel who, through ongoing oversight 

activities, are familiar with the FCM’s operations. 

61 An SRO that implements risk-based auditing will not be required to perform a biennial full scope financial audit 

of each of its member FCMs that carry customer funds. Rather, both the frequency and scope of the examination 

would be determined based upon the DSRO’s overall assessment of the financial and operational risks posed by an 

FCM. However, each financial, sales practice, and compliance area must be covered at least once by the DSRO 

over a three-examination cycle. 

67 
objectives, the market surveillance staff must determine when a trader’s position in a futures 

market becomes so large relative to other market factors that the trader is capable of causing 

prices to diverge from legitimate supply and demand conditions. The surveillance staff 

routinely collects and analyzes daily data concerning overall supply and demand conditions 

in the cash market, cash and future prices and price relationships, and the size of hedgers’ 

and speculators’ positions in the futures market. 

At the heart of the CFTC’s market surveillance system (and also as an important component 

of its financial surveillance system) is the large-trader reporting system. In order to identify 

potentially disruptive futures positions, Staff uses its reporting system to collect and analyze 

data on large trader positions in all commodities. Reportable positions—daily reports of 

futures positions above specified levels set for reporting purposes—are obtained from 

FCMs, clearing members and foreign brokers. Exchanges also provide the daily positions 

that each clearing member is carrying in each futures and options contract on each 

underlying commodity. 

Because traders frequently carry futures positions through more than one FCM and because 

individuals sometimes control, or have a financial interest in more than one account, the 

CFTC routinely collects information that enables its surveillance staff to aggregate related 

accounts. FCMs must file a form which identifies each new account with reportable 

positions for each futures contract. In addition, if a trader’s position reaches a reportable 

level, the trader may be required to file a more detailed identification report to identify 

accounts and reveal any relationships that may exist with other accounts or traders. 

An additional monitoring mechanism allows surveillance economists to investigate further 

the positions of large traders by instituting a “special call,” which requires a trader to report 

their futures and option positions with all brokerage firms, or their cash market or OTC 

positions. The trader is required to give information on their trading and delivery activity. 

This mechanism may be used when a trader is using too many brokers to be easily 

monitored through required reports. Special calls also may be used to examine cash market 

positions and commitments in relation to futures market positions to access the economic 

rationale of the trader’s overall position. The CFTC thus has the authority and techniques to 

investigate and discover the identities of the true account owners and controllers of large 

positions, whether domestic or foreign. 

On a daily basis, staff in DMO’s Market Compliance Section reviews details of transactions 

at each exchange by using the Commission’s automated surveillance system. The 

Commission is currently in the process of significantly upgrading this system to enhance the 

Commission’s ability to detect trade practice violations, including wash trading and trading 

ahead. Additionally, DMO staff periodically observes trading activity on the floor of each 

exchange (for the exchanges that still have open outcry trading) and discusses potential 

issues of concern with compliance staff at the exchange. 

It should be noted that the market surveillance process is not conducted exclusively at the 

CFTC. Contract markets conduct and maintain their own market surveillance programs as 

part of their self-regulatory responsibilities. 

68 
NFA Oversight. Yes. The CFTC has general oversight responsibility for all NFA 

functions to ensure compliance with the CEA and rules thereunder. The CFTC also 

monitors NFA for enforcement of its own rules and bylaws. 

As an RFA, NFA is considered an SRO and, as noted above, must, in carrying out its 

financial audit and surveillance activities, comply with the requirements of CFTC 

Regulation 1.52 and Financial and Segregation Interpretations 4-1, as amended, and 4-2. 

In addition to the FCMs for which it is responsible under the joint audit plan, NFA also is 

responsible for regulatory compliance matters with respect to its member IBs, except for IBs 

that are guaranteed by an FCM that does not have NFA as its DSRO. NFA also is 

responsible for sales practice surveillance over all member CPOs and CTAs. NFA’s 

oversight of CPOs and CTAs also extends to review of annual reports and disclosure 

documents filed pursuant to Part 4 of the CFTC’s regulations consistent with the CFTC’s 

delegation of the same,62 and the conduct of examinations of such firms on a periodic 

basis.63

The CFTC ensures compliance by NFA with its self-regulatory obligations and DCMs with 

core principles by conducting periodic reviews of NFA’s compliance programs and Core 

Principle oversight reviews of DCMs. NFA oversight reviews focus on the specific 

program responsibilities of NFA, including review of the financial and sales practice 

compliance programs for FCMs, IBs, CPOs and CTAs, as well as review of NFA’s 

programs for arbitration, registration and fitness, and disciplinary actions. 

In the implementation of such reviews, Staff conducts on-site inspections, meets with NFA 

or DCM staff and reviews program materials and databases, evaluates procedures, and 

performs reviews of samples of NFA’s or the DCM’s files to determine whether the SRO’s 

procedures are consistent with its regulatory obligations, whether the SRO has properly 

executed its program, and that the files contain sufficient documentation. The results of 

these reviews are presented to the CFTC and reported back to NFA or the DCM. 

Consecutive reviews of the same program may focus on a particular aspect of the program 

in question, including following up on recommendations made in prior reviews. 

As an example of the CFTC’s oversight of NFA, the CFTC oversees NFA’s registration 

program through frequent contacts between staff members on specific matters, quarterly 

meetings of the Registration Working Group, which is comprised of staff from the CFTC 

and NFA, as well as formal reviews by CFTC staff of the operation of NFA’s program. 

The CFTC conducted a review of the registration program in 1996 and is currently 

reviewing the program again. These reviews have two general purposes: (1) to determine 

whether NFA’s written program properly addresses all relevant CFTC regulations and 

guidelines; and (2) to confirm that the execution of the written program is complete and is 

consistently applied in accordance with NFA’s written program. Following the completion 

of the review, the CFTC generates a report detailing its findings with respect to the reviewed 

 

62 62 Fed. Reg. 52,088 (Oct. 6, 1997); 67 Fed. Reg. 77,470 (Dec. 18, 2002). 

63 See Article III of NFA’s Articles of Incorporation at http://www.nfa.futures.org/nfamanual/NFAManual.aspx. 

69 
program, including recommendations for correction of problems or improvements. CFTC 

staff also attends regular meetings of the Joint Audit Committee to deal with examination or 

supervision issues that arise among the SROs. 

Within the past ten years, Staff has conducted reviews of NFA’s programs for CPO and 

CTA compliance, telemarketing supervision, FCM and IB financial reports, disciplinary 

actions, and arbitration. CFTC staff also has conducted oversight reviews of all the SROs 

during the same time period. 

 

Section 17(k) of the CEA provides that the CFTC is authorized to abrogate any rule of an 

RFA if it appears to the CFTC that such abrogation is necessary or appropriate to assure 

fair dealing by the members of the association, to assure a fair representation of its 

members in the administration of its affairs, or to effectuate the purposes of the CEA. 

The CFTC also may alter or supplement RFA rules, after notice and hearing. Section 

17(c) of the CEA provides that the CFTC may suspend the registration of an RFA if it 

finds that the rules thereof do not conform to the requirements of the CFTC. Under 

Section 5c(d) of the CEA, if the CFTC determines that a DCM (or other registered entity 

such as a DCO) is violating core principles it will provide notice to the entity in writing 

of such determination and afford the registered entity an opportunity to make appropriate 

changes to come into compliance, after which the CFTC may take further steps, including 

suspension/revocation of certification.

b) Retain full authority to inquire into matters affecting the investors or the market? 

Yes. See supra, response to Principle 7, Question 2(a). 

Section 8 of the CEA allows the Commission to make such investigations as it deems 

necessary to ascertain the facts regarding the operations of the boards of trade and other 

persons subject to the provisions of the CEA. This includes the authority to investigate 

the market conditions of commodities, including the supply and demand for such 

commodities. 

DCM Core Principle 17—Recordkeeping—requires DCMs to maintain 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. See also CFTC Regulation 1.31, which 

requires that all books and records required to be kept by the CEA or the Commission’s 

regulations are open to inspection by the Commission or DOJ. 

With regards to NFA, pursuant to Section 17 of the CEA, the CFTC broadly retains full 

authority over all matters undertaken by an RFA. 

c) Take over an SRO’s responsibilities where the powers of an SRO are inadequate for 

inquiring into or addressing particular misconduct or allegations of misconduct or 

where a conflict of interest necessitates it? 

Exchanges. Yes. CEA Section 8a(9) authorizes the CFTC to direct a contract market, 

whenever it has reason to believe that an emergency exists, to take such action as in the 

70 
CFTC’s judgment is necessary to maintain or restore orderly trading in or liquidation of 

any futures contract. CEA Section 8a(7) authorizes the CFTC to alter or supplement the 

rules of a contract market under certain circumstances. In order for the CFTC to take 

such action under Section 8a(7), the CFTC must first make the appropriate request to a 

contract market in writing specifying the desired rule change and, after appropriate notice 

and hearing, determine that the contract market did not make the requested changes 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 

contract market, or the product or byproduct thereof, or for the protection of traders or to 

insure fair dealing in commodities traded on a contract market. Under Section 5c(d), if 

the CFTC determines that a DCM is violating core principles, it will provide notice to the 

entity in writing of such determination and afford the registered entity an opportunity to 

make appropriate changes to come into compliance, after which the CFTC may take 

further steps, including suspension/revocation of certification. 

NFA. Section 17(k) of the CEA provides that the CFTC is authorized to abrogate any 

rule of an RFA if it appears to the CFTC that such abrogation is necessary or appropriate 

to assure fair dealing by the members of the association, to assure a fair representation of 

its members in the administration of its affairs, or to effectuate the purposes of the CEA. 

The CFTC also may alter or supplement RFA rules, after notice and hearing. Section 

17(c) of the CEA provides that the CFTC may suspend the registration of an RFA if it 

finds that the rules thereof do not conform to the requirements of the CFTC. 

3) Does the law or regulator require the SRO to follow similar professional standards of 

behavior as would be expected of a regulator:

a) On matters relating to confidentiality and procedural fairness? 

Confidentiality. Yes. The CEA requires SROs to maintain the confidentiality of 

material nonpublic information and information obtained from the CFTC in connection 

with the exercise of their self-regulatory responsibilities: 

DCM Core Principle 14—Governance Fitness Standards, requires a DCM to establish 

and enforce appropriate fitness standards for directors, members of any disciplinary 

committee, members of the contract market, and any other persons with direct access to 

the facility. 

In addition, DCM Core Principle 15—Conflicts of Interest, requires a DCM to establish 

and enforce rules to minimize conflicts of interest in the decision-making processes of the 

contract market and to establish a process for resolving such conflicts of interest. The 

means to address conflicts of interest in decision-making of a contract market should 

include methods to ascertain the presence of conflicts of interest and to make decisions in 

the event of such a conflict. In addition, the contract market should provide for 

appropriate limitations on the use or disclosure of material non-public information gained 

through the performance of official duties by board members, committee members and 

contract market employees or gained through an ownership interest in the contract 

market. 

71 
CEA Section 9(e)(1) makes it a felony for any person who is an employee, member of the 

governing board, or member of any committee of a board of trade, contract market or 

RFA, in violation of a regulation issued by the CFTC, willfully and knowingly to disclose 

for any purpose inconsistent with the performance of such person’s official duties any 

material nonpublic information obtained through special access related to the 

performance of such duties. 

CFTC Regulation 1.59(d)(ii), prohibits any employee, member of the governing board or 

member of any committee of an SRO from disclosing for any purpose inconsistent with 

the performance of such person’s official duties any material, nonpublic information 

obtained through special access related to the performance of duties. 

An exchange or RFA must maintain the confidentiality of information disclosed to it by 

the CFTC, except in a proceeding. The CFTC is authorized under CEA Section 8a(6) to 

communicate to the proper committee or officer of any contract market, RFA or SRO the 

full facts concerning any transaction or market operation, including the names of parties, 

that in the judgment of the CFTC 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 the CEA. However, Section 8a(6) 

provides that any information furnished by the CFTC under this authority “shall not be 

disclosed by such contract market, registered futures association, or SRO except in any 

self-regulatory action or proceeding.” See also CFTC Regulation 140.72, delegating such 

authority to certain Staff. 

 

An exchange must maintain the confidentiality of, and is prohibited from disclosing to 

third parties, information developed by the exchange in an investigation. A contract 

market is required by CEA Section 8c (2) to make public its findings in any exchange 

disciplinary proceeding pursuant to its internal rules (that is, a proceeding to suspend, 

expel, discipline or deny access to an exchange member), but may not disclose the 

evidence for its findings except to the person suspended, expelled, disciplined or denied 

access to the exchange or to the CFTC. The CFTC has clarified that its delegation of 

registration and disqualification functions to NFA permits exchanges to disclose to NFA 

all evidence underlying exchange disciplinary actions. 64 

NFA. Section 17(b)(9) of the CEA requires that an RFA have rules that provide for a fair 

and orderly procedure with respect to the disciplining of members and persons associated 

with members for the denial of membership. Each person subject to such a proceeding 

must be given an opportunity to be heard and must be informed of the specific grounds 

for discipline. Further, a record must be kept and, in the event that disciplinary action is 

taken, specific grounds supporting such action must be provided to the disciplined entity. 

In addition, an RFA, pursuant to CFTC Regulation 170.6, must conduct proceedings in a 

manner consistent with fundamental due process. 

 

64 See CFTC Interpretative Letter No. 00-56 (April 13, 2000). 

 

72 
With respect to confidentiality, CFTC Regulation 1.59 prohibits employees, governing 

board members, committee members and consultants of SROs, from disclosing material 

non-public information obtained through their position with the SRO for any purpose that 

is not consistent with the performance of their duties with respect to the SRO, and 

requires that SROs and RFAs promulgate rules that prohibit governing board members, 

committee members and consultants from disclosing material, non-public information 

obtained as a result of the performance of such person’s official duties. 

Procedural Fairness. Yes. DCM Designation Criteria 3—Fair and Equitable Trading 

requires a Board of Trade to establish and enforce trading rules to ensure fair and 

equitable trading through the facilities of the contract market, and the capacity to 

investigate and discipline any person that violates the rules. 

In addition, various CFTC regulations impose standards of procedural fairness on SRO 

programs. 

DCM Core Principle 2—Compliance with Rules, requires DCMs to 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. A DCM 

should have arrangements, resources and authority for effective rule enforcement. This 

should include the authority and ability to discipline and limit, or suspend, the activities 

of a member or market participant as well as the authority and ability to terminate the 

activities of a member or market participant pursuant to clear and fair standards. 

DCM Core Principle 12—Protection Of Market Participants, requires DCMs to establish 

and enforce rules to protect market participants from abusive practices committed by any 

party acting as an agent for the participants and requires DCMs to establish rules 

providing for a fair and equitable procedure through arbitration or otherwise for the 

settlement of customer’s claims and grievances against any member or employee of the 

contract market. DCMs should have rules prohibiting conduct by intermediaries that is 

fraudulent, noncompetitive, unfair, or an abusive practice in connection with the 

execution of trades and a program to detect and discipline such behavior. The DCM 

should have methods and resources appropriate to the nature of the trading system and 

the structure of the market to detect trade practice abuses. 

Similarly, CFTC Regulation 170.8, requires RFAs to demonstrate a capability to 

promulgate rules and conduct proceedings which provide a fair, equitable and expeditious 

procedure, through arbitration or otherwise, for the voluntary settlement of customers’ 

claims or grievances brought against any member of the association or any employee 

thereof. 

The CFTC has delegated to NFA responsibility for processing and granting applications 

for registration of various categories of registrants under the CEA. The various 

delegation orders have imposed procedural conditions and/or were accompanied by the 

approval of NFA rules that contained procedural protections. For example, in 1985 the 

CFTC approved rules adopted by NFA pursuant to which NFA would conduct 

proceedings to deny, condition, suspend, restrict or revoke the registration of any 

73 
applicant for registration or registrant who may be subject to a statutory disqualification 

under Sections 8a(2) through 8a(4) of the CEA and for whom NFA has been authorized 

to perform the CFTC’s registration functions. The procedures embodied in those NFA 

rules closely parallel those specified by the CFTC in Subpart C of Part 3 of its 

regulations. Specifically, NFA adopted the CFTC’s standards defining the scope of 

evidence that may be presented by the applicant or registrant to challenge allegations of 

statutory disqualification, as well as the standards to be followed by the party reviewing 

the matter and making determinations. Wherever NFA has modified those procedures, 

the CFTC’s review concluded that the modifications would not adversely affect the rights 

of applicants and registrants.65

b) On the appropriate use of information obtained in the course of the SRO’s exercise 

of its powers and discharge of its responsibilities? 

Yes. DCM Core Principle 15—Conflicts of Interest, requires a board of trade to establish 

and enforce rules to minimize conflicts of interest in the decision making process of the 

contract market and establish a process for resolving such conflicts of interest. The 

Commissions guidance in Part 38 Appendix B details: 

(a) Application guidance. The means to address conflicts of interest in decisionmaking of a contract market should include methods to ascertain the presence of 

conflicts of interest and to make decisions in the event of such a conflict. In 

addition, the Commission believes that the contract market should provide for 

appropriate limitations on the use or disclosure of material non-public information 

gained through the performance of official duties by board members, committee 

members and contract market employees or gained through an ownership interest 

in the contract market. 

Furthermore, CEA Section 9(e)(2) makes it a felony for any person who is an employee, 

member of the governing board, or member of any committee of a board of trade, 

contract market or RFA, in violation of a regulation issued by the CFTC, 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 material 

nonpublic information that such person knows was obtained in violation of CEA Section 

9(e)(1) (see infra) from any employee, member of the governing board, or member of any 

committee of a board of trade, contract market, or RFA. 

Moreover, CFTC Regulation 1.59(d)(i), prohibits any employee, member of the 

governing board or member of any committee of an SRO from trading for such person’s 

own account, or for or on behalf of any other account, in any commodity interest based 

on any material, nonpublic information obtained through special access related to the 

performance of such person’s official duties. CFTC Regulation 1.59(d)(2) similarly 

prohibits any person from trading for such person’s own account on the basis of any 

 

65 See 50 FR 34885, 34886 (August 28, 1985). 

74 
material, nonpublic information that such person knows was obtained in violation of 

1.59(d)(i). 

Core Principle 15 for DCMs provides that a DCM shall establish and enforce rules to 

minimize conflicts of interest in the decision making process of the DCM, and 

application guidance includes managing such conflicts through the use of a Regulatory 

Oversight Committee of the Board of Directors, as well as maintaining a certain number 

of Public (disinterested) directors. Core Principle 12 requiring DCMs to establish rules to 

protect market participants from abusive practices should also apply to prohibit abusive 

practices by the DCM itself. 

4) Does the law or regulator assure that potential conflicts of interest at the SRO are 

avoided or resolved? 

Yes. DCM Core Principle 15—Conflicts of Interest, requires a board of trade to establish 

and enforce rules to minimize conflicts of interest in the decision making process of the 

contract market and establish a process for resolving such conflicts of interest. The 

Commissions guidance in Part 38 Appendix B details: 

(a) Application guidance. The means to address conflicts of interest in decisionmaking of a contract market should include methods to ascertain the presence of 

conflicts of interest and to make decisions in the event of such a conflict. In 

addition, the contract market should provide for appropriate limitations on the use 

or disclosure of material non-public information gained through the performance 

of official duties by board members, committee members and contract market 

employees or gained through an ownership interest in the contract market. 

(b) Acceptable Practices. All DCMs bear special responsibility to regulate 

effectively, impartially, and with due consideration of the public interest, as 

provided for in Section 3 of the CEA. Under DCM Core Principle 15, they are 

also required to minimize conflicts of interest in their decision-making processes. 

To comply with this Core Principle, contract markets should be particularly 

vigilant for such conflicts between and among any of their self-regulatory 

responsibilities, their commercial interests, and the several interests of their 

management, members, owners, customers and market participants, other industry 

participants, and other constituencies. Acceptable Practices for minimizing 

conflicts of interest shall include the following elements: 

(1) Board Composition for Contract Markets 

(i) At least thirty-five percent of the directors on a contract market's board 

of directors shall be public directors; and 

(ii) The executive committees (or similarly empowered bodies) shall be at 

least thirty-five percent public. 

(2) Public Director 

75 
(i) To qualify as a public director of a contract market, an individual must 

first be found, by the board of directors, on the record, to have no material 

relationship with the contract market. A “material relationship” is one that 

reasonably could affect the independent judgment or decision making of 

the director. 

(ii) In addition, a director shall not be considered “public” if any of the 

following circumstances exist: 

(A) The director is an officer or employee of the contract market or a 

director, officer or employee of its affiliate. In this context, “affiliate” 

includes parents or subsidiaries of the contract market or entities that 

share a common parent with the contract market; 

(B) The director is a member of the contract market, or a person 

employed by or affiliated with a member. “Member” is defined 

according to Section 1a(24) of the CEA and Commission Regulation 

1.3(q). In this context, a person is “affiliated” with a member if he or 

she is an officer or director of the member, or if he or she has any 

other relationship with the member such that his or her impartiality 

could be called into question in matters concerning the member; 

(C) The director, or a firm with which the director is affiliated, as 

defined above, receives more than $100,000 in combined annual 

payments from the contract market, any affiliate of the contract 

market, or from a member or any person or entity affiliated with a 

member of the contract market. Compensation for services as a 

director does not count toward the $100,000 payment limit, nor does 

deferred compensation for services prior to becoming a director, so 

long as such compensation is in no way contingent, conditioned, or 

revocable; 

(D) Any of the relationships above apply to a member of the director's 

“immediate family,” i.e., spouse, parents, children, and siblings. 

(iii) All of the disqualifying circumstances described in subsection (2)(ii) 

shall be subject to a one-year look back. 

(iv) A contract market's public directors may also serve as directors of the 

contract market's parent company if they otherwise meet the definition of 

public in this Section (2). 

(v) A contract market shall disclose to the Commission which members of 

its board are public directors, and the basis for those determinations. 

(3) Regulatory Oversight Committee 

76 
(i) A board of directors of any contract market shall establish a standing 

committee, consisting of only public directors as defined in Section (2), to 

assist it in minimizing actual and potential conflicts of interest. The ROC shall 

oversee the contract market's regulatory program on behalf of the board. The 

board shall delegate sufficient authority, dedicate sufficient resources, and 

allow sufficient time for the ROC to fulfill its mandate. 

(ii) The ROC shall: 

(A) Monitor the contract market's regulatory program for sufficiency, 

effectiveness, and independence; 

(B) Oversee all facets of the program, including trade practice and 

market surveillance; audits, examinations, and other regulatory 

responsibilities with respect to member firms (including ensuring 

compliance with financial integrity, financial reporting, sales practice, 

recordkeeping, and other requirements); and the conduct of 

investigations; 

(C) Review the size and allocation of the regulatory budget and 

resources; and the number, hiring and termination, and compensation 

of regulatory personnel; 

(D) Supervise the contract market's chief regulatory officer, who will 

report directly to the ROC; 

(E) Prepare an annual report assessing the contract market's selfregulatory program for the board of directors and the Commission, 

which sets forth the regulatory program's expenses, describes its 

staffing and structure, catalogues disciplinary actions taken during the 

year, and reviews the performance of disciplinary committees and 

panels; 

(F) Recommend changes that would ensure fair, vigorous, and 

effective regulation; and 

(G) Review regulatory proposals and advise the board as to whether 

and how such changes may impact regulation. 

(4) Disciplinary Panels 

All contract markets shall minimize conflicts of interest in their disciplinary 

processes through disciplinary panel composition rules that preclude any 

group or class of industry participants from dominating or exercising 

disproportionate influence on such panels. Contract markets can further 

minimize conflicts of interest by including in all disciplinary panels at least 

77 
one person who would qualify as a public director, as defined in subsections 

(2)(ii) and (2)(iii) above, except in cases limited to decorum, attire, or the 

timely submission of accurate records required for clearing or verifying each 

day's transactions. If contract market rules provide for appeal to the board of 

directors, or to a committee of the board, then that appellate body shall also 

include at least one person who would qualify as a public director as defined 

in subsections (2)(ii) and (2)(iii) above. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 12 requiring DCMs to establish rules to protect market participants from 

abusive practices should also apply to prohibit abusive practices by the DCM itself. 

NFA. Yes. See supra, response to Principle 7, Question 2(b) and (g). CFTC Regulation 

1.64(b) requires that each SRO and RFA maintain rules that ensure that 20% of its 

governing board is comprised of knowledgeable individuals who are not members or 

employees of the SRO or RFA, who are not otherwise performing services for the SRO 

or RFA, and who are not officers, principals or employees of a firm that is a member of 

the SRO or RFA. Additionally, the SRO must be able to demonstrate that the board 

membership fairly represents the diversity of interests at that SRO and is otherwise 

consistent with the composition requirements of CFTC Regulation 1.64. CFTC 

Regulation 1.64(c)(1) mandates that each SRO must have in effect rules ensuring that at 

least one member of each major disciplinary committee or hearing panel is a person who 

is not a member of the SRO where the disciplinary action is being taken against a 

member of the SRO, a member of the governing board, or the member of a major 

disciplinary committee, or if the alleged or adjudicated rule violations involve 

manipulation or attempted manipulation, or conduct which directly results in financial 

harm to a non-member of a contract market. With respect to RFA’s, CFTC Regulation 

1.64(c)(3) requires that RFAs include persons representing membership interests other 

than that of the subject of the disciplinary proceeding being considered on each major 

disciplinary committee or hearing panel thereof. Further, Section 17(k) of the CEA 

provides that the CFTC is authorized to abrogate any rule of an RFA if it appears to the 

CFTC that such abrogation is necessary or appropriate to assure fair dealing by the 

members of the association, to assure a fair representation of its members in the 

administration of its affairs, or effectuate the purposes of the CEA. The CFTC also may 

alter or supplement RFA rules, after notice and hearing. Section 17(c) of the CEA 

provides that the CFTC may suspend the registration of an RFA if it finds that the rules 

thereof do not conform to the requirements of the CFTC. 

CFTC Regulation 1.69 requires that a member of an SRO’s governing board, disciplinary 

committee or oversight panel must abstain from voting on any matter and from 

deliberating on the same where the that member is a named party in interest; is an 

employer, employee, or fellow employee of a named party in interest; is associated with a 

named party in interest through a broker association; has significant, ongoing business 

relationship with a named party in interest; or has a family relationship with the named 

78 
party in interest. Moreover, each member of the SRO’s governing board, disciplinary 

committee, or oversight panel must disclose to the appropriate SRO staff whether such 

relationships exist. The SRO must establish procedures for determining whether such 

member is subject to a conflict restriction in any matter involving a named party in 

interest based on information provided by the member and any other source of 

information reasonably available to the SRO. Under CFTC Regulation 1.69(2), if a 

member of an SRO’s governing board, disciplinary board or oversight board has a direct 

and substantial financial interest in the result of the vote based upon either exchange or 

non-exchange position that could reasonably be affected by the action, such member 

must abstain from deliberations and voting regarding the same. Pursuant to that 

regulation, the member must also disclose such interest to SRO staff and the SRO must 

have appropriate procedures in place to evaluate the conflict. 

Core Principle 15 for DCMs provides that a DCM shall establish and enforce rules to 

minimize conflicts of interest in the decision making process of the DCM, and 

application guidance includes managing such conflicts through the use of a Regulatory 

Oversight Committee of the Board of Directors, as well as maintaining a certain number 

of Public (disinterested) directors. Core Principle 12 requiring DCMs to establish rules to 

protect market participants from abusive practices should also apply to prohibit abusive 

practices by the DCM itself. 

Among other requirements enumerated in Section 17 of the CEA and Part 170, an RFA 

must: 

• Assure fair and equitable representation of the views and interests of all 

association members; 

• Impose dues equitably among all members, and may not be structured in a manner 

constituting a barrier to entry of any person seeking to engage in commodity-related 

business; 

• Establish and maintain a program for the protection of customers, including the 

adoption of rules to protect customers and customer funds and to promote fair dealing 

with the public; 

• Provide a fair and orderly procedure with respect to disciplinary actions brought 

against association members or persons associated with members; 

• Provide a fair and orderly procedure for processing membership applications and 

for affording any person to be denied membership an opportunity to submit evidence 

in response to the grounds for denial; and 

• Demonstrate its capacity to promulgate rules and to conduct proceedings that 

provide a fair, equitable and expeditious procedure, through arbitration or otherwise, 

for the voluntary settlement of a customer’s claim or grievance brought against any 

member or any employee of a member. 

79 
Section 17(a) of the CEA requires that an applicant to become an RFA, as part of the 

application process, must submit to the CFTC a registration statement consistent with 

CFTC Regulation 170.11. CFTC Regulation 170.11 provides that the applicant must file 

with the CFTC a letter requesting registration as an RFA, as well as, the constitution, 

charter or articles of incorporation of the association, the bylaws of the association, any 

other rules, resolutions, or regulations of the association corresponding to the 

aforementioned documents, a detailed description of the association’s organization, 

membership, and rules of procedure, and a detailed statement of the association’s 

capability to comply with the provisions of Section 17 of the CEA and Part 170 of the 

CFTC regulations. Pursuant to CFTC Regulation 170.12, the review of such registration 

statement has been delegated by the Commission to the Director of DCIO. Following 

such review, the Commission may by order grant the registration if the requirements are 

satisfied or, after appropriate notice and opportunity to be heard, deny such registration if 

the application is deficient. 

80 
ENFORCEMENT

PRINCIPLES 8-10 

81 
Principle 8. The regulator should have comprehensive inspection, 

investigation and surveillance powers 

Assessment: Fully Implemented 

1) Can the regulator inspect a regulated entity's business operations, including its books 

and records, without giving prior notice? 

Yes. Registrants are required to make certain filings with and disclose certain 

information to the Commission, and keep a variety of books, records, and other 

information on their futures and options related activities open to inspection by 

Commission representatives, as set forth below. These filings, disclosures, books and 

records are required to be readily available to the Commission and DOJ without 

compulsory process or notice. 

All books and records required to be kept, by either the CEA or the Commission's 

regulations, must be retained for five years and must be "readily accessible" during the 

first two years of that period. See CFTC Regulation 1.31(a), 17 C.F.R. 1.31(a). A copy 

of any such book or record must be furnished to any authorized representative of the 

Commission, upon request and at the expense of the person who is required to keep it. In 

lieu of furnishing a copy, the person may give the representative the original book or 

record for reproduction by the Commission. In either event, the copies or originals must 

be provided promptly.66

The record-keeping obligations of various Commission registrants and other market 

participants can be found in the following provisions of the CEA and the CFTC’s 

regulations: 

• FCMs, IBs, floor brokers and floor traders - Sections 4f and 4g of the CEA, 7 

U.S.C. 6f, 6g, as well as in a number of separate provisions in the Commission's 

regulations, including but not limited to 1.32 (segregated account, daily computation 

and record), 1.33 (monthly and confirmation statements), 1.34 (monthly point 

balance), 1.35 (records of cash commodity, futures and option transactions), 1.36 

(record of securities and property received from customers and options customers), 

1.37 (customer’s account identification record), 1.40 (crop, market information 

letters, reports). 

 

66 CFTC Regulation 1.31(a), 17 C.F.R. 1.31(a). 

82 
• CTAs and CPOs - Section 4n of the CEA, 7 U.S.C. 6n and Commission 

Regulations 4.23 and 4.33. 

• DCMs - Section 5(d)(17) of the CEA, 7 U.S.C. 7(d)(17); and Part 16 of 

Commission Regulations. 

• DTEFs - Section 5a(d)(8), 7 U.S.C. 7a(d)(18). 

• DCOs - Section 5b(c)(2)(J), 7 U.S.C. 7a-1(c)(2)(J). 

• options dealers - Commission Regulation 32.7, 17 C.F.R. 32.7 

• traders holding reportable futures or options positions on Commission-DCMs - 

Section 4i of the CEA, 7 U.S.C. 6i, and Commission Regulations found in Parts 17, 

18 and 19 

• electronic trading facilities – Section 2(h), 7 U.S.C. 2(h) 

The CFTC’s access to records includes nonpublic and public information held by 

individuals and entities regulated by the CFTC (FCMs, floor brokers, floor traders, IBs, 

CTAs, CPOs, associated persons, leverage transaction merchants, agricultural trade 

option merchants and exchanges) including customer information and to information 

about persons that do business with such regulated individuals and entities. 

2) Can the regulator obtain books and records and request data or information from 

regulated entities without judicial action, even in the absence of suspected misconduct, in 

response to: 

a) A particular inquiry?

Yes, pursuant to the Commission’s inspection powers, the Commission can obtain 

information from registered individuals and entities without judicial action, as set forth in 

Sections 5, 5a, 5b, 4g and 4n and Regulations 1.31 and 1.35 and described in response to 

Principle 8, Question 1. In addition, the Commission can obtain information from certain 

exempt commercial markets, as set forth in Section 2(h)(5). 

b) On a routine basis? 

Yes. The CFTC carries out periodic, routine inspections and audits of SROs to ensure 

that those SROs are carrying out their obligations under the Act. The CFTC imposes a 

duty in the first instance on DCMs to establish a continuing affirmative action program to 

secure compliance with, among other things, the CEA and with exchange rules and bylaws. CFTC staff has issued guidance as to how an SRO should conduct its financial and 

sales practice programs. As part of that process, individual firms are inspected. 

Under this system of self regulations, the CFTC does not carry out periodic routine 

inspections of the business operations of intermediaries. Rather, the CFTC conducts 

audits of the sufficiency of the SRO’s compliance programs. 

The CFTC does inspect individual intermediaries on a “for cause” basis and on a 

sampling basis as part of its audits of SRO compliance programs. 

83 
3) Does the regulator have the power to supervise its authorized exchanges and 

regulated trading systems through surveillance?

Yes, CFTC staff carries out periodic routine inspections and audits of authorized 

exchanges and regulated trading systems to ensure that they are carrying out their 

obligations under the CEA. The CFTC imposes on authorized exchanges an obligation to 

establish an affirmative action program to secure compliance with, among other things, 

the CEA and with exchange rules and bylaws. The CFTC staff has issued guidance on 

how an exchange should conduct its financial and sales practice program. As a part of 

that program, individual firms are inspected. 

Under this system of self regulation, the CFTC does not carry out periodic routine 

inspections of the business operations of intermediaries. Instead, the CFTC conducts 

audits of the sufficiency of the exchanges’ compliance programs. 

The CFTC does inspect individual intermediaries on a for-cause basis and on a sampling 

basis as part of its examinations of exchange compliance programs. 

4) Does the regulator have record-keeping and record retention requirements for 

regulated entities? 

Yes. See supra, response to Principle 8, Question 1. 

5) Are regulated entities required: 

a) To maintain records concerning client identity?

Yes. FCMs, IBs and members of a contract market must keep a record which shows for 

each commodity futures or options account the true name and address of the person for 

whom such account is carried or introduced and the principal occupation or business of 

such person. They also must keep a record showing the name of any other person 

guaranteeing such account or exercising any trading control over the account.67

The Patriot Act also requires that certain registrants verify the true identity of their 

customers. See infra, response to Principle 8, Question 5(c). 

b) To maintain records that permit tracing of funds and securities in and out of 

brokerage and bank accounts related to securities transactions? 

Yes. Commission regulations require that there be a complete record, or audit trail, of the 

entry and execution of all orders for transactions in commodity futures and options. For 

example, each FCM, IB, and member of a contract market must keep all records, data, 

and memoranda, including copies of statements of purchase and sale, which have been 

prepared in the course of its business of dealing in commodity futures and options. 

Additionally, an FCM or IB receiving an oral order from a customer must immediately 

prepare a written record of the order including account identification and an order 

 

67 CFTC Regulation 1.37(a)(1), 17 C.F.R. 1.37(a)(1). 

84 
number, and the order must be time-stamped within one minute of its receipt.68 A 

member of a DCM receiving an oral order must do the same, and must also time-stamp 

the order when the report of its execution is made.69 

In addition, an FCM must maintain records for each commodity and option customer and 

foreign futures or options customer showing any customer funds carried with the FCM 

and a detailed accounting of all charges and credits to the customer account.70 These 

comprehensive record creation, retention and reporting requirements ensure that all 

transactions in futures and options can be reliably documented and reconstructed, and are 

readily available to investigating authorities. The Commission’s authority to obtain all the 

foregoing records is the same as set forth in response to Principle 8, Question 1. 

c) To put in place measures to minimize potential money laundering? 

Yes. At present, in the futures industry, most of the anti-money laundering (“AML”) 

requirements (i.e., anti-money laundering program, suspicious activity reporting, 

customer identification program, and due diligence for foreign correspondent and private 

banking accounts) apply to CFTC-registered FCMs and IBs. FCMs are equivalent to 

brokers and dealers in the securities industry. IBs are similar to FCMs in that they both 

solicit and accept orders for the purchase or sale of any commodity for future delivery on 

U.S. futures exchanges. They are distinguishable from FCMs in that, unlike FCMs, IBs 

are not permitted to accept money or other property to margin, guarantee, or secure any 

trades or contracts. 

U.S. financial institutions, including FCMs and IBs, are required to establish AML 

programs. 31 U.S.C. 5318(h)(1). A financial institution regulated by an SRO shall be 

deemed to satisfy the requirements of 31 U.S.C. 5318(h)(1) if it implements and 

maintains an AML program that complies with the rules of its SRO. 31 C.F.R. 

103.120(c). FCMs and IBs are supervised by their applicable SROs, including the NFA. 

NFA’s AML rule is set forth in NFA Compliance Rule 2-9(c). The Rule requires FCMs 

and IBs to establish written AML programs. An AML Program must be in writing and 

must include: the development of internal policies, procedures, and controls; the 

designation of a compliance officer; an ongoing employee training program; and an 

independent audit function to test programs. NFA also has issued an Interpretive Notice, 

which provides guidance for FCMs and IBs in complying with the AML rule. All of 

NFA’s Compliance rules, including NFA’s AML rule, can be found at the following link: 

http://www.nfa.futures.org/nfaManual/complianceRules.asp. 

CFTC Regulation 42.2, 7 U.S.C. 42.2, sets forth the CFTC’s AML requirements. 

Regulation 42.2 requires FCMs and IBs to comply with applicable provisions of the Bank 

Secrecy Act (“BSA”), including, the customer identification program (“CIP”) rule that 

was jointly issued by the CFTC and Treasury (see 31 C.F.R. 103.123). FCMs and IBs 

 

68 CFTC Regulation 1.35(a-1)(1), 17 C.F.R. 1.35(a-1)(1). 

69 CFTC Regulations 1.35(a-1)(2) and (4), 17 C.F.R. 1.35(a-1)(2) and (4). 70 CFTC Regulations 1.33, 1.35(a), and (b), 17 C.F.R. 1.35(a) and (b). 

85 
are required to implement a written CIP as part of their required AML programs. The 

objective of the CIP procedures is to enable each FCM and IB to form a reasonable belief 

that it knows the true identity of each customer. 

Treasury requires covered financial institutions, including FCMs and IBs, to establish due 

diligence programs that include appropriate, specific, risk-based and, where necessary, 

enhanced policies, procedures and controls that are reasonably designed to detect and 

report, on an ongoing basis, any known or suspected money laundering activity 

conducted through or involving any correspondent account established, maintained, 

administered, or managed by such covered financial institution in the United States for a 

foreign financial institution.71

Treasury also requires covered financial institutions, including FCMs and IBs, to 

maintain due diligence programs that are reasonably designed to detect and report known 

or suspected money laundering or suspicious activity conducted through or involving any 

private banking account that is established, maintained, administered, or managed in the 

United States by such financial institution for a non-U.S. person.72 Further, FCMs and 

IBs are required to file suspicious activity reports.73 FCMs and IBs are also required to 

file a report concerning a transaction (or series of related transactions) in excess of 

$10,000 in currency.74

FCMs and IBs are also subject to CFTC and NFA customer identification rules that have 

the effect of minimizing potential money laundering. 

CFTC Regulation 1.37 requires every FCM and IB to obtain the true name and address of 

the person for whom an account is carried by the FCM or introduced by the IB. The 

FCM and IB additionally must obtain the principal occupation or business of such person 

and the name of any person that guarantees or exercises any trading control with regard 

to such account. If an account becomes reportable, certain additional information is 

required to be obtained and filed with the Commission. See, e.g., CFTC Regulation 

17.01 (requires the reporting of the identity of the owner of the account and its 

registration; the legal organization, and principal business/occupation of the owner of the 

account; the name and location of all persons having a ten percent or more financial 

interest in the account; and the names and addresses of all persons with trading authority, 

if there are five or fewer such persons). See also CFTC Regulation 18.04 (the 

Commission may require the reporting of the name, address, registration and principal 

business and occupation of the reporting trader; the name and address of each person 

whose trading is controlled by the reporting trader; the name, address and business phone 

of each person who controls the trading of the reporting trader; and the names and 

locations of guarantors and persons with a financial interest of 10 percent or more in the 

reporting trader or its accounts). 

 

71 31 C.F.R. 103.176. 

72 31 C.F.R. 103.178. 

73 31 C.F.R. 103.17. 

74 31 C.F.R. 103.22. 

86 
NFA has also adopted AML and know-your-customer (“KYC”) rules that apply to 

members. NFA’s KYC requirements are set forth in NFA Compliance Rule 2-30. This 

Rule requires NFA members to obtain the true name, address, and principal occupation or 

business of each customer that is a natural person; the customer’s current estimated 

annual income and net worth; age; and an indication of the customer's previous 

investment and futures trading experience. 

Finally, as discussed in response to Principle 8, Question 4, the CEA, CFTC regulations 

and NFA rules also impose comprehensive record creation, retention and reporting 

requirements to ensure that all transactions in futures and options can be reliably 

documented and reconstructed, and are readily available to investigating authorities. 

6) Does the regulator have the authority to determine or have access to the identity of all 

customers of regulated entities? 

Yes. As indicated in response to Principle 8, Question 5(a), registrants must keep a 

record of the identity of the owners, controllers and principles of accounts carried by or 

introduced to or by them. Principals of registered intermediaries, defined as each person 

who is a holder or beneficial owner of ten percent or more of the outstanding shares of 

any class of stock or has contributed ten percent or more of the capital of the entity, must 

provide the Commission with identifying information.75 Moreover, CTAs and CPOs 

must provide the Commission with names and addresses of all partners, officers, 

directors, and persons performing similar functions.76 The Commission’s authority to 

obtain all the foregoing records is the same as set forth in the response to Principle 8, 

Question 1. 

The Patriot Act requires Treasury to issue rules setting forth minimum standards for 

financial institutions (including futures industry registrants) to identify and verify the 

identity of customers. Treasury and the CFTC have jointly issued final rules that require 

FCMs and IBs to have customer identification programs (CIPs) for identifying and 

verifying the identity of customers. An FCM’s or IB’s procedures must enable it to form 

a reasonable belief that it knows the true identity of each customer. 

The CIP rules permit FCMs and IBs to rely on other financial institutions to perform 

identification/verification functions. However, the reliance must be reasonable under the 

circumstances, the relied-upon financial institution must be subject to an AML program 

rule under the BSA and be regulated by a Federal functional regulator, and the financial 

institution must enter into a contract requiring it to certify annually to the FCM or IB that 

it has implemented an AML program and that it will perform specified requirements of 

the CIP. Pursuant to a staff No-Action Letter issued on March 14, 2005, FCMs and IBs 

may rely upon certain CTAs to perform procedures of the FCM's or IB's CIP even though 

such CTAs are not yet subject to an AML program rule. 

 

75 Commission Regulation 3.10, 17 C.F.R. 3.10. 

76 Section 4n of the CEA, 7 U.S.C. 6n. 

87 
7) Where a regulator out-sources inspection or other regulatory enforcement authority to 

an SRO or a third party: 

a) Does the regulator supervise the outsourced functions of third parties? 

Yes. The CFTC’s supervisory approach to outsourcing is addressed in the context of (1) 

reviews of an exchange’s application for initial designation as a “contract market” and (2) 

ongoing supervision, including rule enforcement reviews, which assess a designated 

market’s ongoing compliance with the initial Designation Criteria and “core principles” 

that govern the operation and conduct of such a regulated market. 

Whether the matter involves a delegation of core functions or a contracting for services 

(outsourcing), the staff inquiry focuses on determining whether the delegated functions or 

contracted services will enable the exchange to remain in compliance with the CEA’s 

requirements. 

Moreover, the registered entity must have a sufficient degree of control over the persons 

under contract because it remains the registered entity’s responsibility to ensure that its 

obligations under the Act are met. 

The location of the service provider, affiliate status, use of subcontractors and registered 

status of the service provider are all material considerations. As each “delegation” or 

“outsourcing” presents issues of fact finding, no single aspect is determinative. Staff 

inquiry would be guided by the factors outlined in 1.1. Note in particular that with regard 

to use of affiliates, among others, “the person under contract must have no conflict of 

interest.” 

 

Background Note. As an initial matter, it is important to understand the distinction 

drawn by the CFTC between “outsourcing” and a “delegation of functions.” 

The CFTC distinguishes between “outsourcing” and a “delegation” of functions. 

Section 5c (b) of the CEA provides that: 

(1) In general - a contract market or derivatives execution facility 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 contract market or DTEF that delegates a function under 

paragraph (1) shall remain responsible for carrying out the function.” 

In the context of a 2001 rulemaking, the NFA asked the CFTC to clarify a contract 

market’s ability to delegate functions under the CEA’s core principles and to limit 

entities acceptable for outsourcing of functions to registered futures associations and 

registered entities. The CFTC’s response outlined its approach to the performance of 

88 
exchange functions by third parties by distinguishing between a delegation of function 

and outsourcing:77

Section 5c(b) of the CEA, however, limits only “delegations” of functions to RFAs and to 

registered entities; it does not restrict “outsourcing” of specified activities on a contract 

basis. 

The Commission has long-recognized the ability of contact markets to meet their selfregulatory obligations by using persons under contract to perform specified duties. The 

Commission has conditioned the use of outside contractors to perform duties in 

connection with self-regulatory functions upon the contract market “maintaining a 

sufficient degree of control over the persons under contract” and the person under 

contract having no conflict of interest.” The Commission has further provided that, when 

using contractors to fulfill a self-regulatory function, it is the exchange’s responsibility to 

ensure that its obligations under the CEA are met.78 Accordingly, DCMs have contracted 

for the performance of various services related to their operations and self-regulatory 

responsibilities, including compliance with various core principles. For example, contract 

markets or DTEFs reasonably may be expected to outsource to various contractors 

functions relating to operating their trading platforms or to disseminating information 

required to be made public. 

“In contrast to such contracting arrangements, a delegation confers upon another the 

authority to act in the delegating entity’s name. The distinction between delegation of 

authority and contracting for services is particularly well-illustrated in matters related to 

member discipline and market surveillance. A market that delegates these functions 

empowers the delegatee to take appropriate remedial actions, including the sanctioning of 

members or market participants for rule violations. In contrast, a market may contract 

with an entity to conduct trading surveillance and to investigate the facts surrounding rule 

infractions.” 

“Unlike a delegatee, a contractor would not have the authority to decide on behalf of the 

delegating entity whether an infraction had occurred or to impose remedial sanctions. 

These decisional functions can be exercised only by delegation of that authority to 

registered entities or a registered futures association, as Congress has provided.” 

Further, although section 5c(b)(2) of the CEA provides that the Commission would have 

oversight authority over a delegatee because it is a registered entity, the contract market 

or DTEF that delegates responsibilities under the CEA “also “shall remain responsible for 

carrying out the function.” 

“Therefore, regardless of whether a registered entity has delegated functions or 

contracted for services, the entity must assure itself that the delegated functions or 

contracted services will enable it to remain in compliance with the [CEA]’s 

requirements.” 

 

77 66 Federal Register 42256, 42266 (August 10, 2001). 

78 Comm. Fut. L. Rep. (CCH) ¶6430, CFTC (May 13, 1975) 

89 
“Moreover, the registered entity must have a sufficient degree of control over the persons 

under contract because it remains the registered entity’s responsibility to ensure that its 

obligations under the [CEA] are met.” 

b) Does the regulator have full access to information maintained or obtained by the 

third parties? 

Yes. The CFTC would have access whether the function is characterized as a 

“delegation” or “outsourcing.” If an SRO “delegated” a function, the CFTC would have 

regulatory power with respect to both the SRO and the “registered entity” to whom the 

SRO delegated a function. If an SRO “outsourced” a function, the CFTC would have 

power over the SRO. 

c) Can the regulator cause changes/improvements to be made in the third parties' 

processes?

Yes, through exercise of its powers over the registered entities. CFTC staff conducts 

ongoing supervision that addresses the continuing compliance of DCMs and DTEFs with 

core principles. 

Note that whether there may be a concern with respect to access to information or a need 

to “cause changes or improvements” in the third parties’ processes CFTC staff requires a 

written regulatory services agreement “for purposes of determining compliance with 

Designation Criteria and core principles.” See Staff Memorandum dated February 10, 

2004, recommending designation of HedgeStreet, at p. 36. Among other things, Staff 

inquires into the ability of the exchange to monitor and supervise the service provider (as 

required by the CFTC) and as part of this process would raise any issues arising from 

such services agreement. 

d) Are these third parties subject to disclosure and confidentiality requirements that 

are no less stringent than those applicable to the regulator? 

Yes. Any delegation can only be made to another registered entity. An SRO that 

“outsourced” a function remains responsible for the exercise of all SRO responsibilities 

and, to the extent the matter involves a confidential matter, would be required to ensure 

that the entity carrying out the outsourced function maintains any required 

confidentiality. 

90 
Principle 9. The regulator should have comprehensive enforcement powers 

Assessment: Fully Implemented 

1) Does the regulator or other competent authority within the jurisdiction have the 

investigative and enforcement power to enforce compliance with the laws and regulations 

relating to securities activities? 

Yes. The CFTC has comprehensive investigative and enforcement powers. The CFTC 

enforces compliance with the laws and regulations relating to the futures industry by 

conducting investigations and bringing enforcement actions where appropriate. The 

CFTC has broad authority to investigate actual or potential violations of the federal 

commodities laws and to determine the scope of its investigations and the persons and 

entities subject to investigation. 

Section 8(a)(1) authorizes the Commission to make such investigations as it deems 

necessary to ascertain the facts regarding the operations of boards of trade and other 

persons subject to the provisions of this chapter. 7 U.S.C. 2. Further, Section 6(c) of the 

CEA, 7 U.S.C. 15, provides: 

For the purpose of securing effective enforcement of the provisions of this 

chapter, for the purpose of any investigation or proceeding under this chapter, ... 

any member of the Commission or any Administrative Law Judge or other officer 

designated by the Commission ... 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. 

Finally, Part 11 of the Commission’s Rules Relating to Investigations set forth the rules 

applicable to investigatory proceedings conducted by the Commission to determine 

whether there have been violations of the CEA or the Commission’s regulations. 

Regulation 11.2 sets out the authority of the DOE to carry out Section 6(c) and conduct 

the investigations, which includes obtaining evidence through voluntary statements and 

submissions, through exercise of inspection powers over registrants, and through the 

issuance of subpoenas.79 In addition, Part 11 provides witnesses certain procedural 

protections, such as the right to have a lawyer present when testifying and to review the 

Commission’s formal order of investigation. A witness can also assert his or her Fifth 

Amendment protection against self-incrimination. CFTC investigations are non-public. 

 

79 17 U.S.C. 11.2. 

91 
Where the investigation indicates such a violation, the Director of DOE shall recommend 

an appropriate civil enforcement action, either administrative or in federal court. See

infra, response to Principle 9, Question 2. 

2) Does the regulator or other competent authority within the jurisdiction have the 

following powers: 

a) Power to seek orders, to refer matters for civil proceedings or to take other action to 

ensure compliance with regulatory, administrative, and investigative powers? 

b) Power to impose administrative sanctions? 

c) Power to initiate or to refer matters for criminal prosecution? 

d) Power to order the suspension of trading in securities or to take other appropriate 

actions? 

Yes, to all of the above. Under Sections 6c, 6(c) and 6(d) of the CEA, the CFTC has 

the authority to file a civil enforcement action in federal district court or an 

administrative enforcement proceeding in an administrative tribunal to ensure 

compliance with the CEA. 

The relief available in federal district court is composed of the remedies that Congress 

expressly authorized federal courts to grant under Section 6c of the CEA and the 

federal courts' general equitable powers. Thus, the Commission's federal court 

enforcement actions may seek any or all of the following types of relief when 

appropriate: 

• Preliminary and permanent injunctions barring future violations of the CEA 

and CFTC regulations and enforcing compliance with the CEA and regulations; 

• An ex parte order (i) prohibiting any person from destroying, altering or 

disposing of, or refusing to permit authorized representatives of the Commission to 

inspect, when and as requested, any books and records or other documents, (ii) 

prohibiting any person from withdrawing, transferring, removing, dissipating, or 

disposing of any funds, assets, or other property, or (iii) appointing a temporary 

receiver to administer such restraining order; 

• Imposition of civil monetary penalties; 

• Appointment of a permanent receiver to administer a defendant's estate; 

• An order directing that a defendant disgorge ill-gotten gains; 

• An order directing that a defendant make restitution to customers; 

• An order rescinding all contracts entered into by a defendant with any 

customer; 

• An order directing that the defendant make an accounting (in a form and by an 

individual or firm approved by the Commission and the Court) of the defendant's 

estate; and 

• An award of pre-judgment interest on any sums to be disgorged or paid in 

restitution. 

92 
All complaints initiating an administrative action pursuant to Sections 6(c) and 6(d) of 

the CEA are conducted under the Commission's Rules of Practice contained in Part 10 of 

the Commission's regulations. The following sanctions are available in administrative 

actions and all administrative complaints notify respondents of these possible sanctions 

that can be imposed if liability is found: 

• An order prohibiting a respondent from trading on or subject to the rules of any 

contract market and requiring all contract markets to refuse such person all trading 

privileges thereon for such period as may be specified in the order; 

• An order suspending (for a period of not more than six months), revoking or 

restricting a respondent's registration with the Commission; 

• An order assessing civil monetary penalties against a respondent, not to exceed 

$140,000 per violation ($1 million for manipulation; 

• An order directing that a respondent make restitution to customers of damages 

proximately caused by the respondent's violations; and 

• An order directing a respondent to cease and desist from violating the CEA or 

CFTC regulations in an administrative action brought pursuant to Section 6(d). 

In addition to other substantive violations of the CEA, as set forth in Section 6(c), if an 

individual or firm named in a subpoena refuses to comply with its terms, the 

Commission may apply to a federal district court to enforce the subpoena. The 

Commission has delegated its authority to file a subpoena enforcement action to the 

Director of DOE. 

In pertinent part, Section 6(c) of the CEA provides as follows:80

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 . . . 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 . . . officer designated by the Commission, there to produce records, if 

so ordered, or to give testimony touching the matter under investigation or in 

question. 

If the subpoenaed party refuses to comply with the district court's order enforcing the 

subpoena, the court can punish the party for contempt. 

The CFTC has the power to refer matters for criminal prosecution to DOJ, but cannot 

independently initiate such actions. Alleged criminal violations of the CEA pursuant to 

Section 9 of the CEA or violations of other federal laws that involve commodity futures 

trading are frequently referred to DOJ for prosecution. 

 

80 7 U.S.C.A. 15. 

93 
3) Does the regulator or other competent authority have the investigative and enforcement 

power to require from any persons involved in relevant conduct or who may have 

information relevant to a regulatory or enforcement inquiry/investigation: 

a) Data? 

b) Information? 

c) Documents? 

d) Records? 

e) Statements or testimony? 

Yes, to all of the above. Through its inspection power, the CFTC can obtain information 

from registered individuals and entities, large traders and market members, without 

judicial action. Sections 4g and 4n of the CEA provide the CFTC with the authority to 

examine all the books and records of registered individuals and entities. Pursuant to 

section 5(2) of the CEA, all records required to be maintained by futures exchanges are 

open at all times to inspection by any representative of the CFTC or DOJ. See response 

to Principle 8, Question 1. 

The CFTC’s access to records includes nonpublic and public information held by 

individuals and entities regulated by the CFTC (FCMs, floor brokers, floor traders, IBs, 

CTAs, CPOs, associated persons, leverage transaction merchants, agricultural trade 

option merchants and exchanges) including customer information and to information 

about persons that do business with such regulated individuals and entities. 

In addition to its inspection powers, the CFTC has broad subpoena powers and may 

obtain information from any individual or entity, whether registered or not, in connection 

with possible violations of futures laws. Section 6(c) of the CEA authorizes the CFTC to 

subpoena the production of documentary and testimonial evidence "from any place in the 

United States, any State, or any foreign country or jurisdiction.” 

4) Can private persons seek their own remedies for misconduct relating to the securities 

laws? 

Yes. Section 22 of the CEA, 7 U.S.C. 25, permits private rights of action under certain 

circumstances. Section 22(a) permits, under certain circumstances, private damage 

actions against anyone other than a SRO who violates, or wilfully aids and abets a 

violation, of the CEA. Section 22(b) establishes, under certain circumstances, a private 

damage remedy against SROs and their officials, which in bad faith refuse to enforce 

their own rules, or enforce their own rules in violation of the CEA, and cause monetary 

loss to the plaintiff. 

Section 14 of the CEA, 7 U.S.C. 18, permits anyone complaining of a violation of the 

CEA or the CFTC’s rules to apply to the CFTC for an order awarding damages caused by 

the violation. These so-called reparations procedures offer a variety of methods to 

94 
resolve claims, including a voluntary procedure based on the submission of written 

documents, a summary procedure for claims of less than $30,000 where evidence is 

submitted in writing and an oral hearing may be held by telephone and a formal 

procedure before an administrative law judge. See CFTC regulations relating to 

Reparations procedures in 17 C.F.R. 12. 

The CFTC also requires each DCM to adopt rules which provide for the fair and 

equitable procedure through arbitration or otherwise for the settlement of customer’s 

claims and grievances against any member or employee of the contract market.81 The 

use by customers of the dispute resolution mechanism established by contract markets

voluntary.

 is 

 

82 

Section 17(a)(10) of the CEA requires that any RFA 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. 

5) Where an authority other than the regulator must take enforcement or other corrective 

action, can the regulator share information obtained through its regulatory or investigation 

activities with that authority? 

Yes. Sections 8(a)(2) and 12(a), 7 U.S.C. 12, 16, specifically authorize the Commission 

to request the assistance of and cooperate with other state and federal agencies, including 

DOJ, in the conduct of its investigations. 

6) Where the regulator is unable to obtain information in its jurisdiction necessary to an 

investigation, is there another authority that can obtain the information? 

To the extent the information is available from another federal or state agency, such as 

a state securities regulator, the SEC or FERC, the CFTC may obtain this information 

by seeking access to the public and non public information in that agency’s files. The 

CFTC cooperates with other domestic enforcement authorities through explicit 

statutory authorization, formal MOUs and other informal arrangements to combat 

fraud and other illegal practices that could harm customers or threaten market 

integrity. 

7) If yes, can that authority share the information with the regulator for the regulator's 

use in investigations and proceedings? 

The only limitation on the sharing of information is in the context of information that is 

obtained by DOJ in a criminal investigation through the grand jury process. Under the 

Federal Rules of Criminal Procedure, DOJ cannot share this information with the CFTC, 

though it can share any information obtained through means other than the grand jury. 

81 17 C.F.R. 180. 

82 17 C.F.R. 180.3. 

95 
Principle 10. The regulatory system should ensure an effective and credible 

use of inspection, investigation, surveillance and enforcement powers and 

implementation of an effective compliance program 

Assessment: Fully Implemented 

1) Is there an effective system of inspection in place whereby the regulator carries out 

inspections: 

a) On a routine periodic basis?

Yes. 

Market Surveillance Program. The CFTC conducts a market surveillance program to 

detect and prevent price manipulation in futures and option markets. The principal goals 

of market surveillance are to spot adverse situations in these markets and to pursue 

appropriate remedial actions, in coordination with the involved exchange, to avoid 

market disruption. To accomplish these objectives, the market surveillance staff must 

determine when a trader’s position in a futures market becomes so large relative to other 

market factors that the trader is capable of causing prices to diverge from legitimate 

supply and demand conditions. The surveillance staff routinely collects and analyzes 

daily data concerning overall supply and demand conditions in the cash market, cash and 

future prices and price relationships, and the sizes of hedgers’ and speculators’ positions 

in the futures market. 

At the heart of the CFTC’s market surveillance system (and also as an important 

component of its financial surveillance system) is the large-trader reporting system. In 

order to identify potentially disruptive futures positions, Staff uses its reporting system to 

collect and analyze data on large trader positions in all commodities. Reportable 

positions—daily reports of futures positions above specified levels set for reporting 

purposes—are obtained from FCMs, clearing members and foreign brokers. Exchanges 

also provide the daily positions that each clearing member is carrying in each futures and 

options contract on each underlying commodity. 

Since traders frequently carry futures positions through more than one FCM and since 

individuals sometimes control, or have a financial interest in, more than one account, the 

CFTC routinely collects information that enables its surveillance staff to aggregate 

related accounts. FCMs must file a form which identifies each new account with 

reportable positions for each futures contract. In addition, if a trader’s position reaches a 

reportable level, the trader may be required to file a more detailed identification report to 

identify accounts and reveal any relationships that may exist with other accounts or 

traders. 

96 
An additional monitoring mechanism allows surveillance economists to investigate 

further the positions of large traders by instituting a “special call,” which requires a trader 

to report its futures and option positions with all brokerage firms, or its cash market or 

OTC positions. The trader is required to give information on its trading and delivery 

activity. This mechanism may be used when a trader is using too many brokers to be 

easily monitored through required reports. Special calls also may be used to examine cash 

market positions and commitments in relation to futures market positions to access the 

economic rationale of the trader’s overall position. The CFTC thus has the authority and 

techniques to investigate and discover the identities of the true account owners and 

controllers of large positions, whether domestic or foreign. A salient example of the use 

of special call authority is the September 2008 Staff Report on Commodity Swap Dealers 

and Index Traders with Commission Recommendations, available on the CFTC’s Web 

site. CFTC staff undertook a survey of swap dealers and commodity index funds to 

better characterize their activity and understand their potential to influence the futures 

markets. This type of a compelled survey relating to off-exchange activity is 

unprecedented, but the growth and evolution in futures market participation and growing 

public concern regarding off-exchange activity supported the need for this extraordinary 

regulatory inquiry. Special call authority was also invoked in early 2008 to start 

receiving daily information on large positions and transactions from the Henry Hub 

Natural Gas Swap traded on the ICE ECM as “NG Fin, FP for LD1”. This action was 

taken since this contract appears to be part of a single market with the NYMEX-traded 

Henry Hub Natural Gas Futures Contracts. Needless to say, the vast majority of the 

special calls are much more targeted to particular traders and time periods. 

It should be noted that the market surveillance process is not conducted exclusively at the 

CFTC. Contract markets conduct and maintain their own market surveillance programs 

as part of their self-regulatory responsibilities. 

Rule Enforcement Reviews of DCMs. The Commission’s regulatory scheme is based 

upon the assumption of self-regulatory responsibilities by the DCMs and continuing 

oversight by the Commission of the exercise of those responsibilities. 

In addition to monitoring exchange operations on an ongoing basis through compliance 

reporting and ad hoc “for cause” inquiries, the Commission’s staff periodically reviews 

the programs and procedures adopted by each DCM to ensure compliance with the 

relevant core principles and to assess the effectiveness of those rules and procedures. 

The operational integrity of exchanges is addressed through the CFTC’s periodic RERs 

that broadly address market surveillance, trade practice surveillance and disciplinary 

programs. The DMO’s Market Compliance Section conducts regular reviews of each 

DCM’s ongoing compliance with core principles through the self-regulatory programs 

operated by the exchange in order to enforce its rules, prevent market manipulation and 

customer and market abuses, and ensure the recording and safe storage of trade 

information. 

Periodic RERs (about every two to three years) normally examine a DCM’s market 

surveillance program for compliance with Core Principle 4, Monitoring of Trading, and 

97 
Core Principle 5, Position Limitations or Accountability. On some occasions, these two 

types of RERs may be combined in a single RER. Market Compliance can also conduct 

horizontal RERs of the compliance of multiple exchanges in regard to particular core 

principles. 

In conducting an RER, Staff examines trading and compliance activities at the exchange 

in question over an extended time period selected by DMO, typically the twelve months 

immediately preceding the start of the review. Staff conducts extensive review and 

analysis of documents and systems used by the exchange in carrying out its selfregulatory responsibilities; interview compliance officials and staff of the exchange; and 

prepare a detailed written report of their findings. In nearly all cases, the RER report is 

made available to the public and posted on http://www.cftc.gov. 

On a daily basis, staff in DMO’s Market Compliance Section reviews details of 

transactions at each exchange by using the Commission’s automated surveillance system. 

The Commission is currently in the process of significantly upgrading this system to 

enhance the Commission’s ability to detect trade practice violations, including wash 

trading and trading ahead. Additionally, DMO staff periodically observes trading activity 

on the floor of each exchange (for the exchanges that still have open outcry trading) and 

discusses potential issues of concern with compliance staff at the exchange. 

b) Based upon a risk assessment?

See below. 

c) Based upon a complaint associated with an inspected entity? 

With respect to (a)-(c), the Commission itself does not conduct routine on-site direct 

inspections of intermediaries, but it does conduct such examinations for cause or to test 

the quality of the DSRO’s work. With respect to testing the work performed by DSROs, 

Staff conducts risk-based reviews that focus on five areas of an SRO’s supervisory 

program: financial stability, customer protection, risk management, market moves and 

operational capabilities. 

Under the CEA, SROs also are required to develop programs to assess whether FCMs 

and IBs are in compliance with exchange and Commission minimum financial and 

related reporting requirements. Financial and Segregation Interpretations No. 4-1 and 4-

2, issued by Commission staff, establish minimum components for a DSRO’s financial 

surveillance program. These interpretations provide that a DSRO should conduct an 

examination of each FCM on a basis no less frequently than once every 9 to 15 months. 

Each examination must assess the FCM’s compliance with minimum capital and 

customer funds protection requirements. 

Under Regulation 1.52, SROs with FCM members in common may establish joint audit 

plans, and pursuant to such plans delegate the responsibility to audit and conduct 

financial surveillance of an FCM to one of the SROs as the DSRO. With respect to an 

FCM that is not a member of any exchange, NFA is the FCM’s DSRO. The Commission 

requires DSROs to ensure that each FCM is subject to an on-site examination within nine 

98 
to 18 months of the “as of” date of the previous examination by the DSRO. The Joint 

Audit Committee (JAC), which consists of representatives of the DSROs that are 

signatories to a joint audit plan under Regulation 1.52, has established uniform 

procedures for such on-site examinations. 

The Commission has issued guidance that emphasizes DSRO examination of the internal 

controls of FCMs, noting that the DSRO’s assessment of such internal controls must 

include a review and evaluation of the procedures followed by an FCM in evaluating and 

minimizing the financial risk to the FCM and its customers. Such assessments must take 

into account the types, size and concentration of customer, non-customer and proprietary 

transactions, positions and commitments the FCM carries, on exchange and offexchange, both domestic and foreign. See Interpretative Release 4-2 (August 20, 1999). 

2) Is there an automatic system which identifies unusual transactions on authorized 

exchanges and regulated trading systems?

Yes. 

Core Principle 2 of Section 5(d) of the CEA requires a DCM to monitor and enforce 

compliance with 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. 

Core Principle 4 of Section 5(d) of the CEA requires the DCM to monitor trading to 

prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement 

process. 

Core Principle 5 of Section 5(d) of the CEA requires the DCM 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 

levels for speculators, where necessary and appropriate. 

Core Principle 12 of Section 5(d) of the CEA requires a DCM to establish and enforce 

rules to protect market participants from abusive practices committed by any party acting 

as an agent for the participants. 

Pursuant to the acceptable practices set forth in Appendix B to Part 38 of the 

Commission’s regulations, an acceptable market surveillance program should provide for 

the regular collection and evaluation of market data to determine whether markets are 

responding to the forces of supply and demand. An exchange also should have routine 

access to the positions and trading of its market participants. To diminish potential 

problems that may arise from excessively large speculative positions, an exchange may 

need to establish speculative limits for some commodities. Rules establishing such limits 

may provide for hedge or other exemptions, and the limits may be set differently for each 

contract, delivery month, or period when in effect. Spot month limits should be adopted 

for markets based on commodities having limited deliverable supplies or where necessary 

to minimize a market’s susceptibility to manipulation or price distortion. 

99 
Position limits may not be necessary for markets where the threat of excessive 

speculation or manipulation is very low. For such contracts, such as financial 

instruments, an exchange may provide for position accountability in lieu of position 

limits. An exchange should have an automated large trader reporting system that is used 

daily to enforce compliance with position limit rules. 

Pursuant to Appendix B to Part 38 of the Commission’s regulations, a contract market’s 

trade practice surveillance program should have the arrangements, resources, and 

authority necessary to perform effective rule enforcement. The arrangements and 

resources attendant to the program should facilitate the direct supervision of the contract 

market, including analysis of relevant data. 

An acceptable trade practice surveillance program should have systems that maintain all 

data reflecting the details of each transaction executed on the contract month. In this 

regard, the program should include routine electronic analysis of these data to detect 

potential trading violations. The program also should provide for appropriate and 

thorough investigation of all potential trading violations brought to the contract market’s 

attention, including member and Commission referrals and customer complaints. In 

addition, the program should have the authority to discipline, suspend, or terminate the 

activities of members or market participants pursuant to clear and fair standards. 

All exchanges have a trade practice surveillance system that is designed to detect 

potential trade practice violations. 

3) Can the regulator demonstrate adequate mechanisms and procedures to detect and 

investigate: 

a) Market and/or price manipulation?

Yes. The exchanges are obliged to detect and deter unlawful conduct and use a 

combination of direct surveillance, inspection, reporting, product design requirements, 

position limits, settlement price rules or market halts complemented by vigorous 

enforcement of their rules. The CFTC conducts oversight of the exchanges’ programs to 

ensure effectiveness. In addition to the exchange surveillance program, the CFTC 

independently conducts an extensive market surveillance program, utilizing large trader 

reports. DOE also aggressively pursues leads to detect and deter violations, including 

manipulation. See infra, response to Principle 26, Question 1. 

With respect to a specific inquiry, the CFTC has power to investigate possible violations 

of the CEA, as discussed in Response to Principle 9 Question 1. In particular, the 

Division of Enforcement employs its full panoply of investigative powers to examine 

conduct that affects the integrity of the commodity futures markets, including price 

manipulation, cornering, communication of false information that tend to affect 

commodity prices (Sections 6(c), 6(d) and 9(a)(2) of the CEA): position limit violations 

(Section 4a(e) of the CEA); and enumerated trade practice violations, such as wash 

trades, accommodation trades and fictitious sales (Section 4c(a) of the CEA). To the 

100 
extent the investigation indicates a violation of the CEA, the Commission takes 

appropriate enforcement action as described in response to Question 2 in Principle 9. 

In addition, the Division is empowered to investigate violations of “core principles” 

relating to registered entities (e.g. exchanges and clearing organizations). 

b) Insider trading? 

The CEA does not generally prohibit insider trading in the commodity futures and 

options markets. The premise has been that insider trading has limited applicability to 

futures trading because it would defeat the market’s basic economic function of allowing 

traders to hedge the risks of their commercial enterprises.83 The price discovery function 

of futures markets depends on traders bringing information to the market through their 

trading. From an economic perspective, regulation has not focused on the source or 

quality of the information; rather, rational traders have been presumed to trade in their 

best economic interests. However, the knowing communication of false or misleading 

information that tends to affect commodity prices is a violation of the CEA. (7 U.S.C. 

13(a)(2)). The exception is for information obtained by employees of the CFTC and 

registered entities. Section 9(e) of the CEA provides an explicit prohibition against 

insider trading for certain persons, making it a felony: (1) for any person who is an 

employee, member of the governing board, or member of any committee of a board of 

trade, registered entity, or registered futures association, in violation of a regulation 

issued by the Commission, 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, or willfully and knowingly disclose for any purpose 

inconsistent with the performance of such person’s official duties as an employee or 

member, any material nonpublic information obtained through special access related to 

the performance of such duties, and (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 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, registered entity, 

or registered futures association. 

It should be noted that the CEA’s prohibition of insider trading applies to Commission 

employees (7 U.S.C. 13(c) and (d)) and employees of self regulatory organizations, as 

well as the SRO’s board and committee members (7 U.S.C. 13(e); Reg. 1.59). There is 

no explicit insider trading prohibition that applies to others in the futures industry, though 

some situations might allow for charges under the CEA’s general fraud authority (e.g., a 

broker trading ahead of an executable customer order). 

 

83 Testimony of Commission Chairman Phillip McBride before the SEC/CFTC Jurisdictional Issues and Oversight: 

Hearings on H.R. 5447, H.R. 5515 and H.R. 6156 Before the Subcommittee on Telecommunications, Consumer 

Protection and Finance of the House Committee on Energy and Commerce, 97th Cong., 2nd Sess,. Part 1 at 21 

(1982); A Study of the Nature, Extent and Effects of Futures Trading by Persons Possessing Material Non-Public 

Information (Sept. 1986). See also, Markham, Jerry W., “Front-Running” – Insider Trading Under the CEA,” 38 

Cath. U. L. rev. 69 (Fall 1988). 

101 
To the extent an investigation indicates a violation of the CEA, the Commission takes 

appropriate enforcement action as described in response to Principle 9, Question 2. 

c) Failure of compliance with other regulatory requirements, for example: conduct of 

business, capital adequacy, disclosure or segregation of client assets? 

Yes. FCMs must segregate customer funds and cannot commingle firm assets with 

customer funds. Clearing organizations and depositories also must treat such funds as 

customer assets (Section 4d of the CEA); DCM Core Principle 11 requires DCMs to have 

and enforce rules to provide for the financial integrity of contracts traded on the DCM 

(including clearing and settlement through a DCO); Capital, accounting, internal controls, 

and segregation requirements for FCMs and IBs are enumerated in Regulations 1.16 -

1.34. 

All of the investigative tools available to the DOE are employed in the investigation of 

these types of matters. These tools include: 

• Ability to obtain records and information via inspection powers and subpoena 

powers; 

• Ability to obtain voluntary statements and sworn testimony; 

• Trade analysis; and 

• Financial analysis. 

To the extent the investigation indicates a violation of the CEA, the Commission takes 

appropriate enforcement action as described in response to Question 2 in Principle 9. 

4) Does the regulator have an adequate system to receive and respond to investor 

complaints?

Yes. The CFTC has authority to collect information and evidence pertinent to the 

effective enforcement of the CEA, 7 U.S.C. 2, 5, 9, 12(a), 13a-1, 15, and the CFTC’s 

rules, and may also collect information and evidence relating to futures and options 

matters on behalf of foreign authorities, 7 U.S.C. 16(f)(1). This includes information 

provided by the public. 

The CFTC's DOE investigates and prosecutes alleged violations of the CEA and 

Commission regulations, which often emanate from customer complaints. And, while the 

Commission does not represent any particular customer or claimant, the Commission 

relies on the public as an important source of information in carrying out its regulatory 

and enforcement responsibilities. The public may contact the Division to report 

suspicious activities or transactions which may involve the trading of commodity futures 

contracts or commodity options by calling the CFTC toll-free (866-366-2382), submitting 

a form on the CFTC’s Web site 

102 
(http://www.cftc.gov/customerprotection/redressandreparations/index.htm) or e-mailing 

the Commission (Questions@cftc.gov). 

The information provided by the public is used in the routine operation of the 

Commission, which includes law enforcement, review of legislative and regulatory 

proposals, regulation of the commodity futures markets, and review of reports and 

documents filed with the Commission. Specifically, the Commission’s DOE will review 

the complaint and, if warranted, conduct an investigation into the activity. In the event 

the investigation results in an enforcement action alleging violations of the CEA, the 

Commission may use the information provided by the public in any administrative or 

civil proceeding in which it is a party, or in which any member of the Commission or its 

staff participates as a party. The CFTC may also provide the information to other state 

and federal agencies, and foreign authorities. 

As indicated in response to Principle 9, Question 4, the Commission may also direct 

customers to the Commission’s reparations program as a mechanism for resolving 

appropriate complaints. 

5) Is there evidence, such as inspection reports and follow up action, which indicates that 

the regulator is competently discharging inspection responsibilities? 

As stated in response to Principle 10, Question 1, the CFTC does not conduct routine 

direct inspections of intermediaries, but it does conduct such examinations for cause or to 

test the quality of the DSRO’s work. Routine examinations are handled by an 

intermediary’s DSRO. A DSRO should conduct an examination of each FCM on a basis 

no less frequently than once every nine to 18 months pursuant to Commission guidance. 

Examination reports and workpapers from such inspections are retained by DSROs but 

may be reviewed by DCIO and sampled for testing in the Commission’s oversight 

reviews of SRO’s compliance with core principles. Final reports of such oversight 

reviews of SROs by DCIO are maintained but are considered confidential supervision 

reports. 

DMO’s Market Compliance Section conducts regular reviews of each DCM’s ongoing 

compliance with core principles through the self-regulatory programs operated by the 

exchange in order to enforce its rules, prevent market manipulation and customer and 

market abuses, and ensure the recording and safe storage of trade information. These 

reviews are known as rule enforcement reviews (RERs). 

Periodic RERs normally examine a DCM’s audit trail, trade practice surveillance, 

disciplinary, and dispute resolution programs for compliance with the relevant core 

principles, which include Core Principle 10, Trade Information, and Core Principle 17, 

Recordkeeping with respect to audit trail programs; Core Principle 2, Compliance With 

Rules, and Core Principle 12, Protection of Market Participants with respect to trade 

practice surveillance and disciplinary programs; and Core Principle 13, Dispute 

Resolution, with respect to dispute resolution programs. Other periodic RERs normally 

examine a DCM’s market surveillance program for compliance with Core Principle 4, 

Monitoring of Trading, and Core Principle 5, Position Limitations or Accountability. In 

103 
conducting an RER, DMO) staff examine trading and compliance activities at the 

exchange in question over an extended time period selected by DMO, typically the 

twelve months immediately preceding the start of the review. Staff conduct extensive 

review of documents and systems used by the exchange in carrying out its self-regulatory 

responsibilities; interview compliance officials and staff of the exchange; and prepare a 

detailed written report of their findings. RER reports are available to the public. 

6) Is there evidence that the regulator is adequately addressing unusual market activity? 

The Commission routinely monitors activity in all markets under its jurisdiction for 

unusual activity in the markets. The Commission’s market surveillance program’s 

primary mission is to identify situations that could pose a threat of manipulation and to 

initiate appropriate preventive actions. Each day, for all active futures and option contract 

markets, the CFTC's market surveillance staff monitors the daily activities of large 

traders, key price relationships, and relevant supply and demand factors in a continuous 

review for potential market problems. 

Surveillance economists prepare weekly summary reports of futures and option contracts 

for regional surveillance supervisors, who immediately review these reports. Surveillance 

staff informs Commission and senior staff of potential problems and significant market 

developments at weekly surveillance meetings so that they will be prepared to take 

prompt action when necessary. 

The market surveillance process is not conducted exclusively at the CFTC. Surveillance 

issues are usually handled jointly by the CFTC and the appropriate exchange. Relevant 

surveillance information is shared and corrective actions are taken, when appropriate. 

Potential problem situations are jointly monitored and, if necessary, verbal contacts are 

made with the participants in question. These contacts may be for the purpose of 

understanding their trading, confirming reported positions, alerting the brokers or traders 

as to the regulatory concern for the situation, or warning them to trade responsibly. This 

“jawboning” activity by the Commission and the exchanges has been effective in 

resolving most potential problems at an early stage. 

The Commission customarily gives the exchange the first opportunity to resolve problems 

in its markets, either informally or through emergency action. If an exchange fails to take 

actions that the Commission deems appropriate, the Commission has broad emergency 

powers under which it can order the exchange to take actions specified by the 

Commission. Such actions could include imposing or reducing limits on positions, 

requiring the liquidation of positions, extending a delivery period, or closing a market.

7) Does the regulator require regulated entities to have in place supervisory and 

compliance procedures reasonably designed to prevent securities laws violations? 

Yes. As noted in the Rule Enforcement Review section of the response to Principle 10, 

Question 1, DMO staff conducts a review of the DCM for compliance with Core 

Principle 2 of Section 5(d) of the CEA to ensure that the Exchange is enforcing the rules 

104 
of the contract market, including the terms and conditions of any contracts to be traded 

and any limitations on access to the contract market. 

Core Principle 4 of Section 5(d) of the CEA requires the DCM to monitor trading to 

prevent market manipulation, price distortion, and disruptions of the delivery or cashsettlement process. 

Core Principle 5 of Section 5(d) of the CEA requires the DCM to reduce the potential 

threat of market manipulation or congestion, especially during trading in the delivery 

month. A DCM must adopt position limitations or position accountability for speculators, 

where necessary and appropriate. 

Core Principle 9 of Section 5(d) of the CEA requires the DCM to provide a competitive, 

open, and efficient market and mechanism for executing transactions. 

Core Principle 10 of Section 5(d) of the CEA requires the DCM to maintain rules and 

procedures to provide for the recording and safe storage of all identifying trade 

information in a manner that enables the contract market to use the information 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. 

Core Principle 11 of Section 5(d) of the CEA requires the DCM to establish and enforce 

rules providing for the financial integrity of any contracts traded on the contract market 

(including the clearance and settlement of the transactions with a DCO), and rules to 

ensure the financial integrity of any FCMs and IBs and the protection of customer funds. 

Core Principle 12 of Section 5(d) of the CEA requires the DCM to establish and enforce 

rules to protect market participants from abusive practices committed by any party acting 

as an agent for the participants. 

For information on intermediaries, see supra, response to Principle 10, Question 6. 

8) Does the regulator monitor how compliance procedures are executed and 

communicated to employees of such entities?

Yes. During RERs conducted by DMO, Staff reviews the DCM’s compliance program 

to ensure, among other things, that the exchange is adhering to the procedures prescribed 

in the exchange’s Compliance Manual. DMO staff also conducts a review of the DCM to 

ensure that the exchange has adequate staff to fulfill its self-regulatory responsibilities. 

To help ensure compliance by registrants with the operational conduct requirements, 

Commission Regulation 166.3 requires each registrant (except APs with no supervisory 

duties), to “diligently supervise” the handling by its partners, officers, employees and 

agents of all activities relating to its business as a CFTC registrant. Also, the review of 

FCM internal procedures falls within the scope of SRO audit and surveillance obligations 

under Regulation 1.52. SRO obligations under this regulation include monitoring and 

auditing compliance by FCMs with their minimum financial and related reporting 

requirements, and also receiving the financial reports that all FCMs are required to file. 

105 
In the context of an enforcement investigation, DOE will review and investigate the 

supervisory and compliance procedures of Commission registrants. As set forth more 

fully in response to Principle 10, Question 9, below, failure to supervise is a violation of 

the Commission’s Regulations. 

9) Can the regulator take measures against or discipline or sanction intermediaries for 

failure to supervise reasonably subordinate personnel whose activities violate the securities 

laws?

Yes. Commission Regulation 166.3 requires each Commission registrant to “diligently 

supervise the handling ... of all commodity interest accounts” by its partners, officers, 

employees and agents. Thus, any violation of the CEA by a supervised person creates a 

liability on the supervisor for failure to supervise. Independently, Section 2(a)(1)(B) of 

the CEA imposes respondeat superior liability on the principal for the acts of its agents. 

“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.” The full panoply of remedies is available in an enforcement proceeding alleging 

these violations. See Response to Principle 8, Question 2. 

10) Does the regulator require market surveillance mechanisms that permit an audit of 

the execution and trading of all transactions on authorized exchanges and regulated 

trading systems? 

Yes. The Commission interprets this question to mean an exchange’s compliance with 

the audit trail requirements under the CEA. 

Core Principle 10 of Section 5(d) of the CEA requires the DCM to provide for the 

recording and safe storage of all identifying trade information in a manner that enables 

the contract market to use the information 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. 

Core Principle 17 of Section 5(d) of the CEA requires the DCM to maintain 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 five years. 

Pursuant to the acceptable practices set forth in Appendix B to Part 38 of the 

Commission’s regulations, an effective contract market audit trail should capture and 

retain sufficient trade-related information to permit contract market staff to detect trading 

abuses and to reconstruct transactions within a reasonable period of time. In addition, the 

contract market must create and maintain an electronic transaction history database that 

contains information with respect to transactions executed on the DCM. An acceptable 

audit trail also must be able to track a customer order from time of receipt through fill 

allocation or other disposition. Further, an acceptable audit trail should include original 

106 
source documents, transaction history, electronic analysis capability, and safe storage 

capability. 

Original source documents include unalterable, sequentially identified records on which 

trade execution information is originally recorded, whether manually or electronically. A 

transaction history consists of an electronic history of each transaction, including all data 

that are input into the trade entry or matching system for the transaction to match and 

clear. These data should include the categories of participants for whom such trades are 

executed; timing and sequencing data adequate to reconstruct trading; and the 

identification of each account to which fills are allocated. An electronic analysis 

capability permits sorting and presenting data included in the transaction history so as to 

reconstruct trading and to identify possible trading violations, while safe storage 

capability provides for a method of storing the data included in the transaction history in 

a manner that protects the data from unauthorized alteration, accidental erasure, or other 

loss. 

CFTC Regulation 1.31 governs the manner in which an exchange is required to maintain 

trade-related records. The Regulation mandates that all records required to be kept under 

the CEA or CFTC regulations be maintained for five years and be readily accessible 

during the first two years. However, trading cards, documents on which trade 

information is originally recorded in writing, and order tickets must be retained in hard 

copy for five years. 

11) Does the regulator or other competent authority have an effective enforcement 

program in place to enforce regulatory requirements?

Yes. 

The CFTC has over 95 attorneys and 18 investigators on board in the Enforcement 

Division who are charged with investigating and prosecuting violations of the CEA. As 

part of the Commission’s aggressive efforts to bolster staffing levels, an additional 14 

professional staff are scheduled to come on board in the next few weeks. Currently, there 

are more than 200 pending investigations in Enforcement. Moreover, 97% of 

Enforcement cases were successfully resolved in fiscal year 2008. 

When an investigation indicates that there is reason to believe that violative conduct has 

occurred, the CFTC files either an administrative or civil injunctive enforcement action 

against the alleged wrongdoers. In an administrative action, wrongdoers who are found 

to have violated the CEA or CFTC regulations or orders can be prohibited from trading 

on U.S. futures markets and, if registered, have their registrations suspended or revoked. 

Violators also can be ordered to cease and desist from further violations, to pay civil 

monetary penalties of $140,00084 per violation ($1 million for manipulation) or triple 

 

84 CFTC Regulation 143.8, 17 C.F.R. 143.8, provides an inflation adjustment for civil monetary penalties assessed 

under CEA 6(c) and 6b pursuant to the authority Debt Collection Improvement Act of 1996 at least once every four 

years. The inflation adjustment applies only to violations of the CEA, CFTC regulations or orders that occur after 

November 27, 1996 or the date when the inflation adjustment becomes effective. 

107 
their monetary gain, and to pay restitution to those persons harmed by the misconduct. 

See 7 U.S.C. 6(c) and 6(d). In civil injunctive actions, defendants can be enjoined from 

further violations, their assets can be frozen and their books and records impounded. 

Defendants also can be ordered to disgorge all illegally obtained funds, to make full 

restitution to customers, and to pay civil monetary penalties. See 7 U.S.C. 6(c). 

Each year, the CFTC brings between 40 and 50 enforcement actions. In fiscal year 2008, 

the Commission brought 40 enforcement cases. The Division is on track to exceed that 

number for FY2009. These cases target certain program areas, for example: 1) allegations 

of manipulation, attempted manipulation, trade practice violations, and false reporting; 2) 

misconduct by commodity pools, hedge funds, CPOs, and CTAs; and 3) financial, 

supervision, recordkeeping and other violations committed by registered entities. In 

addition, the Enforcement program continues to battle pervasive fraud involving retail 

forex futures, forex options, and/or off-exchange retail forex transactions. 

By way of example, the following summary of recent enforcement matters provides some 

measure of the effectiveness of the Commission’s enforcement program. 

Overall Civil Monetary Penalties. During FY 2008, a total of $234,835,121.55 in 

civil monetary penalties (“CMPs”) was imposed in the Commission’s enforcement 

actions, which included both administrative and federal district court cases. Of that 

amount, the Commission collected $140,745,252, or 60% of the amount imposed. 

Commodity Pools and Hedge Funds. From October 2000 through September 2008, 

the Commission filed a total of 73 enforcement actions alleging misconduct in 

connection with commodity pools and hedge funds, and the Commission has obtained 

penalties of $564,127,597 in these actions. The majority of the Commission’s 

commodity pool/hedge fund fraud cases are brought against unregistered CPOs 

and/or CTAs (40 of 73 cases filed). 

Cooperative Enforcement. During FY 2008, cooperative efforts resulted in 31 cases 

being filed by other domestic criminal and civil law enforcement authorities that 

included cooperative assistance from the Commission. 

Forex. Since enactment of the CFMA in December 2001 through December 2008, 

the Commission has filed a total of 98 enforcement actions against 181 firms and 193 

individuals selling illegal foreign currency futures and option contracts. To date, the 

Commission has obtained in these enforcement actions approximate monetary 

sanctions of $562 million in civil monetary penalties and $453 million in restitution. 

International Enforcement. The Commission has entered into bilateral cooperative 

enforcement/information sharing arrangements with more than twenty-five foreign 

authorities. In 2002, the Commission entered into a multilateral information sharing 

arrangement established by IOSCO which has become the international benchmark 

for such international MOUs. In FY 2008, DOE made 105 requests for assistance to 

35 foreign authorities and received 32 requests from 16 different foreign authorities. 

108 
Energy Market Manipulation. From December 2002 to date, the CFTC has filed a 

total of 43 enforcement actions charging a total of 73 respondents/defendants (42 

companies and 31 individuals) with misconduct in the energy markets. The CFTC 

has obtained $445,940,000 in civil monetary penalties in settlement of these 

enforcement actions. Copies of the complaints and dispositive orders issued in cases 

filed by the Commission are found on the Commission’s Web site at 

http://www.cftc.gov/lawandregulation/enforcementactions/index.htm. 

109 
COOPERATION

PRINCIPLES 11-13

110 
Principle 11. The regulator should have the authority to share both public and 

non-public information with domestic and foreign counterparts 

Assessment: Fully Implemented 

1) For each of the regulators identified, does the regulator have authority to share with 

other domestic regulators and authorities information on: 

a) Matters of investigation and enforcement? 

b) Determinations in connection with authorization, licensing or approvals? 

c) Surveillance? 

d) Market conditions and events? 

e) Client identification? 

f) Regulated entities? 

g) Listed companies and companies that go public? 

Yes, to all of the above. The CFTC may communicate public information without 

restriction. Section 8(e) of the CEA provides the parameters under which the CFTC may 

share non-public information, including, for example, to any department or agency of any 

State or any political subdivision thereof, acting within the scope of its jurisdiction. 

The CFTC has the authority to share any registration information maintained by the 

Commission upon reasonable request by any domestic department or agency. Whenever 

the Commission determines that the information is appropriate to be used by the domestic 

agency, the Commission may provide it without request.85

In addition, Section 8a(3) of the CEA requires that the Commission provide the SEC with 

notice of the commencement of any proceeding and a copy of any order entered by the 

Commission against any FCM or IB registered pursuant to section 6f (a)(2) of the CEA, 

any floor broker or floor trader exempt from registration pursuant to section 6f (a)(3) of 

the CEA, any associated person exempt from registration pursuant to section 6k(6)[1] of 

the CEA, or any board of trade designated as a contract market pursuant to section 7b–1 

of the CEA. 

 

85 7 U.S.C. 12(g). 

111 
More broadly, Section 12(a) of the CEA directs: “The Commission may cooperate with 

any department or agency of the government, any state or territory, department, agency or 

political subdivision thereof.” Thus, the Commission has the authority to share all of the 

information enumerated in (a)-(g) above which is obtained in the course of its 

administration of the CEA or pursuant to the exercise of its subpoena powers under 

Section 6(c) of the CEA, 7 U.S.C. 15, subject to the restrictions set forth in Section 8(e). 

That is, no information furnished to any domestic regulator, department or agency shall 

be disclosed by such department or agency except in any action or proceeding under the 

laws of the United States to which it, the Commission, or the United States is a party. In 

order to grant such access, the CFTC asks that, in the absence of a request submitted 

pursuant to a formal MOU between the CFTC and the requesting authority, the domestic 

authority provide a written access request setting forth its need for the requested 

information, providing confidentiality undertakings and agreeing to the restrictions in 

Section 8(e) of the CEA. 

To the extent the non-public files contain bank records that are subject to the Right to 

Financial Privacy Act or electronic communications subject to the Electronic 

Communications Privacy Act, the Commission must ascertain, before sharing the 

records, that the material is relevant to a legitimate law enforcement inquiry of the 

requesting agency and ensure that there is a valid Access Request granted to that agency 

that includes RFPA and/or ECPA materials. 

2) Can the regulator share the information described in Key Question 1 with other 

domestic authorities without the need for external approval such as from a relevant 

government minister or attorney? 

Yes. The CFTC has the authority to share such information with domestic authorities, 

subject to the conditions set forth in Section 8(e) of the CEA and discussed in response to 

Principle 11, Question 1, above, without the need for external approval. 

3) Does the regulator have the authority to share information with foreign counterparts 

with respect to each of the matters listed in Key Question 1, specifically: 

a) Matters of investigation and enforcement? 

b) Determinations in connection with authorization, licensing or approvals? 

c) Surveillance? 

d) Market conditions and events? 

e) Client identification? 

f) Regulated entities? 

g) Listed companies and companies that go public?

112 
Yes, to all of the above. The CFTC has the authority to share the information enumerated 

in (a)-(g) above with foreign futures authorities and certain other foreign authorities, 

subject to certain conditions. The CFTC may communicate public information without 

restriction. 

Section 8(e) of the CEA places certain restrictions on the ability of the CFTC to provide 

access to its existing non-public files to foreign futures authorities and certain other 

foreign authorities, described below. 

• Status of the requesting authority. Section 8(e) of the CEA authorizes the 

CFTC to provide information in the possession of the CFTC obtained in connection 

with the administration of the CEA to a “foreign futures authority” or any department 

or agency of a foreign government or any political subdivision thereof acting within 

the scope of its authority.” Section 1a (10) defines a “foreign futures authority” as 

“any foreign government, or any department, agency, governmental body or 

regulatory organization empowered by a foreign government to administer or enforce 

a law, rule or regulation as it relates to a futures or option matter.” 

• Confidentiality. The confidentiality restrictions placed on information provided 

by the CFTC relate to the nature of the specific information provided. With respect to 

nonpublic information generally, Section 8(e) of the CEA requires that nonpublic 

information provided to a requesting authority not be disclosed except in connection 

with an adjudicatory action or proceeding in the jurisdiction of the requesting 

authority to which the authority or its government is a party. In order to grant such 

access, the CFTC asks that, in the absence of a request submitted pursuant to a formal 

MOU between the CFTC and the requesting authority, the foreign authority provide a 

written access request setting forth its need for the requested information and 

providing confidentiality undertakings. 

• Restricted uses. In granting requests for assistance, the CFTC generally will 

permit information it provides to be used for the purposes stated within the request 

with respect to ensuring compliance with, or enforcement of, the laws and regulations 

of the requesting authority and for the purposes stated within the general framework 

of the use stated in the request including conducting a civil or administrative 

enforcement proceeding, assisting in a criminal prosecution, or conducting any 

investigation related thereto for any general charge applicable to the violation of the 

provisions specified in the request. 

• Reciprocity. Because the CFTC’s approach is to seek to maximize the amount of 

available assistance, it has not imposed an inflexible reciprocity requirement on 

requests for assistance. Rather, in deciding whether to grant assistance, the CFTC is 

directed by Section 12(f)(2) of the CEA statute to “consider whether . . . the 

requesting authority has agreed to provide reciprocal assistance to the CFTC in 

futures and options matters” and whether “compliance with the request would 

prejudice the public interest of the United States.” 

113 
• MOU. The CFTC has entered into numerous information-sharing arrangements 

with non-US regulatory authorities. In addition, the CFTC is a signatory to the Boca 

Declaration and IOSCO MMOU. See http://www.cftc.gov. See infra, response to 

Principle 12, Question 3. 

No secrecy or blocking laws are imposed in the United States on information sharing 

with foreign futures authorities. 

4) Can the regulator share the information for enforcement and regulatory purposes with 

foreign counterparts without the need for external approval, such as from a relevant 

government minister or attorney? 

Yes. 

5) Can the regulator provide information to other domestic and foreign authorities on an 

unsolicited basis?

Yes. To the extent the conditions set forth in response to Principle 11, Questions 1 and 3 

above are met. 

6) Can the regulator share information with foreign counterparts even if the alleged 

conduct is not such that it would constitute a breach of the laws of the regulator's 

jurisdiction if conducted within that jurisdiction? 

Yes. The CFTC does not impose a dual illegality requirement. Section 12(f)(1) of the 

CEA expressly states that the CFTC may provide investigative assistance to a foreign 

futures authority (including information) “without regard to whether the facts stated in 

the request would also constitute a violation of the laws of the United States.” 

7) Where the regulator can obtain information and records identifying the person or 

persons beneficially owning or controlling bank accounts related to securities and 

derivatives transactions and brokerage accounts, can the regulator share that information 

with domestic and foreign counterparts? 

Yes, subject to the conditions discussed in response to Principle 11, Questions 1 and 3.

114 
Principle 12. Regulators should establish information sharing mechanisms that set out 

when and how they will share both public and non-public information with their domestic 

and foreign counterparts 

Assessment: Fully Implemented 

1) Does the regulator have the power, by legislation, rules or as a matter of administrative 

practice, to enter into information-sharing agreements (whether formal or informal) with 

other domestic authorities? 

Yes. As a matter of practice, the CFTC can enter into information-sharing arrangements, 

generally known as MOUs, to facilitate consultation, cooperation and the exchange of 

information, public or non-public, with other domestic authorities. MOUs are statements 

of intent to consult, cooperate and exchange information, which are approved by the 

Commission and signed by the Chairman or his/her designee. MOUs facilitate 

cooperation by establishing clear mechanisms for the exchange of information, including 

setting forth the terms and conditions for sharing and protecting the confidentiality of 

non-public information. 

It is important to note that such arrangements are not a prerequisite for the CFTC to 

cooperate with domestic authorities. As discussed in the response to Principle 11, 

Question 1, the CFTC can cooperate and share non-public information with domestic 

authorities, whether on an ad hoc basis or under an MOU, pursuant to Sections 8(e) and 

12(a) provided, among other things, that the CFTC has received assurances of 

confidentiality regarding the use of non-public information. Assurances of 

confidentiality are typically incorporated in the terms of the MOUs. 

2) Does the regulator have the power, by legislation, rules or as a matter of administrative 

practice, to enter into information-sharing agreements (whether formal or informal) with 

foreign counterparts? 

Yes. Section 12(a) of the CEA grants the CFTC the power to cooperate with any foreign 

futures authority or any department, agency or political subdivision thereof. The CEA 

permits the Commission to furnish to foreign authorities information in its files, both 

public and non-public, that the Commission has obtained in connection with its 

administration of the CEA. Moreover, Section 12(f) authorizes the Commission to 

conduct an investigation, including the use of inspection and compulsory process, in 

response to a request from a foreign futures authority. In addition, implicit in the 

Commission’s authority to share information with foreign futures authorities under 

Section 8(e) and the reference to MOUs in Section 8(a), is the authority to enter into 

information sharing agreements with such authorities. 

Furthermore, in the CFMA, Congress included the following: 

115 
Sense of the Congress – It is the sense of the Congress that, consistent with its 

responsibilities under the CEA, the CFTC should, as part of its international 

activities, continue to coordinate with foreign regulatory authorities, to participate 

in international regulatory organizations and forums, and to provide technical 

assistance to foreign government authorities, in order to encourage– 

(1) The facilitation of cross-border transactions through the removal or 

lessening of any unnecessary legal or practical obstacles; 

(2) The development of internationally accepted regulatory standards of best 

practice; 

(3) The enhancement of international supervisory cooperation and emergency 

procedures; 

(4) The strengthening of international cooperation for customer and market 

protection; and 

(5) Improvements in the quality and timeliness of international information 

sharing. 

See also section 8(a)(1)(B)(ii) of the CEA. 

3) Has the relevant regulator developed information-sharing mechanisms to: 

a) Facilitate the detection and deterrence of cross-border misconduct? 

b) Assist in the discharge of licensing and surveillance responsibilities? 

Yes, to all of the above. The CFTC cooperates with foreign regulatory and 

enforcement authorities through formal MOUs and other arrangements to combat 

cross-border fraud and other illegal practices that could harm customers or threaten 

market integrity. 

Cross-border information sharing among market authorities plays an integral role in 

the effective surveillance of global markets that are linked by products, participants, 

and technology. Information sharing arrangements can be critical in combating crossborder fraud and manipulation, addressing the financial risks of market participants, 

and sharing regulatory expertise on market oversight and supervision. The CFTC 

makes and receives a significant number of requests for assistance and information to 

and from foreign authorities in connection with various surveillance and enforcement 

issues. In FY 2008, the CFTC made 120 requests for assistance to 39 different foreign 

authorities. Likewise, the CFTC has received and responded to 47 requests in FY 

2008 from 18 different authorities. 

The CFTC has entered into MOUs and cooperative arrangements with many 

jurisdictions, including cooperative enforcement arrangements, arrangements relating 

to sharing financial and other types of fitness information, and arrangements for 

sharing information on matters related to the implementation of the CFTC's Part 30

regulations, which grant foreign firms an exemption from certain CFTC requirements. 

116 
These arrangements are public documents and copies may be obtained from the Office 

of the Secretariat at the CFTC or by viewing the CFTC’s Web site at 

http://www.cftc.gov/international/memorandaofunderstanding/index.htm. The CFTC 

also is negotiating arrangements and side letters designed to enhance and streamline 

the supervision of entities regulated by a non-US regulatory authority. 

The CFTC has entered into bilateral arrangements for cooperative enforcement with 

authorities in more than 20 jurisdictions. MOUs typically provide for access to nonpublic documents and information already in the possession of the authorities and 

often include undertakings to obtain documents and to take testimony of, or statements 

from, witnesses on behalf of a requesting authority. In addition, the CFTC is a 

signatory to the MOU Concerning Consultation, Cooperation and the Exchange of 

Information of IOSCO, October 16, 2002, the first worldwide multilateral enforcement 

cooperation arrangement among securities and derivatives regulators. The IOSCO 

MOU provides for the exchange of essential information to investigate cross-border 

securities and derivatives violations, including the most serious offenses, such as 

manipulation, insider trading and customer fraud. The MOU enables regulators to 

share critical information, including bank, brokerage, and client identification records 

and to use that information in civil and criminal prosecutions. 

4) Where warranted by the scope of cross-border activity and the ability to provide 

reciprocal assistance, does the regulator actively try to establish information-sharing 

arrangements with foreign regulators? 

Yes. As indicated, where a foreign regulator is not a signatory to the IOSCO MMOU, 

the Commission has entered into bilateral MOUs and other cooperative arrangements to 

facilitate information sharing. In addition, as noted above, the CFTC is actively working 

on entering into MOUs and side letters in a supervisory context. 

5) Are these arrangements documented in writing? 

Yes. See http://www.cftc.gov/international/memorandaofunderstanding/index.htm. 

6) Does the regulator take steps to assure safeguards are in place to protect the 

confidentiality of information transmitted consistent with its uses?

Yes, as required by the various confidentiality provisions of the CEA. The CEA only 

permits the Commission to disclose to foreign authorities information in the 

Commission’s possession when it is satisfied that the information will not be publicly 

disclosed except in an adjudicatory action or proceeding.86 Thus, the information shared 

may be disclosed in a civil or administrative enforcement proceeding or a criminal 

prosecution to which the foreign authority is a party. The disclosed information also 

could be utilized by a foreign authority for the purpose of ensuring compliance with (and 

in investigations of) matters, and in surveillance and enforcement activities, provided that 

the information is not publicly disclosed except in an adjudicatory action or proceeding to 

 

86 Section 8(e) of the CEA, 7 U.S.C. 12(e). 

117 
which the foreign authority is a party. The information may be disclosed to an SRO for 

surveillance or enforcement activities if the SRO is a foreign futures authority. See 

Section 8(e) of the CEA, 7 U.S.C. 12(e). The Commission seeks these assurances from 

an authorized representative of the foreign authority before it shares non-public 

information. 

7) Can the regulator demonstrate that it shares information, where appropriate 

safeguards are in place, when it is requested by another domestic authority or foreign 

counterpart?

Domestic. During FY 2008, cooperative efforts resulted in 31 cases being filed by other 

domestic criminal and civil law enforcement authorities that included cooperative 

assistance from the Commission. 

Foreign. Yes. In FY 2008, the CFTC made 120 requests for assistance to 38 different 

foreign authorities. Likewise, the CFTC has received and responded to 47 requests from 

18 different jurisdictions in FY 2008. 

118 
Principle 13. The regulatory system should allow for assistance to be 

provided to foreign regulators who need to make inquiries in the discharge of 

their functions and exercise of their powers 

Assessment: Fully Implemented 

1) Is the domestic regulator able to offer effective and timely assistance to foreign

regulators in obtaining: 

a) Contemporaneous records sufficient to reconstruct all securities and derivatives 

transactions, including records of all funds and assets transferred into and out of bank 

and brokerage accounts relating to those transactions? 

b) Records for securities and derivatives transactions that identify: 

i) The client: 

1) Name of the account holder? 

2) Person authorized to transact business? 

ii) The amount purchased or sold? 

iii) The time of the transaction? 

iv) The price of the transaction? 

v) The individual and the bank or broker and brokerage house that handled the 

transaction? 

c) Information located in its jurisdiction identifying persons who beneficially own or 

control non-natural persons organized in its jurisdiction? 

Yes, to all of the above. Under Section 12(f) of the CEA, the CFTC has the authority to 

conduct an investigation, including the use of compulsory powers, on behalf of a foreign 

futures authority. This includes compelling (a) the production of documents (including, 

but not limited to, bank records, trading records, records identifying the beneficial owners 

that are critical to such investigations) and (b) the taking of statements. In exercising its 

statutory authority to provide such assistance, the CFTC is directed by Congress to 

consider whether (1) the requesting authority has agreed to provide reciprocal assistance 

in futures matters to the CFTC, and (2) compliance with the request would prejudice the 

public interest of the United States. Information provided is generally subject to 

119 
confidentiality and use restrictions.87 Banking and other financial records may, under 

certain circumstances, be subject to the Right to Financial Privacy Act, which provides a 

procedure for obtaining bank records that includes notice to the account holder and an 

opportunity to be heard. However, it should be noted that, in certain circumstances, such 

notice can be delayed. Certain electronic communications may be subject to the 

Electronic Communications Privacy Act protections. 

2) Is the domestic regulator able to offer effective and timely assistance to foreign

regulators in securing compliance with laws and regulations related to: 

a) Insider dealing, market manipulation, misrepresentation of material information 

and other fraudulent or manipulative practices relating to securities and derivatives, 

including solicitation practices, handling of investor funds and customer orders? 

b) The registration, issuance, offer, or sale of securities and derivatives, and reporting 

requirements related thereto? 

c) Market intermediaries, including investment and trading advisers who are required 

to be licensed or registered, collective investment schemes, brokers, dealers and transfer 

agents? 

d) Markets, exchanges and clearing and settlement entities? 

Yes, to all of the above. The Commission is authorized to conduct an investigation, 

including the use of compulsory process, in response to a request from a foreign futures 

authority. The Commission may render assistance to a foreign authority even if the 

matter would not constitute a violation of the laws of the United States. See Sections 6(c) 

and 12(f) of the CEA, 7 U.S.C. 15, 16(f). In other words, the CFTC does not need an 

independent interest in the alleged violations. 

3) Is the domestic regulator able, according to its domestic laws and regulations, to 

provide effective and timely assistance to foreign regulators regardless of whether the 

domestic regulator has an independent interest in the matter? 

Yes. See Sections 6(c) and 12(f) of the CEA, 7 U.S.C. 15, 16(f). 

4) Is the domestic regulator able to offer effective and timely assistance to foreign

regulators in obtaining information on the regulatory processes88 in its jurisdiction? 

Yes. See Sections 6(c) and 12(f) of the CEA, 7 U.S.C. 15, 16(f). 

5) Is the domestic regulator able to offer effective and timely assistance to foreign

regulators in requiring or requesting: 

a) The production of documents? 

 

87 Section 12(f)(2) of the CEA. 

88 “Regulatory processes” refer to formal processes, such as licensing procedures or audit procedures which could be 

relevant to enforcement. 

120 
b) Taking a person’s statement or, where permissible, testimony under oath? 

Yes, to all of the above. See supra, response to Principle 13, Question 1. 

6) Is the domestic regulator able to offer effective and timely assistance to foreign

regulators in obtaining court orders, if permitted, for example, urgent injunctions? 

Yes. The CFTC has the authority to assist a foreign authority in obtaining a court order, 

including in urgent circumstances. Using its full investigatory powers, the CFTC can 

obtain information for a foreign authority that can be used in proceedings to obtain a 

court order. 

 

7) Is the domestic regulator able to provide effective and timely assistance to foreign

regulators regarding information about financial conglomerates subject to its supervision 

and more precisely assistance in relation, for example, to: 

a) The structure of financial conglomerates? 

b) The capital requirements in conglomerate groups? 

c) Investments in companies within the same group? 

d) Intra-group exposures and group-wide exposures? 

e) Relationships with shareholders? 

f) Management responsibility and the control of regulated entities?

Yes. See supra, response to Principle 11, Question 3. 

To the extent the requirements of Section 8(e) and 12(f) of the CEA are met, the 

Commission can share both confidential and non-confidential information in its files.89 

For FCMs, this would include:90 

• an organizational chart depicting the various entities with which the FCM is 

affiliated (including subsidiaries) and specifically identifying the FCM’s material 

affiliates, as determined by the criteria identified in CFTC Regulation 1.14(a);91

• capital requirements of an FCM or its affiliate(s) required by the Commission or 

the SEC; 

• financing and capital adequacy, including sources of funding, management of 

liquidity of material assets of the FCM, the structure of debt capital and sources of 

alternative funding; 

 

89 For purposes of this question, we have interpreted financial conglomerates to include FCMs, DCMs and DCOs. 

90 For other registrant categories, the Commission could seek such information by way of an inspection request 

and/or a subpoena. 

91 Note that all non-material entities or affiliates in large organizational groups may not necessarily be included. 

Information relating to other related entities are only reported if it impacts whether an affiliate is deemed to be 

material. 

121 
• direct ownership of 10% or more of the FCM (available through the NFA 

registration database); and 

• risk management policies and procedures that describe the methods followed to 

mitigate exposures resulting from related party transactions. 

See generally, CFTC Regulations 1.12, 1.14, 1.15 and 1.17. In addition, to the extent the 

Commission becomes concerned about the financial condition of an FCM, Section 

4(c)(3) of the CEA empowers the Commission to require an FCM to make reports 

concerning the financial activities of affiliated persons whose business activities are 

reasonably likely to have a material impact on the financial or operational condition of 

the FCM. 

In its designation application, and on an ongoing basis, DCOs must demonstrate to the 

Commission that it has adequate financial, operational, and managerial resources to 

discharge the responsibilities of a DCO. (Section 5b(2): Core Principle (B) Financial 

Resources). In addition, DCOs must 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 DCO. (Section 5b(2) Core Principle (J) Reporting). Thus, 

to the extent the information regarding financial conglomerates is related to a DCOs 

ability to comply with the Designation Criteria and core principles and the CEA in 

general, the Commission may have such information in its files. 

To the extent the information and/or documents identified are not in its files, the 

Commission can request such documents from its registrants on behalf of a foreign 

authority or obtain such information from the SEC (or any other federal agency), if the 

subject is required to report it. 

122 
ISSUERS

PRINCIPLES 14-16 

123 
The “issuer” Principles do not explicitly apply to the CFTC. However, as requested 

by the IMF staff in July, Staff have described the relevant accounting and auditing 

standards under the CFTC’s regulations. 

Principle 14. There should be full, timely and accurate disclosure of financial 

results and other information that is material to investors' decisions 

1) Does the regulatory framework have clear, reasonably timely, comprehensive and 

specific disclosure requirements that apply to: 

a) Public offerings, including the conditions applicable to an offering of securities for 

public sale, the content and distribution of prospectuses and other offering documents 

(and, where relevant, short form profile or introductory documents) and 

supplementary documents prepared in the offering? 

b) Annual reports? 

c) Other periodic reports? 

d) Shareholder voting decisions? 

2) Does the regulatory framework have sufficiently clear, comprehensive and specific 

requirements that apply to: 

a) Timely disclosure of events that are material to the price or value of listed 

securities? 

b) Listing of securities? 

c) Advertising of public offerings outside of the prospectus? 

3) If there are derivative markets, is there disclosure of the terms of the contracts traded, 

the mechanics of trading and the risks related to gearing or leverage by market operators 

or intermediaries? 

4) Does the regulatory framework require: 

a) Financial information and other required disclosure in prospectuses, listing 

documents, annual and other periodic reports, and, where applicable, in connection 

with shareholder voting decisions, to be of sufficient timeliness to be useful to investors? 

124 
b) Periodic information about financial position and results of operations (which may 

be in summary form) to be made publicly available to investors? 

c) Appropriate measures to be taken (for example, provision of more recent unaudited 

financial information) when the audited financial statements included in a prospectus 

for public offerings are stale? 

5) In addition to specific disclosure requirements, is there a general requirement to 

disclose either all material information or all information necessary to keep the disclosures 

made from being misleading? 

6) Are there measures available to the regulator (e.g., review, certification, supporting 

documentation, sanctions) to help assure the sufficiency, accuracy and timeliness of the 

required disclosures? 

7) Does regulation ensure that proper responsibility is taken for the content of 

information in disclosure documents and the timeliness of disclosure by providing for 

sanctions or liability of the issuer and those responsible persons who fail to exercise due 

diligence in the gathering and provision of information? (Depending upon the 

circumstances, these persons may include the issuer, underwriters, directors, authorizing 

officers, promoters, and experts and advisers consenting to be named as such.) 

8) Are the circumstances where disclosures may be omitted or delayed limited to trade 

secrets, similar proprietary information or other valid business purposes, such as 

incomplete negotiations? 

9) Where there are derogations from the objective of full and timely disclosure, is 

regulation sufficient to provide for: 

a) Temporary suspensions of trading? 

b) Restrictions on, or sanctions regarding, the trading activities of persons with 

superior information? 

10) If public offerings or listings by foreign issuers are significant within the jurisdiction, 

are the jurisdiction’s disclosure requirements for such offerings or listings of equity 

securities by foreign issuers consistent with IOSCO’s International Disclosure Standards 

for Cross-Border Offerings and Initial Listings by Foreign Issuers?

125 
Principle 15. Holders of securities in a company should be treated in a fair 

and equitable manner 

1) Does the regulatory framework and legal infrastructure address the rights and 

equitable treatment of shareholders in connection with the following: 

a) Voting: 

i) For election of directors? 

ii) On corporate changes affecting the terms and conditions of their securities? 

iii On other fundamental corporate changes? 

b) Timely notice of shareholder meetings? 

c) Procedures that enable beneficial owners to give proxies or voting instructions 

efficiently? 

d) Ownership registration (in the case of registered shares) and transfer of their 

shares? 

e) Receipt of dividends and other distributions, when, as, and if declared? 

f) Transactions involving: 

i) A takeover bid? 

ii) Other change of control transactions? 

g) Holding the company, its directors and senior management accountable for their 

involvement or oversight resulting in violations of law? 

h) Bankruptcy or insolvency of the company? 

2) Is full disclosure of all information material to an investment or voting decision 

required in connection with shareholder voting decisions generally and the transactions 

referred to in Questions 1(f)(i) and 1(f)(ii) specifically? 

3) With respect to transactions referred to in Question 1(f)(i) and 1(f)(ii), are shareholders 

of the class or classes of securities affected by the proposal: 

a) Given a reasonable time in which to consider the proposal? 

126 
b) Supplied with adequate information to enable them to assess the merits of the 

proposal? 

c) As far as practicable, given reasonable and equal opportunities to participate in any 

benefits accruing to the shareholders under the proposal? 

d) Given fair and equal treatment (in particular, minority security holders) in relation 

to the proposal? 

e) Not unfairly disadvantaged by the treatment and conduct of directors of any party 

to the transaction or by the failure of the directors to act in good faith in responding to 

or making recommendations with respect to the proposal? 

4) With respect to substantial holdings of voting securities: 

a) Is information about the identity and holdings of persons who hold a substantial 

(well below controlling) beneficial ownership interest in a company required to be 

timely disclosed: 

 

i) In public offering and listing particulars documents? 

ii) Once the ownership threshold requiring disclosure has been reached? 

iii) At least annually (e.g., in the issuer's annual report)? 

b) Are material changes in such ownership and other required information required to 

be timely disclosed? 

c) Are these disclosure requirements applicable to two or more persons acting in 

concert even though their individual beneficial ownership might not have to be 

disclosed? 

d) Is the legal infrastructure sufficient to assure enforcement of, and compliance with, 

the applicable requirements? 

5) With respect to holdings of voting securities by directors and senior management: 

a) Is information about the beneficial ownership interest and material changes in 

beneficial ownership in a company required to be timely disclosed? 

 

b) Is such information available: 

i) In public offering and listing particulars documents? 

ii) At least annually (e.g., in the issuer's annual report)? 

c) Is the legal infrastructure sufficient to ensure enforcement of and compliance with 

these requirements? 

127 
6) If public offerings or listings by foreign issuers are significant within the jurisdiction, 

does the jurisdiction require disclosure in foreign issuers’ offering and listing particulars 

documents of any governance provisions or information relating to the foreign issuer’s 

jurisdiction that may materially affect the fair and equitable treatment of shareholders? 

128 
Principle 16. Accounting and auditing standards should be of a high and 

internationally acceptable quality 

1) Are public companies required to include audited financial statements in: 

a) Public offering and listing particulars documents? 

b) Publicly available annual reports? 

2) Do the required audited financial statements include: 

a) A balance sheet or statement of financial position? 

b) A statement of the results of operations? 

c) A statement of cash flow? 

d) A statement of changes in ownership equity or comparable information included 

elsewhere in the audited financial statements or footnotes? 

3) With respect to the financial statements required in public offering and listing 

particulars documents and publicly available annual reports: 

a) Are these required to be prepared and presented in accordance with a 

comprehensive body of accounting standards? 

b) Are these accounting standards of a high and internationally acceptable quality? 

4) Are the financial statements presented under circumstances so that they: 

a) Are comprehensive? 

b) Are understandable by investors? 

c) Reflect consistent application of accounting standards? 

d) Are comparable if more than one accounting period is presented? 

5) With respect to the audited financial statements included in public offering and listing 

particulars documents and publicly available annual reports: 

a) Are these required to be audited in accordance with a comprehensive body of 

auditing standards? 

129 
b) Are these auditing standards of a high and internationally acceptable quality? 

6) Are there standards or requirements sufficient to ensure that the external auditor is 

independent? 

7) Where unaudited financial statements are used, for example, in interim reports, and 

interim period financial statements in public offering and listing particulars documents, in 

full or summary format, is the financial information presented in accordance with 

accounting standards that are of a high and internationally acceptable quality? 

8) In regard to oversight, interpretation and independence: 

a) With respect to accounting standards: 

i) Does the regulatory framework provide for an organization responsible for the 

establishment and timely interpretation of accounting standards? 

ii) If yes, are the organization's processes open and transparent, and, if the 

organization is independent, is the interpretation process undertaken in cooperation 

with, or subject to oversight by, the regulator or another body that acts in the public 

interest? 

b) With respect to auditing standards: 

i) Does the regulatory framework provide for an organization responsible for the 

establishment and timely interpretation of auditing standards? 

ii) If yes, are the organization's processes open and transparent, and, if the 

organization is independent, is the interpretation process undertaken in cooperation 

with, or subject to oversight by, the regulator or another body that acts in the public 

interest? 

c) With respect to the external auditor, in the case of listed companies: 

i) Is the external auditor required to be independent in both fact and appearance of 

the company being audited? 

ii) Is there a governance body independent in both fact and appearance of the 

management of the company (e.g., shareholders or a statutory or corporate audit 

oversight body) that oversees the process of selection and appointment of the 

external auditor? 

iii) Is prompt disclosure of information about the resignation, removal or 

replacement of an external auditor required? 

9) Is there an adequate mechanism in place for: 

130 
a) Enforcing compliance with accounting standards such as requiring restatements of 

financial statements that deviate from accepted standards? 

b) Enforcing compliance with auditing and auditor independence standards, such as 

refusal to accept, or requiring revision of, audit reports that deviate from required 

standards as to the opinion expressed or scope of the audit, or for lack of 

independence? 

10) If public offerings or listings by foreign issuers are significant within the jurisdiction, 

does the regulator permit the use of high quality, internationally acceptable accounting 

standards by foreign companies that wish to list or offer securities in the country? 

************************************************************************** 

ADDENDUM 

Issuer Principles relate to “securities” and are beyond the scope of the CFTC’s jurisdiction. 

However, as requested by the IMF staff in July, Staff has written the following brief overview of 

relevant accounting and auditing standards under the CFTC’s regulations. 

The CFTC does not regulate public stock offerings. The Commission, however, is providing a 

response to Principle 16 for the purpose of providing a framework for the accounting and 

auditing requirements imposed upon financial statements required to be submitted by FCMs. 

Commission regulations require each FCM to file with the Commission, and with the FCM’s 

DSRO, monthly financial statements (the “Form 1-FR-FCM”). The Form 1-FR-FCM is a 

regulatory financial statement filing which is used by the Commission and the FCM’s DSRO to 

assess the FCM’s compliance with Commission regulatory capital requirements and customer 

funds protection requirements. 

The monthly Form 1-FR-FCM is required to include a statement of financial condition, a 

statement of changes in ownership equity, a statement of changes in liabilities subordinated to 

the claims of general creditors, a statement of computation of the minimum capital requirement, 

a statement of segregation requirements and funds in segregation for customers trading on U.S 

commodity exchanges, a statement of funds held for customers trading on non-U.S. markets. In 

addition to the information and statements expressly required, an FCM is required to include 

further information as may be necessary to make the financial statements not misleading. 

FCMs also are required to file with the Commission, and with the FCM’s DSRO, an annual 

Form 1-FR-FCM that has been audited by a certified public accountant. The audited Form 1-FRFCM must contain a statement of financial condition, a statement of income, a statement of cash 

flows, a statement of changes in ownership equity, a statement of changes in liabilities 

subordinated to the claims of general creditors, a statement of computation of the minimum 

capital requirement, a statement of segregation requirements and funds in segregation for 

customers trading on U.S commodity exchanges, a statement of funds held for customers trading 

on non-U.S. markets, and appropriate footnote disclosures. In addition to the information 

131 
expressly required, an FCM is required to include further information as may be necessary to 

make the audited Form 1-FR-FCM not misleading. 

FCM audited and unaudited financial statements submitted on Forms 1-FR-FCM are required to 

be prepared and presented in accordance with United States generally accepted accounting 

principles, applied upon a consistent basis. Since the financial statements are contained in a 

CFTC prescribed form, the financial information is uniformly received from FCM registrants, 

which allows Commission and SRO staff the ability to immediately identify whether an FCM is 

failing to meet its minimum capital requirements or is not in compliance with regulations 

designed to protect the holding of customer funds. The prescribed format further provides an 

easy means of assessing changes in the financial condition of an FCM between reporting periods, 

and provides staff with the ability to compare the financial condition of a firm relative to other 

FCMs. 

The Commission also establishes qualifications for the certified public accountants that conduct 

the audits of the annual Form 1-FR-FCM. In order to be recognized as an authorized certified 

public accountant, the auditor must be properly registered and in good standing under the laws of 

the state of the auditor’s residence or principal office. 

The auditor also must be independent from the FCM that is the subject of the audit engagement. 

The Commission gives appropriate consideration to all relevant circumstances in determining 

whether an auditor is, in fact, independent from the FCM. Commission regulations specify that 

the auditor, his firm, or a member of the firm, may not have, or commit to acquiring, a direct 

financial interest, or any material indirect financial interest in the FCM. The auditor also may 

not perform bookkeeping services or assume responsibility for maintaining the accounting 

records of the FCM or any of its affiliates. 

Commission regulations further provide that the audit must be conducted by the auditor in 

accordance with U.S. generally accepted auditing standards. The audit must include a review 

and appropriate tests of the accounting systems, the internal accounting control, and the 

procedures for the safeguarding of customer and firm assets. The audit must include all of the 

procedures necessary under the circumstances for the certified public accountant to express an 

opinion on the financial statements in the Form 1-FR-FCM. 

An FCM is required to provide notice to the Commission and to the FCM’s DSRO if the FCM 

dismisses a public accountant, or if the public accountant resigns, within 15 business days of the 

dismissal or resignation. The FCM’s notice must state the date of the dismissal or resignation, 

and whether there was any disagreement with the former accountant on any matter of accounting 

principles or practices, financial statements disclosure, auditing scope or procedures, or 

compliance with CFTC regulations that, if not resolved to the satisfaction of the former 

accountant, would have caused him to make reference in his audit report. The FCM also is 

required to request that the former public accountant provide the FCM with a letter addressed to 

the Commission stating whether he agrees with the representations contained in the FCM’s 

notice. 

132 
CFTC staff reviews FCM financial statements on a monthly basis. The Commission does not 

accept financial statements that do not comply with the above requirements. In this regard, the 

Commission has denied requests for relief from the regulations requiring that FCM financial 

statements be prepared in accordance with U.S. GAAP. The Commission also has directed 

FCMs to resubmit financial statements that do not comply with CFTC regulations.

133 
COLLECTIVE INVESTMENT SCHEMES

PRINCIPLES 17-20

134 
Principle 17. The regulatory system should set standards for the eligibility 

and the regulation of those who wish to market or operate a collective 

investment scheme 

Assessment: Fully Implemented 

1) Does the regulatory framework set standards for the eligibility and the regulation for 

those who wish to: 

a) Market a CIS? 

b) Operate a CIS? 

Under Section 4m of the CEA, all individuals and firms, with certain exceptions, that 

intend to do business as a CPO must register with the CFTC. Section 1a(5) of the CEA 

defines a CPO as any person engaged in a business of the nature of an investment trust or 

syndicate who solicits, accepts or receives from others funds, securities or property for 

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

any contract market or DTEF. 

In 1984, the CFTC delegated to NFA the registration of CPOs. NFA reviews 

applications for registration to determine, among other things, whether an application is 

subject to statutory disqualification under Sections 8a(2-3) of the CEA. NFA performs 

an extensive background check, which includes fingerprinting of natural person 

principals and related FBI clearances, to determine whether a statutory disqualification 

exists. For foreign applicants, NFA may perform additional background checks such as 

checks with foreign regulatory and self-regulatory bodies and Interpol. NFA also 

imposes proficiency testing requirements upon all individual applicants. 

The fitness requirements for all market intermediaries are incorporated into the basic 

registration application form, Form 7R. Form 7R requires disclosure of the applicant's 

name, address, branch offices, and principals, as well as detailed information about the 

disciplinary and criminal history of the firm. A Form 8R, which requires similar 

information to the 7R, is required for each natural person principal and AP applicant. 

Additionally, applicants for registration as a CPO who have previously operated a CIS 

under an exemption from registration pursuant to CFTC Regulation 4.13 must 

accompany their Form 7R with financial statements consistent with the applicable 

provisions of Part 4 of the CFTC’s regulations. 

Part 4 of the CFTC’s regulations mandate the filing with NFA, as a delegate of the 

CFTC, of disclosure documents for review prior to a CPO’s use in its solicitation of 

135 
participants in the CIS, as well as annual financial statements for the CIS to determine 

compliance with the provisions of that Part. 

2) Do the eligibility criteria for CIS include the following: 

a) Honesty and integrity of the operator? 

b) Competence to carry out the functions and duties of the operator (i.e. human and 

technical resources)? 

c) Financial capacity? 

d) Operator specific powers and duties? 

e) Adequacy of internal management procedures? 

Yes, to all of the above. The CEA specifies certain disqualifications from registration, 

including many that are based on prior proceedings in which the applicant was found to 

have violated the law or in which the applicant was formally enjoined from engaging in 

certain activities. The Commission has authorized NFA to receive and review registration 

applications and grant or deny registrations, subject to appeal to the Commission and the 

courts. NFA performs an extensive background check to determine whether a 

disqualification exists. Three essential elements of the background check are the 

Disciplinary Information questions on the application forms that require the applicant to 

disclose and supply detailed information concerning possible disqualifications, a check 

against the Financial Industry Regulatory Authority’s (FINRA’s) Central Registration 

Depository (CRD) database, and the fingerprint cards provided by individuals. 

Although Form 7R is only required of entities applying for registration, Form 8R is 

required of each natural person who is a principal of the applicant, as well as for 

individuals seeking registration as an associated person (AP). Persons filing a Form 8R 

also must provide fingerprints on a card provided by NFA. In addition, Form 8R requires 

disclosure of information on the employment, residential, educational, disciplinary and 

criminal history of the individual principal or applicant. A "principal" is defined under 

CFTC Regulation 3.1 as a sole proprietor, general partner, director, officer, manager or 

managing member, or person who is in charge of a principal business unit, division or 

function subject to Commission regulation, or any person occupying a similar position 

who exercises a controlling influence over the regulated activities of the firm. In 

addition, any holder or beneficial owner of 10% or more of the outstanding shares of 

stock in the firm, or any person who has contributed 10% or more of the firm's capital, is 

a principal. It is through this requirement that the CFTC and NFA can consider the 

knowledge, resources, skills and ethical attitude of senior management, directors and 

substantial owners/shareholders. However, it should be noted that the CFTC uses an 

objective approach to assessing ethical attitude, based, in part, on past conduct that could 

indicate a potential lack of appropriate ethical standards. No subjective inquiry is 

performed with respect to the business model or management capabilities of the applicant 

for registration. 

136 
CPOs are not required to comply with any minimum financial requirements. 

3) Does the approval of schemes take into account the possible need for international 

cooperation in the case of CIS marketed across jurisdictions or where promoters, 

managers or custodians are located in several different jurisdictions? 

Yes. In certain cases, NFA, as the CFTC’s delegate, consults with foreign regulatory 

authorities to assess the “fitness” of applicants for registration whose applications 

disclose prior employment with a non-U.S. firm, or where the U.S. registrant has foreign 

principals. 

4) Are there: 

a) Effective, proportionate and dissuasive sanctions for unlicensed operation of a CIS 

and/or for violation of CIS operator obligations? 

Yes. The Commission has an arsenal of sanctions available to address wrongdoing by 

market participants. Section 6(c) of the CEA authorizes CFTC to undertake 

administrative proceedings against CPOs, including the imposition of conditions, 

suspension or revocation of registration, the imposition of civil penalties and restitution 

to customers, and the imposition of cease and desist orders. Moreover, the CFTC has the 

ability to obtain court orders to freeze pool and/or CPO assets and have receivers 

appointed to operate the commodity pool for the benefit of participants. See supra, 

response to Principle 9, Question 2. The CFTC also can refer actions for criminal 

prosecution. Section 9(a) sets forth applicable criminal penalties, which include a fine of 

not more than $1 million and/or imprisonment for not more than 10 years, together with 

the costs of prosecution. 

b) Are these sanctions consistently applied? 

Yes. As set forth above, the Commission has a myriad of tools at its disposal to deter and 

remediate violations of the CEA by a CIS operator. The interplay of many factors 

influences the particular mix of sanctions imposed in any given matter. The Commission 

bases its analysis of an appropriate sanction in a matter on the gravity of the offense, the 

specific circumstances of each violation and violator, the deterrent and remedial effect of 

each package of sanctions and penalties imposed in analogous cases. The Commission 

has identified a variety of factors relevant to ascertaining the gravity of an offense, 

including whether the violation involves core provisions of the Act, like fraud and 

manipulation, and whether the violator acted willfully. The Commission may also 

consider the impact of the case on Commission resources as a result of cooperation or 

settlement. In 1994, as part of a review of the Commission’s sanctioning authority (See

A Study of CFTC and Futures Self-Regulatory Organization Penalties, Nov. 8, 1994), the 

Commission reiterated this list of factors that have influenced the Commission in its civil 

penalty assessments. These factors provide guidance for all parties in the Commission’s 

adjudicatory process. 

137 
5) Is the regulator responsible for ensuring compliance with the eligibility standard? In 

particular, does the regulatory framework provide for attribution to the regulatory 

authority of responsibilities and clear powers with respect to: 

a) Registration or authorization of a CIS? 

b) Inspections to ensure compliance by CIS operators? 

c) Investigation of suspected breaches? 

d) Remedial action in the event of breach or default? 

Yes, to all of the above. The CFTC and NFA are responsible for oversight of CPOs. As 

discussed in the response to Question 2, the CFTC has delegated to NFA responsibility 

for registration, including registration of CPOs. 

NFA, as a registered futures association, has oversight responsibility for CPOs and has 

instituted a program that seeks to monitor compliance by CPOs with all applicable CFTC 

and NFA rules and regulations. 

Pursuant to Section 17 of the CEA, as a registered futures association, NFA must: 

• Establish training standards and proficiency testing for persons involved in the 

solicitation of transactions, supervisors of such persons and all persons for which it 

has registration responsibilities, and a program to audit and enforce compliance with 

such standards; and 

• Establish minimum standards governing sales practices of its members and 

persons associated therewith for transactions subject to provisions of the CEA. 

Additionally, when an entity seeks to be registered as a CPO, it must submit a disclosure 

document to NFA, as the CFTC’s delegate, for review to determine compliance with 

CFTC regulations as well as NFA rules prior to holding itself out to be a duly registered 

CPO and soliciting participants. CFTC staff regularly reviews NFA’s review of 

disclosure documents as part of the CFTC’s oversight of NFA. 

NFA also conducts examinations of registered CPOs generally within the first year after 

becoming active and then every 3 to 4 years thereafter to ensure compliance with the 

CFTC’s regulations and NFA’s rules. NFA conducts a risk-based analysis to determine 

the frequency with which it conducts examinations of CPOs. This analysis considers 

many different business factors, as well as information such as customer complaints or 

concerns that arise during NFA's review of a firm's disclosure document, financial 

statement or promotional material. 

In the event that a registered CPO fails to comply with its regulatory obligations, NFA’s 

Business Conduct Committee (BCC) is empowered to take action against the entity and 

impose sanctions, including expulsion, suspension, fine, censure, or any other fitting 

penalty, for any violation of its rules. Similarly, the CFTC, through its DOE, may impose 

138 
civil penalties for violations of CFTC regulations ranging from a ban from registration to 

a monetary penalty, as well as seek criminal penalties. 

6) Is there ongoing monitoring of the conduct of CIS operators throughout the life of a 

scheme, including continued compliance with eligibility, licensing, registration, or 

authorization requirements? 

Yes. Pursuant to Part 4 of the CFTC’s regulations, registered CPOs are required to file 

disclosure documents and annual financial statements with NFA for review to determine 

whether such documents comply with the mandates of the applicable CFTC regulations. 

As part of the CFTC’s oversight of NFA, CFTC staff regularly reviews a sample of 

disclosure documents on a quarterly basis to determine the efficacy of NFA’s review. 

Additionally, CFTC staff is in regular communication with NFA staff regarding discrete 

issues in both disclosure documents and annual financial statements as they arise. 

7) Does the ongoing monitoring involve review of reports to the regulator submitted by 

CIS (CIS operators, custodians, etc.) on a routine basis? 

Yes. NFA regularly reviews annual financial statements and disclosure documents filed 

by registered CPOs, and CFTC staff conducts ongoing oversight of NFA with respect to 

these responsibilities. 

8) Does the ongoing monitoring normally involve performance of on-site inspections of 

entities involved in operating CIS (CIS operators, custodians, etc.)? 

Yes. NFA conducts regular on-site inspections of registered CPOs as part of its ongoing 

monitoring of their operations. Additionally, as stated previously, NFA conducts a riskbased analysis to determine the frequency with which it conducts examinations of CPOs. 

This analysis considers many different business factors, as well as information such as 

customer complaints or concerns that arise during NFA's review of a firm's disclosure 

document, financial statement or promotional material. NFA generally conducts 

examinations of registered CPOs within the first year after becoming active and then 

every 3 to 4 years thereafter. 

9) Do the regulatory authorities proactively perform investigative activities in order to 

identify suspected breaches with respect to entities involved in the operation of a CIS? 

Yes. Although the CFTC retains authority to conduct inspections, NFA has primary 

responsibility for inspections of CPOs, and performs periodic examinations as discussed 

above. 

10) Is the operator of a CIS subject to a general and continuing obligation to report to the 

regulatory authority or investors, either prior to or after the event, any information 

relating to material changes in its management, organization or by-laws? 

Yes. CFTC Regulation 4.26 requires each CPO to correct any defect in its Disclosure 

Document that it knows to be materially inaccurate or incomplete in any respect. The 

correction must be made to all existing participants within 21 days of the date upon 

139 
which the CPO first knows or has reason to know of the defect. Any amendments to the 

Disclosure Document must be filed electronically with NFA. In addition, CFTC 

Regulation 4.22(a) requires that the periodic account statement distributed for the pool 

disclose any material business dealings involving the CPO and any other persons 

providing services to the pool if they have not previously been disclosed to the pool’s 

participants. NFA also requires CPOs to provide annual updates regarding their 

registration information and business operations. 

11) Does the regulatory system assign clear responsibilities for maintaining records of the 

operations of the scheme? 

Yes. CFTC Regulation 4.23 states that each CPO must make and keep books and records 

relating to the pool as well as to its operation as a CPO in an accurate, current and orderly 

manner in its main business office and in accordance with CFTC Regulation 1.31. 

According to these regulations, records must be made available to the CFTC and DOJ. 

12) Are there provisions to prohibit, restrict or disclose certain conduct likely to give rise 

to conflicts of interest between a CIS and its operators or their associates or connected 

parties? 

CFTC Regulation 4.24(j) requires a CPO to include in its Disclosure Document a full 

description of any actual or potential conflicts of interest regarding any aspect of the pool 

on the part of the CPO, the trading manager (if any), any major CTA, the CPO of any 

major investee pool, any principal of the foregoing entities, and any other persons 

providing services to the commodity pool. The CPO also must describe any other 

material conflict of interest with respect to the pool. 

13) Are there regulatory provisions aiming at minimizing conflict of interest situations, to 

ensure that any conflicts that do arise do not adversely affect the interests of investors? 

CFTC regulations do not mandate that a CPO take any actions to minimize conflicts of 

interest; rather, CFTC Regulation 4.24(j) requires the disclosure of a full description of 

any actual or potential conflicts of interest regarding any aspect of the pool on the part of 

the CPO, the trading manager (if any), any major CTA, the CPO of any major investee 

pool, any principal of the foregoing entities, and any other persons providing services to 

the commodity pool. 

14) Is the CIS required to comply with rules related to: 

a) Best execution? 

b) Appropriate trading and timely allocation of transactions? 

c) Churning? 

d) Related party transactions? 

e) Underwriting arrangements? 

140 
Yes. Within the CFTC’s disclosure-based regime, CPOs are responsible for adhering to 

trading strategies and other information set forth in the Disclosure Document and other 

documents governing the operation of the pool, and are required under CFTC Regulation 

4.24(h)(2) to disclose any material restrictions or limitations on trading. 

With respect to CPOs, CFTC Regulation 4.24(k) requires that, if there are any material 

transactions or arrangements for which there is no publicly disseminated price between 

the pool and any person affiliated with a person providing services to the pool, the CPO 

must disclose a full description of such arrangements, including a discussion of the costs 

associated therewith. 

Additionally, CFTC Regulation 1.35(a-1)(5) specifically governs post-execution 

allocation of bunched orders and provides that specific account identifiers for accounts 

included in bunched orders need not be recorded at the time of order placement or upon 

report of execution if: (1) the person placing and directing the allocation of an order 

eligible for post-execution allocation has been granted written investment discretion with 

respect to the customer account; (2) eligible account managers must make certain 

information available to customers, including the general nature of the allocation 

methodology to be used, whether accounts in which the manager has an interest have 

been included in the bunched order, and a summary of data sufficient to compare one 

customer’s results with another customer’s or the manager’s; (3) the orders eligible for 

post-execution allocation must be allocated by an eligible account manager as soon as 

practicable after the entire transaction is executed or not later than the end of the day on 

which the order is executed, be allocated in a fair and equitable manner, and be in 

accordance with an allocation methodology that is objective and specific to permit 

independent verification of its fairness; and (4) eligible account managers must make 

available upon request of any representative of the CFTC, DOJ, or other appropriate 

regulatory agency records sufficient to demonstrate that all allocations meet the standards 

articulated in CFTC Regulation 1.35(a-1)(5) and to permit reconstruction of the handling 

of the order from the time of placement to the allocation. 

Further, CFTC Regulation 1.46 governs the application and closing out of offsetting and 

short positions by FCMs and provides that where an FCM purchases any commodity for 

future delivery for a customer when the account of such customer at the time of such 

purchase has a short position in the same future of the same commodity on the same 

market or sells any commodity for future delivery for a customer when the account of 

such customer at the time of such sale has a long position in the same future of the same 

commodity on the same market, the FCM must apply such purchase or sale against such 

previously held short or long futures position and promptly furnish the customer with a 

statement showing the financial result of the transactions involved. The FCM is required 

to perform the same function with respect to the purchase or sale of puts and calls with 

respect to options, with the exception of providing a statement to the customer. Under 

CFTC Regulation 1.46(b), where the short or long futures or option position in such 

customer’s or option customer’s account immediately prior to such offsetting purchase or 

sale is greater than the quantity purchased or sold, the FCM must apply such offsetting 

purchase or sale to the oldest portion of the previously held short or long position, absent 

specific instructions from the customer to the contrary. CFTC Regulation 4.24(h)(2) 

141 
requires the CPO to disclose the manner in which the FCMs holding the pool’s accounts 

will treat offsetting positions pursuant to Regulation 1.46, if the method is other than to 

close out all offsetting positions, or to close out offsetting positions other than on a firstin, first-out basis. 

15) Does the regulatory system provide for clear indication of circumstances under which 

delegation is allowed and is there prohibition of systematic and complete delegation of core 

functions of the CIS operator to the extent that there is a transformation, gradual or 

otherwise, into an empty box? 

Neither the CEA nor CFTC regulations prohibit a CPO from delegating functions to 

another person or entity. The CPO remains primarily responsible for its obligations 

under the CEA and CFTC regulations despite any delegations to any other parties. 

16) If delegation is permitted, is the delegation done in such as way so as not to deprive the 

investor of the means of identifying the company legally responsible for the delegated 

functions? In particular: 

a) Is the CIS operator responsible for the actions or omissions, as though they were its 

own, of any party to whom it delegates a function? 

b) Does the regulatory system require the CIS operator to retain adequate capacity 

and resources and have in place suitable processes to monitor the activity of the 

delegate and evaluate the performance of the delegate? 

c) Can the CIS operator terminate the delegation and make alternative arrangements 

for the performance of the delegated function where appropriate? 

d) Are there requirements for disclosure to investors in relation to the delegation 

arrangements and the identity of the delegates? 

e) Does the regulatory system address delegations which may give rise to a conflict of 

interest between the delegate and the investors? 

As set forth above, CPOs are not prohibited from delegating functions to another person 

or entity. A CPO, however, remains primarily responsible for its obligations under the 

CEA and CFTC regulations. Regulatory oversight is maintained through periodic audits 

of CPOs by NFA, with oversight of reviews of NFA by the CFTC. Moreover, the CPO is 

required under CFTC Regulation 4.24 to disclose information about entities and 

individuals who provide services to the commodity pool as well as any conflicts of 

interest that may arise. 

142 
Principle 18. The regulatory system should provide for rules governing the 

legal form and structure of collective investment schemes and the segregation 

and protection of client assets

Assessment: Fully Implemented 

1) Does the regulatory framework provide for requirements as to the legal form and 

structure of CIS that delineate the interests of participants and their related rights? 

Yes. CFTC Regulation 4.20 generally provides that a CPO must operate its pool as an 

entity cognizable as a legal entity separate from that of the CPO. The CFTC may exempt 

a CPO from this requirement if it sets up a corporation that: (1) represents in writing that 

each participant will be issued stock or other evidence of ownership in the corporation for 

all property received from participants; (2) demonstrates that it has adequate procedures 

in place to ensure that all property from participants is received in the corporation’s name 

and that no property of the pool is commingled with any other person; and (3) is not 

found by the CFTC to be organized contrary to the public interest. The creation of any 

legal entity does, of necessity, require the preparation of an organizational document, 

which delineates the structure of the entity and the rights and obligations associated with 

holding an ownership interest therein. 

2) Does the regulatory framework provide that the legal form and structure of a CIS, as 

well as the implications thereof for the nature of risks associated with the scheme, be 

disclosed to investors in such a way that they are not dependent upon the discretion of the 

CIS operator? 

Yes. CFTC Regulation 4.24(d) requires that a CPO disclose the form of organization of 

the pool in the Disclosure Document of the pool that is distributed to prospective 

participants. As a matter of course, the offering of an interest in the pool generally 

involves the provision of the organizational documents for the pool in conjunction with 

the Disclosure Document. Further, pursuant to CFTC Regulation 4.24(g), the CPO is 

required to disclose the principal risk factors relating to participation in the pool, 

including, but not limited to, risks relating to volatility, leverage, liquidity, and 

counterparty creditworthiness with respect to the trading structures employed and 

investment activity expected to be engaged in by the pool. 

3) Is there a regulatory authority responsible for ensuring that the form and structure 

requirements are observed and evidence that the above requirements are enforced in the 

assessed jurisdiction? 

Yes. When an entity seeks to be registered as a CPO, it must submit a disclosure 

document to NFA, as the CFTC’s delegate, for review to determine compliance with the 

CFTC’s regulations as well as NFA’s rules prior to holding itself out to be a duly 

143 
registered CPO and soliciting participants. CFTC staff regularly reviews NFA’s review 

of disclosure documents as part of the CFTC’s oversight of NFA. NFA also conducts 

periodic examinations of CPOs, as discussed above. 

In the event that a registered CPO fails to comply with its regulatory obligations, NFA’s 

BCC is empowered to take action against the entity and impose sanctions, including 

expulsion, suspension, fine, censure, or any other fitting penalty, for any violation of its 

rules. Similarly, the CFTC, through its DOE may impose civil penalties for violations of 

CFTC regulations ranging from a ban from registration to a monetary penalty as well as 

seek criminal penalties. 

4) Does the regulatory framework provide that where changes are made to investor rights 

that do not require prior approval from investors, notice is given to them before the 

changes take effect? 

Yes. CFTC Regulation 4.26(a)(1) requires that all information contained in the 

Disclosure Document must be current as of the date of the document, including 

information relating to rights of participants. CFTC Regulation 4.26 states that a CPO 

must provide participants with disclosure of changes to the information in the Disclosure 

Document within 21 days of the date on which the CPO knows or has reason to know 

about such changes. Additionally, CFTC Regulation 4.24(w) requires that a CPO must 

disclose all material information to existing or prospective pool participants even if the 

information is not specifically required by CFTC regulations. 

5) Does the regulatory framework provide that where changes are made to investor rights, 

notice is given to the relevant regulatory authority? 

Yes. CFTC Regulation 4.26 provides that a CPO must file with NFA any amendments to 

the Disclosure Document, including those changes made to the rights of commodity pool 

participants. 

6) Does the regulatory framework require the separation and segregation of CIS assets 

from the assets of the CIS operator and its managers? 

Yes. CFTC Regulation 4.20(b) states that all funds, securities and property received by a 

CPO must be received in the name of the commodity pool. CFTC Regulation 4.20(c) 

states that no CPO may commingle the property of any commodity pool with the property 

of any other person. 

CFTC Regulation 4.24(h)(iii)(A) requires that the Disclosure Document disclose the 

identity of the custodian or other entity (e.g., bank or broker-dealer) which will hold the 

pool’s assets. 

7) Does the regulatory framework provide for requirements governing the safekeeping of 

CIS assets such as: 

a) The obligation to entrust the assets to an independent third party; or 

144 
b) Special legal or regulatory safeguards in cases where custodial functions are 

performed by the same legal entity responsible for investment functions (or related 

entities)? 

Yes, to all of the above. CFTC Regulation 4.20(b) states that all funds, securities and 

property received by a CPO must be received in the name of the commodity pool. CFTC 

Regulation 4.20(c) states that no CPO may commingle the property of any commodity 

pool with the property of any other person. 

CFTC Regulation 4.24(h)(iii)(A) requires that the Disclosure Document disclose the 

identity of the custodian or other entity (i.e., bank or broker-dealer) which will hold the 

pool’s assets. 

8) Does the regulatory framework provide for the keeping of books and records in 

relation to transactions involving CIS assets and all transactions in CIS shares or units or 

interests? 

Yes. CFTC Regulation 4.23 generally describes all of the recordkeeping requirements 

applicable to CPOs. Among other things, a CPO must maintain: (1) an itemized daily 

record of all commodity interest transactions of the pool; (2) a subsidiary ledger or other 

equivalent record for each participant in the pool showing all of the funds, securities and 

other property received from and distributed to each participant; (3) a Statement of 

Financial Condition; and (4) a Statement of Income (Loss) for the appropriate periods. 

9) Does the regulatory framework adequately provide for audit requirements (internal or 

external) in relation to the assets of a CIS? 

Yes. NFA’s periodic examinations of CPOs include testing on a sample basis of the 

reporting of assets in a pool’s financial statements. 

CFTC Regulation 4.22 requires that financial statements in the periodic and annual 

reports of a commodity pool be presented in accordance with U.S. GAAP, and that the 

annual report be certified by an independent public accountant in accordance with the 

applicable provisions of CFTC Regulation 1.16. 

10) Does the regulatory framework adequately provide for an orderly winding up of CIS 

business, if needed? 

Yes. CFTC Regulation 4.22(c) requires the filing of a final Annual Report containing 

financial statements within 90 days of the pool’s permanent cessation of trading or the 

return of funds to participants. If necessary, Section 6c of the CEA provides the CFTC 

with the ability to obtain court orders to freeze pool and/or CPO assets and have receivers 

appointed to operate the commodity pool for the benefit of participants. 

145 
Principle 19. Regulation should require disclosure, as set forth under the 

principles for issuers, which is necessary to evaluate the suitability of a 

collective investment scheme for a particular investor and the value of the 

investor’s interest in the scheme 

Assessment: Fully Implemented 

1) Does the regulatory framework require that all matters material to an evaluation of a 

CIS and the value of an investor’s interest are disclosed to investors, and potential 

investors, in an easy to understand format? 

Yes. The CFTC regime for oversight of commodity pools and CPOs is disclosure-based. 

CFTC regulations require that a CPO provide a detailed Disclosure Document to 

prospective pool participants before accepting their subscriptions for interests in a 

commodity pool. CFTC regulations require that prescribed cautionary statements and 

risk disclosures be presented on the cover and the first page of the Disclosure Document. 

Further, specified information must be presented in the initial pages of the Disclosure 

Document. This information includes: the name, address, phone number, and form of 

organization of the commodity pool and the CPO; whether the commodity pool is 

privately offered, continuously offered, traded by multiple advisors, or has a principalprotection feature; the date when the Disclosure Document may be used; and the breakeven point per unit of initial investment. The document also must disclose the business 

background of the operator and advisors of the pool as well as their respective principals; 

all fees and expenses of the pool; conflicts of interest relating to the operation of the pool; 

relevant material actions against persons managing, trading, or maintaining accounts for 

the pool; risks of futures trading and specific risks of the pool; information on the pool’s 

investment program and use of proceeds; and provisions relating to redemption. In 

addition, performance information must be in a prescribed capsule format, the 

performance of the offered pool must be presented prior to any other performance 

disclosures, and any information that is not specifically required to be disclosed generally 

must appear after required information. 

Rules of the NFA require that the Disclosure Document be written using plain English 

principles, including: 

(i) Avoiding legal jargon; 

(ii) Using short sentences and paragraphs; 

(iii) Using words that are definite and part of everyday language; 

(iv) Using glossaries to define technical terms that cannot be avoided; and 

(v) Using table and bullet lists, where appropriate 

146 
2) Does the regulatory framework include a general disclosure obligation to allow 

investors, and potential investors, to evaluate the suitability of the CIS for that investor or 

potential investor? 

Yes. As discussed in the response to Question 1, the CFTC’s disclosure-based regime 

requires that a CPO provide a Disclosure Document to prospective participants in each 

pool that it offers, and to inform existing participants with respect to material changes 

regarding the operation of the pool. The Disclosure Document includes information, 

such as the minimum subscription amount required to participate, the risks of the 

investments to be undertaken, and the costs associated with the investment, that would 

allow the investor or potential investor to evaluate the suitability of the investment. 

3) Does the regulatory framework specifically require that the offering documents, or 

other publicly available information, include the following: 

a) The date of issuance of the offering document? 

b) Information concerning the legal constitution of the CIS? 

c) The rights of investors in the CIS? 

d) Information on the operator and its principals? 

e) Information on the methodology of asset valuation? 

f) Procedures for purchase, redemption and pricing of units? 

g) Relevant, audited financial information concerning the CIS? 

h) Information on the custodian (if any)? 

i) The investment policy(ies) of the CIS? 

j) Information on the risks involved in achieving the investment objectives? 

k) The appointment of any external administrator or investment managers or advisers 

who have a significant and independent role in relation to the CIS (including 

delegates)? 

l) Fees and charges in relation to the CIS? 

Yes, to all of the above. In response to questions (a)-(l), the Disclosure Document must 

include: 

• The date on which the CPO first intends to use the Disclosure Document; 

• The form of organization of the pool; 

• Whether or not a participant’s liability is limited and restrictions on the 

transferability of a participant’s interest; 

147 
• Identity, business background, and past performance of the CPO, CTAs, and their 

principals; 

• The net asset value included in the pool’s past performance and financial reports 

is required to be calculated in accordance with generally accepted accounting 

principles (U.S GAAP); 

• The minimum and maximum subscriptions that may be contributed to the pool, 

where funds will be held prior to trading, the value at which a participant’s interest 

may be redeemed, conditions or restrictions on redemption, any fees associated with 

redemption, and liquidity risks relative to the pool’s redemption capabilities; 

• The most recent account statement and audited annual report for the pool must be 

attached to the Disclosure Document; 

• The custodian that will hold the pool’s assets; 

• A description of the trading and investment programs and policies that will be 

followed by the pool, including an explanation of how the pool’s advisors, investee 

funds, and types of investments are selected; 

• The general risks of investing in a commodity pool, including the financial risks 

presented by futures contracts and options on futures contracts, and the fact that the 

commodity pool may be subject substantial charges for management, advisory, and 

brokerage fees which will require the pool to make substantial trading profit in order 

to cover the fees; also, the particular risks of the pool, including risks related to 

volatility, leverage, liquidity, and counterparty creditworthiness, as applicable to the 

types of trading and investing strategies expected to be employed; 

• Information on external administrators or any other person providing services to 

the pool, such as disclosure of fees paid by the pool or potential conflicts of interest 

relating to such arrangements; and 

• A complete description of each fee and expense incurred or expected to be 

incurred by the pool, and the “break-even'' point where profits exceed fees and 

expenses. 

4) Does the regulatory authority have the power to hold back, or intervene, in an offering? 

For example, are there regulatory actions available in the event that the information is 

inaccurate, misleading or false, or does not satisfy the filing/approval requirements? 

Yes. Pursuant to authority delegated from the CFTC, NFA is responsible for reviewing 

all Disclosure Documents. Prior to using a Disclosure Document, a CPO must submit the 

Document to NFA and receive an acceptance letter confirming that the Document can be 

used to solicit. If the Document does not meet regulatory requirements, NFA will 

provide notice of deficiencies and state that the Document may not be used until all 

issues are addressed. All Disclosure Documents are filed through the NFA’s Electronic 

Disclosure Document Filing System. 

5) Does the regulatory framework cover advertising material outside of the offering 

documents, in particular does it prohibit false or misleading advertising? 

Yes. Pursuant to CFTC Regulation 4.41, no CPO may advertise in a manner which: 

148 
• Employs any device, scheme or artifice to defraud any participant or prospective 

participant; 

• Involves any transaction, practice or course of business which operates as a fraud 

or deceit on any participant or prospective participant; and 

• Refers to any testimonial unless the advertisement or sales literature providing the 

testimonial prominently discloses that the testimonial may not be representative of all 

participants, the testimonial is no guarantee of future performance, and, if applicable, 

a non-nominal sum was paid for the testimonial. 

In addition, CPOs are subject to NFA rules that prohibit any false or misleading 

communications with the public, and also provide specific guidance regarding the content 

and use of promotional material. 

6) Does the regulatory framework require that the offering documents be kept up to date 

to take account of any material changes affecting the CIS? 

CFTC Regulation 4.26 requires that all information contained in a Disclosure Document 

must be current as of the date of the document, provided, however, that performance 

information may be current as of a date not more than three months prior to the date of 

the document. No CPO may use a Disclosure Document dated more than nine months 

prior to the date of its use. If a CPO knows or should know that the Disclosure 

Document is materially inaccurate or incomplete, it must correct that defect and distribute 

the correction within 21 calendar days. 

7) Does the regulatory framework require a report to be prepared in respect of a CIS’s 

activities either on an annual, semi-annual or other periodic basis? 

Yes. CFTC regulations require both periodic and annual reports. Regulation 4.22(a) 

requires each CPO to distribute a periodic report (either monthly for pools with assets 

greater than $500,000, otherwise quarterly) within 30 calendar days of the end of each 

reporting period. The periodic report must contain a statement of operations and a 

statement of changes in net assets. Regulation 4.22(c) requires each CPO to distribute an 

Annual Report to each participant within 90 calendar days after the end of the pool’s 

fiscal year. The Annual Report, which also must be filed with NFA, must contain certain 

information, including, but not limited to: the pool’s Net Asset Value and Statements of 

Financial Condition, Operations, and Changes in Net Assets. 

8) Does the regulatory framework require the timely distribution of periodic reports? 

Yes. As described in the response to Question 7, CFTC Regulation 4.22(a) 

requires each CPO to distribute an account statement to each pool participant in 

each pool that it operates within 30 calendar days after the last date of the 

reporting period. 

9) Does the regulatory framework require that the accounts of a CIS be prepared in 

accordance with high quality, internationally acceptable accounting standards? 

149 
Yes. CFTC Regulation 4.22 requires that the financial statements in the periodic 

and annual reports must be presented and computed in accordance with generally 

accepted accounting principles consistently applied. In addition, the pool’s annual 

report must be certified by an independent public accountant. 

150 
Principle 20. Regulation should ensure that there is a proper and disclosed 

basis for asset valuation and the pricing and the redemption of units in a 

collective investment scheme 

Assessment: Fully Implemented 

1) Are there specific regulatory requirements in respect of the valuation of CIS assets? 

Yes. CFTC Regulations 4.10(b), 4.22 and 4.25 specifically require the use of 

generally accepted accounting principles in calculating the net asset value of a 

pool. 

2) Are there regulatory requirements that the net asset value of assets be calculated: 

a) On a regular basis? 

b) In accordance with high-quality, accepted accounting standards used on a 

consistent basis?

Yes, to all of the above. CFTC Regulation 4.22 requires that valuations are to be 

reported in the Statement of Changes in Net Assets included in the periodic and annual 

reports of the pool. As noted above, net asset value is required to be computed in 

accordance with generally accepted accounting principles consistently applied. 

3) Are there specific regulatory requirements in respect of the fair valuation of assets 

where market prices are not available? 

Yes. Because CFTC regulations require the use of generally accepted accounting 

principles in calculating pool valuations, CPOs are subject to FAS 157, Fair Value 

Measurements, issued by the Financial Accounting Standards Board. This statement 

defines fair value for commodity pools, establishes a framework for measuring fair value 

under U.S. GAAP, and expands disclosure about fair value measurements. 

4) Are independent auditors required to check the valuations of CIS assets? 

Yes. Annual financial reports of commodity pools are required to be audited by an 

independent public accountant. 

5) Are there specific regulatory requirements in respect of the pricing upon redemption or 

subscription of interests in a CIS? 

151 
Yes. CFTC Regulation 4.24(p) requires a CPO to provide in its Disclosure Document a 

complete description of any restrictions upon the transferability of a participant’s interest 

in the pool, and a complete description of the frequency, timing and manner in which a 

participant may redeem interests in the pool. Specifically, the description regarding 

redemption must specify how the redemption value of a participant’s interest will be 

calculated, the conditions under which redemption will be made (including time between 

request for redemption and payment) and any restrictions on redemption. 

6) Does regulation ensure that the valuations made are fair and reliable? 

Yes. See supra, response to Principle 20, Questions 2-4. 

7) Does regulation require the price of the CIS be disclosed or published on a regular 

basis to investors or prospective investors? 

Yes. CFTC Regulation 4.22 requires CPOs to distribute account statements to 

participants on at least a quarterly basis (and monthly if the pool has at least $500,000 in 

assets). These reports include all material information relevant to the net asset value per 

participation of the pool. Similar information must be included in the Disclosure 

Document provided to any prospective participant. 

8) Are there regulatory requirements, rules of practice, and/or rules addressing pricing 

errors? Are the relevant regulatory authorities able to enforce these rules? 

Yes. See supra, response to Principle 20, Questions 2, 4 and 7. 

9) Does the regulatory framework address the general or specific circumstances in which 

there may be suspension or deferral of routine valuation and pricing or of regular 

redemption? 

Yes. See supra, response to Principle 20, Question 5. 

10) Does the regulatory authority have the power to ensure compliance with the rules 

applicable to asset valuation and pricing? Is there evidence as to actions taken by the 

relevant regulatory authority in this area? 

Yes. Section 4n of the CEA states that each CPO must regularly furnish statements of 

account to each participant. Such statements must include all the information contained 

in the relevant CFTC regulations. Violations of the CEA and CFTC regulations subject a 

person to a wide variety of sanctions, including, but not limited to, suspension or 

revocation of registration, monetary penalties and restitution. 

The CFTC also takes a proactive approach to ensuring compliance by CPOs with respect 

to pool operations. For example, each year, DCIO issues a CPO guidance letter to assist 

CPOs and their public accountants with the preparation and filing of annual reports. 

Each CPO guidance letter highlights regulatory and accounting changes affecting CPOs 

with respect to financial filing and provides reminders of requirements in response to 

common deficiencies observed in prior years’ annual reports. CPO guidance letters are 

152 
available on the CFTC’s Web site at 

http://www.cftc.gov/industryoversight/intermediaries/guidancecporeports.html. 

11) Does the regulatory framework require that the regulator: 

a) Be kept informed of any suspension or deferral of redemption rights? 

b) Have the power to take action, to demand, delay or stop the suspension or deferral 

of redemption rights? 

CFTC Regulation 4.26 requires a CPO to provide NFA with a copy of any amendments 

to its Disclosure Document, including notice of any suspension or deferral of redemption 

rights. The CFTC and NFA have the power to take action where a CPO has violated 

either CFTC or NFA rules with respect to valuation and redemption. 

153 
MARKET INTERMEDIARIES

PRINCIPLES 21-24

154 
Principle 21. Regulation should provide for minimum entry standards for 

market intermediaries 

Assessment: Fully Implemented 

1) Does the jurisdiction require that, as a condition of operating a securities business, the 

market intermediaries (as defined above) be licensed? 

Yes. The CFTC divides market intermediaries into distinct categories according to 

function, and each of these categories is generally subject to licensing requirements as a 

condition to operating as an intermediary in the regulated futures markets. The CFTC’s 

“licensing” regime is implemented through a general registration requirement. 

Specifically, Section 8a of the CEA, requires all individuals and firms, with certain 

exceptions, that intend to do business as futures professionals to be registered with the 

CFTC. The primary purposes of registration are to screen an applicant's fitness to engage 

in business as a futures professional and to identify those individuals and organizations 

whose activities are subject to federal regulation. In addition, all individuals and firms 

that wish to conduct futures-related business with the public must apply for NFA 

membership or Associate status. 

Registration of market intermediaries is performed by the NFA pursuant to delegation 

from the CFTC, and the requirements for registration vary depending on the category of 

market intermediary. For an FCM, IB, CPO, or CTA, registration requires the 

completion of a Form 7-R, which requires: 

• Disclosure of business information, including information concerning any holding 

company and/or branch offices; 

• Disclosure of criminal or regulatory actions, as well as financial information; and 

• Nomination of contact persons for membership, accounting arbitration, 

compliance and enforcement issues. 

Additionally, FCMs and IBs may be required to submit for approval their procedures 

and/or materials concerning: (a) anti-money laundering; (b) business continuity; (c) 

electronic order routing systems (for FCMs) or automated order routing systems (for 

IBs); (d) promotional materials; (e) supervision of associated persons; (f) handling of 

customer complaints; (g) margins and/or segregation procedures (for FCMs). FCMs and 

IBs may also be required to provide copies of their Source of Assets letters and any 

subordinated loan agreements. 

155 
For principals or associated persons of an FCM, IB, CPO or CTA, or for floor traders or 

floor brokers, registration requires the completion of a Form 8-R, which requires: 

• Criminal, civil, regulatory, financial, professional, educational and residential 

background disclosures; 

• Evidence of the satisfaction of proficiency examination requirements; and 

• Completion of a fingerprint card (to be used by the FBI in conducting a 

background check on the applicant). 

As is discussed in further detail below, in addition to the CFTC’s registration 

requirement, certain categories of market intermediaries are subject to minimum capital 

requirements as a condition to operating as an intermediary in the regulated futures 

markets. 

 2) Are there minimum standards or criteria that all applicants for licensing must meet 

before a license is granted (or denied) and that are clear and publicly available which: 

a) Are fair and equitable for similarly situated intermediaries? 

Yes. As explained in the answer to question #1 of this Principle, the CFTC and the NFA 

both impose minimum standards and criteria that all applicants for licensing (registration) 

must meet as a condition to becoming registered as an intermediary in the regulated 

futures markets. The minimum standards concerning registration of intermediaries are 

published on the Commission and NFA Web sites. The CFTC’s rules concerning 

registration are set forth in Part 3 of its rules (17 C.F.R. 3.1-3.75), which is publicly 

accessible through the CFTC’s Web site at 

http://www.cftc.gov/lawandregulation/index.htm. Each of the NFA’s requirements 

relevant to intermediaries is clearly explained and publicly available on the NFA’s Web 

site at http://www.nfa.futures.org/NFA-registration/index.html. In particular, part 200 et 

seq. of the NFA’s rules, each of which is fully set forth on the NFA’s Web site at 

http://www.nfa.futures.org/nfamanual/NFAManual.aspx, provides extensive guidance 

with respect to the NFA’s requirements for the registration of intermediaries. 

The CFTC’s and NFA’s registration requirements are applied fairly and equitably to all 

similarly situated intermediaries. 

b) Are consistently applied? 

Yes. The CFTC’s and NFA’s minimum standards and criteria for registration of 

intermediaries are consistently applied. As explained in the answer to question #1 of this 

Principle, all similarly situated entities of the same category of registrant (i.e., all 

similarly situated FCMs, all similarly situated IBs, etc.) are subjected to identical 

registration requirements. 

c) Include an initial capital requirement, as applicable? 

156 
Yes. CFTC Regulation 1.17 prescribes the minimum levels of “adjusted net capital” that 

FCM and IB applicants must possess. 

d) Include a comprehensive assessment of the applicant and all those in a position to 

control or materially influence the applicant that addresses “ethical attitude,” including 

past conduct, and appropriate proficiency requirements,92 such as, industry knowledge, 

skill and experience? 

Yes. As explained in the answer to question #1 of this Principle, the NFA’s registration 

process does include an examination of an applicant’s past conduct and proficiency 

requirements. Specifically, the NFA requires the completion of a Form 8-R by any 

individual serving as a principal or an AP of the applicant-entity. A "principal" is defined 

under CFTC Regulation 3.1 as a sole proprietor, general partner, director, officer, 

manager or managing member, or person who is in charge of a principal business unit, 

division or function subject to Commission regulation, or any person occupying a similar 

position who exercises a controlling influence over the regulated activities of the firm. In 

addition, any holder or beneficial owner of 10% or more of the outstanding shares of 

stock in the firm, or any person who has contributed 10% or more of the firm's capital, is 

a principal. It is through this requirement that the CFTC and NFA can consider the 

knowledge, resources, skills and ethical attitude of senior management, directors and 

substantial owners/shareholders. 

Form 8-R examines an individual’s background as concerns any criminal, civil or 

regulatory issues, any financial issues, professional work experience, and education. 

Additionally, Form 8-R requires evidence of the satisfaction of any necessary proficiency 

examination requirements. The individual applicant also is required to complete a 

fingerprint card, which is used by the FBI in conducting a background check on the 

applicant. 

It should be noted that the CFTC uses the information gained during the registration 

process as part of an objective approach to assessing ethical attitude, based, in part, on 

past conduct that could indicate a potential lack of appropriate ethical standards. No 

subjective inquiry is performed. 

e) Include an assessment of the sufficiency of internal controls and risk management 

and supervisory systems in place, including relevant written policies and procedures? 

Yes. As explained in the answer to question #1 of this Principle, FCMs and IBs may be 

required to submit for approval their procedures and/or materials concerning: (a) antimoney laundering; (b) business continuity; (c) electronic order routing systems (for 

FCMs) or automated order routing systems (for IBs); (d) promotional materials; (e) 

supervision of associated persons; (f) handling of customer complaints; and, (g) margins 

and/or segregation procedures (for FCMs). FCMs and IBs may also be required to 

provide copies of their Source of Assets letters and any subordinated loan agreements. 

However, the NFA is not required to conduct a specific assessment of the sufficiency of 

 

92 Such requirements would not be applied to shareholders for example. 

157 
an applicant’s internal controls and risk management prior to granting an FCM or IB 

registration. Nonetheless, it should be noted that certified financial statements are 

required for such entities prior to registration and, should material inadequacies in the 

accounting system, internal accounting control or in the procedures for safeguarding 

customer funds or firm assets, exist, the certified accountant must notify the 

applicant/registrant, who must notify NFA, the DSRO, and the CFTC. 

3) Does the relevant authority have the power to: 

a) Refuse licensing, subject only to administrative or judicial review, if authorization 

requirements have not been met? 

Yes. Sections 8a(2), 8a(3) and 8a(4) of the CEA provide the Commission with authority 

to statutorily disqualify a person’s or an entity’s registration in limited, enumerated 

situations. Pursuant to this authority, the Commission has enacted Regulations 3.60 

through 3.64, which establish the procedures by which the Commission may deny, 

condition, suspend, revoke or place restrictions upon registration. 

b) Withdraw, suspend or condition a license where a change in control or other change 

results in a failure to meet relevant requirements on an ongoing basis? 

Yes. Paragraph (a)(3) of Regulation 3.31 requires a registrant to file a Form 8-R on 

behalf of each new natural person principal who was not listed on the registrant's Form 7-

R promptly after the change occurs. (NFA Rule 208 prescribes a 20-day period after the 

inclusion of a new natural principal in which the Form 8-R must be filed.) As discussed 

above, a "principal" is defined under regulation 3.1 as a sole proprietor, general partner, 

director, officer, manager or managing member, or person who is in charge of a principal 

business unit, division or function subject to Commission regulation, or any person 

occupying a similar position who exercises a controlling influence over the regulated 

activities of the firm, any holder or beneficial owner of 10% or more of the outstanding 

shares of stock in the firm, or any person who has contributed 10% or more of the firm's 

capital. CFTC Regulation 1.17 provides that, should an FCM not be in compliance with 

its net capital requirements, it must transfer all customer accounts and immediately cease 

doing business as an FCM, subject to a 10-business day period during which the CFTC 

may have discretion to permit it to continue operation pursuant to a demonstration that it 

will be able to achieve compliance. CFTC regulations 3.55, 3.56 and 3.60 provide the 

adjudicatory steps to be taken for the CFTC to deny, condition, suspend, revoke or place 

restrictions on registration subject to Section 8a(4) of the CEA. 

c) Take effective steps to prevent the employment of persons (or seek the removal of 

persons) who have committed securities violations or who are otherwise unsuitable 

from continuing to engage in intermediary activities, even if these persons are not 

separately licensed intermediaries if they can have a material influence on the firm? 

Yes. Section 8a(4) of the CEA permits the CFTC to suspend, revoke or place restrictions 

upon the registration of any registrant based on certain criteria, which are set forth in 

section 8a(3) of the CEA. These include, but are not limited to, violations of the CEA or 

158 
rules thereunder, any wilful material misstatement or omission on the application, as well 

as for “other good cause.” Section 8a(2) empowers the Commission to refuse to register 

any person whose prior registration is under suspension or has been revoked. 

 Additionally, Commission regulation 3.51 provides that, when information comes to the 

attention of the Commission that an applicant for initial registration in any capacity under 

the CEA is subject to statutory disqualification, the Commission may take steps to have 

the application withdrawn on a voluntary basis, or through the institution of legal 

proceedings. 

4) Where licensing is the responsibility of a SRO, is the process subject to appropriate 

oversight by the regulator? 

Yes. The Commission has authorized the NFA, a SRO and currently the only registered 

futures association, to receive and review registration applications and grant or deny 

registrations, subject to appeal to the Commission and the courts. The CFTC oversees 

the operations of the NFA, which may be subject to CFTC enforcement action for failure 

to comply with the CEA and CFTC rules. 

5) Are market intermediaries required to update periodically relevant information with 

respect to their license and to report immediately to the regulator (or licensing authority) 

material changes in the circumstances affecting the conditions of the license? 

Yes. Pursuant to CFTC Regulation 3.31, each firm registrant or applicant for registration 

must promptly correct any deficiency or inaccuracy in its registration information, 

including information about its principals and APs. 

6) Is the following relevant information about licensed intermediaries available to the 

public: 

a) The existence of a license, its category and status? 

b) The scope of permitted activities or identity of senior management and names of 

other individuals authorized to act in the name of the intermediary?

Yes, to all of the above. In response to both (a) and (b), the NFA’s Background 

Affiliation Status Information Center (BASIC), which can be accessed from the NFA’s 

Web site, includes information on each registrant, the category of license held by the firm 

or individual, the main office, its listed principals, and membership/registration history. 

Disciplinary actions against the firm or individual are also included. 

7) Does the regulator routinely monitor, investigate and enforce securities laws and 

regulations affecting intermediary activities? 

Yes. The CFTC’s regulatory scheme is based upon the allocation of self-regulatory 

responsibilities to the DCMs and NFA to ensure compliance by their members with all 

relevant rules (i.e., CFTC, NFA and exchange rules), with continuing oversight by the 

CFTC on a periodic basis. 

159 
Section 5(d) of the CEA requires DCMs to monitor and enforce compliance with all 

applicable rules, which include ensuring fair and equitable trading and the financial 

integrity of transactions. Similarly, CEA section 17(a) requires a registered futures 

association to have rules that are designed to prevent fraudulent and manipulative 

practices, promote just and equitable principles of trade, and protect the public. CEA 

section 17(q) requires the association to adopt a comprehensive program that fully 

implements the rules promulgated by the CFTC. 

In addition, CFTC Regulation 166.3 and NFA compliance Rule 2-9 establish a general 

duty upon registered persons to “diligently supervise” their employees in all aspects of 

their commodity futures activities. Other CFTC, exchange and NFA rules, as well as 

official NFA compliance publications and exchange notifications, impose more specific 

supervisory duties. 

As part of its overall program, the CFTC’s DOE routinely investigates and enforces the 

provisions of the CEA and the Commission’s regulations that apply to intermediaries. 

These include, in particular, CTA, CPO and hedge fund fraud or other misconduct, 

unlicensed activity, and FCM liability for failure to supervise and/or vicarious liability 

for the acts of its agents. DOE’s investigative tools are described in more detail in 

response to Principle 10, Question 3. DOE’s enforcement tools are described in more 

detail in response to Principle 10, Question 11. 

8) Does the regulatory scheme for investment advisers require that: 

a) If an investment adviser deals on behalf of customers, the capital and other 

operational controls applicable to other market intermediaries also should apply to the 

adviser? 

N/A. A CTA is any person who, for compensation or profit, is engaged in the business of 

providing commodity interest advisory services to others. CTAs are not permitted to deal 

on behalf of customers under this license. If a CTA engages in other activities requiring 

separate registration, then it must comply with the applicable requirements. 

b) If the adviser does not deal, but is permitted to have custody of client assets, 

regulation provides for the protection of client assets, including segregation and 

periodic or risk-based inspections (either by the regulator or an independent third 

party)? 

N/A. CTAs are not permitted to have custody of client assets. 

c) In the case of both (a) and (b), as well as advisers who manage client portfolios 

without dealing on behalf of clients or holding client assets, does regulation include: 

i) Record-keeping requirements? 

Yes. CFTC Regulation 4.33 requires CTAs to keep accurate, current and orderly books 

and records concerning the clients and subscribers of the CTA and of the activities of the 

CTA itself. 

160 
ii) Clear and detailed requirements setting out the disclosures to be made by the 

adviser to potential clients, including: descriptions of the adviser’s educational 

qualifications, relevant industry experience, disciplinary history (if any), investment 

strategies, fee structure and other client charges, potential conflicts of interest, and 

past investment performance (if relevant)? 

Yes. CFTC Regulations 4.34 and 4.35 require that a CTA disclose specific information, 

including the business background of the CTA and its principals that will make trading or 

operational decisions, any material actions against the CTA and principals, a description 

of the trading program and related risk factors, fees, any actual or potential conflicts of 

interest, and past performance of its client accounts. 

iii) Rules and procedures designed to prevent guarantees of future investment 

performance, misuse of client assets, and potential conflicts of interest?93

Yes. CFTC Regulation 4.35(a)(9) requires the prominent disclosure of the following 

statement with past performance information presented in CTA Disclosure Documents: 

“PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE 

RESULTS.” 

CFTC Regulation 4.34(j) requires a CTA to provide a full description of any actual or 

potential conflicts of interest regarding any aspect of the CTA’s trading program on the 

part of: 

• The CTA; 

• Any FCM with which the client will be required to maintain its commodity 

interest account; 

• Any IB through which the client will be required to introduce its account to an 

FCM; and 

• Any principal of the foregoing. 

The CTA also must disclose any other material conflict involving any aspect of the 

offered trading program, including any arrangement whereby the CTA or principal 

thereof may benefit, directly or indirectly, from the maintenance of the client’s 

commodity interest account with an FCM or IB (such as payment for order flow or soft 

dollar arrangements). 

Section 4o of the CEA and CFTC Regulation 4.41 prohibit, among other things, a CTA 

from employing any device, scheme or artifice to defraud any client. 

 

93 Principle 21, Key Issue 8. 

161 
Principle 22. There should be initial and ongoing capital and other prudential 

requirements for market intermediaries that reflect the risks that the 

intermediaries undertake 

Assessment: Fully Implemented 

1) Are there initial and ongoing minimum capital requirements for relevant market 

intermediaries? 

Yes. FCMs and IBs are subject to minimum capital requirements. Customer protection 

and the financial stability of the marketplace are central objectives of the CEA, and their 

achievement can be fulfilled by ensuring an adequate minimum capital requirement for 

FCMs and IBs.94 With respect to FCM capital requirements, the Commission has stated 

in various rule revisions concerning its net capital regulation that its goal is to enhance 

the protection of customers' segregated funds and to ensure that the capital of FCMs 

appropriately takes into account risks undertaken by the firm, and those two results are of 

the greatest importance to the security and overall well-being of individual participants, 

institutions involved in the futures markets, and the markets themselves. 

Section 4f(b) of the CEA provides that FCMs and IBs must meet the minimum financial 

requirements that the Commission “may by regulation prescribe as necessary to insure” 

that FCMs and IBs meets their obligations as registrants. The minimum capital 

requirements for FCMs and IBs are set forth in CFTC Regulation 1.17. This regulation 

requires each FCM and IB to maintain at all times adjusted net capital (as defined below) 

in an amount that meets or exceeds the greatest of several capital computations required 

under the regulation. Regulation 1.17 also provides an alternative means for IBs to 

satisfy net capital requirements, by operating pursuant to a guarantee agreement that 

meets the requirements set forth in Regulation 1.10(j). Such guaranteed IBs must place 

their trades only with the FCM guaranteeing the IB. In the annual report of “Futures 

Industry Registrants by Location”, which is published on the Commission’s Web site, 

there were 1,095 guaranteed IBs, 552 IBs that were not guaranteed, and 179 registered 

FCMs as of September 30, 2008. See http://www.cftc.gov/stellent/ 

groups/public/@ecintrotofuturesindustry. 

For FCMs, the minimum capital requirement is the greatest of the following: 

1. $250,000; 

2. The minimum amount of net capital required by the NFA; 

 

94 45 FR 79416 (December 1, 1980). 

162 
3. The risk-based capital computation, which is a risk-based component added by 

the Commission in September of 2004, and equals the sum of 8% of customer and 4% 

of “noncustomer”95 maintenance margin requirements; and 

4. For FCMs also registered as securities brokers or dealers, the amount of capital 

required by the SEC. 

As indicated in the May 31, 2009 “Financial Data for FCMs” report, which is published 

on the Commission’s Web site, the lowest capital requirement for any FCM was 

$500,000 (the minimum dollar amount required by NFA), and the highest capital 

requirement for any FCM was over $1.7 billion. All of the FCMs with requirements in 

excess of $1 billion were also registered as securities broker-dealers and had capital 

requirements determined under SEC regulations. See 

http://www.cftc.gov/marketreports/financialdataforfcms/index.htm. 

The minimum capital requirements for IBs are lower than for FCMs, as the CEA permits 

only FCMs to carry customer futures and options positions and to hold customer funds. 

The capital requirements for IBs that are not guaranteed are the greatest of the following: 

1. $30,000; 

2. The minimum amount required by the NFA; and 

3. For IBs also registered as securities brokers or dealers, the amount of capital 

required by the SEC. 

Approximately half of all non-guaranteed IBs are also registered as securities brokerdealers. Moreover, as all IBs are members of the NFA, no IB has a capital requirement 

of less than $45,000, which is the minimum dollar amount requirement adopted by the 

NFA for non-guaranteed IBs. 

The Commission has recently published for public comment proposed amendments to the 

requirements for minimum capital under Regulation 1.17. See 74 FR 21290 (May 7, 

2009). In particular, the Commission is proposing the following revisions: 

1. Increasing minimum dollar amount requirements in the regulation (from $30,000 

to $45,000 for IBs, and from $250,000 to $1 million for FCMs); 

2. Revising the risk-based component to require 10% of customer and noncustomer 

maintenance margin requirements; and 

3. Applying capital requirements for OTC derivative positions in customer, 

noncustomer and proprietary accounts carried by the FCM that are similar to the 

capital requirements for exchange-traded futures carried in such accounts.96

 

95 A noncustomer account, as defined in Commission Regulation 1.17(b)(4), is an account that is not included in the 

definition of either customer or proprietary account. These are usually accounts of affiliated entities and certain 

employees and officers of the FCM. 

96 The Commission has also requested comment on possible future proposals to revise the minimum adjusted net 

capital requirement of FCMs that are also registered as securities broker-dealers, by having the FCM/BD’s capital 

requirement not based only on the higher of the CFTC’s or SEC’s requirements, but rather the combined 

requirements of the two regulations. 

163 
It also should be noted that FCMs generally have treated “early warning” notice 

requirements under Commission Regulation 1.12(b) as establishing a de facto higher 

capital requirement for FCMs. Specifically, Regulation 1.12(b) requires FCMs to provide 

immediate notification to the Commission and their DSROs if the FCM’s capital falls 

below the following levels: 

• 110% of the risk-based capital requirement; 

• 150 percent of the $250,000 requirement, or of the requirement for minimum 

capital under NFA rules; or 

• If the FCM is a securities broker-dealer, the early warning level established under 

SEC rules. 

In order to avoid triggering the notice requirement under Regulation 1.12(b), FCMs 

generally seek to maintain capital at levels above the early warning levels described 

above. 

2) Are the capital adequacy requirements structured to result in capital addressed to the 

full range of risks to which market intermediaries are subject, e.g., market, credit, 

liquidity, operational, and legal, including reputational, risks? 

Yes. The key regulatory objective of the Commission’s net capital rule is to require 

registrants to maintain a minimum base of liquid assets in excess of their liabilities to 

finance their business activity. The requirements in Regulation 1.17 are mostly focused 

on market risk, credit risk, and liquidity risk. The early warning notice requirements 

under Regulation 1.12, and more particularly the de facto higher capital requirements 

under that regulation, also help increase the cushion available to address the various risks 

to firm capital, which would include operational and legal risk. 

The definitions of the terms “current assets” and “net capital” in Commission Regulation 

1.17(c)(2) and (5) require the FCM to include only generally liquid assets when 

determining the amount of capital maintained by the firm. “Net capital” means the 

amount by which the FCM’s “current assets”, i.e., cash and other assets “commonly 

identified as expected to be realized as cash or sold during the next 12 months”, exceed 

the firm’s total liabilities (except certain subordinated liabilities meeting the specific 

limitations of Commission Regulation 1.17(h)). When determining current assets, 

Regulation 1.17(c)(2) specifically excludes certain items such as unsecured receivables, 

and further requires that unrealized losses shall be deducted, and unrealized profits shall 

be added to the extent that they are secured or on exchange-traded positions (as such, the 

Commission’s capital requirements take account of certain off-balance sheet items in 

addition to on-balance sheet items). Other assets must be marked to market, including all 

long and all short positions in commodity options which are traded on a contract market; 

all listed security options; and all long and all short securities and commodities positions. 

Further, the rule describes values to be attributed to any commodity option that is not 

traded on a contract market and to any unlisted security option. 

164 
In light of the regulatory emphasis on maintaining liquid assets, Regulation 1.17(c)(5) 

also requires deductions from the market values of certain assets to reflect the possibility 

of price depreciation when liquidated. For example, the definition of “adjusted net 

capital” in Regulation 1.17(c)(5) specifies certain required deductions with respect to the 

FCM’s or IB’s proprietary futures and options on futures positions; its inventory, fixed 

price commitments, and forward contracts; and also its securities and security options. 

The required deductions are also referred to as “haircuts”, and are reductions of the 

market values of these assets by a set percentage, e.g., the firm must generally deduct 

twenty percent of the market value of its proprietary forward contracts. 

The SEC’s net capital rule for securities broker-dealers also specifies “haircuts” for 

certain assets of the broker-dealer. The Commission generally has harmonized the 

haircuts applied to securities and securities options under Regulation 1.17(c)(5) with the 

haircuts required under the SEC’s net capital rule. For example, both the SEC’s and the 

Commission’s regulations require a deduction of fifteen percent of the value of equities. 

For certain firms, the SEC and CFTC also may permit the firm to apply internal models 

to determine “alternative” market risk and credit risk charges to be applied to a portfolio 

of trading securities. 

 

3) Are capital adequacy requirements sensitive to the quantum of risks undertaken; that 

is, does required capital increase as risk increases, e.g., in the event of large market moves? 

Yes. The “risk-based” capital requirements of FCMs are directly related to increases in 

margin requirements for the futures and options positions of their customers and 

noncustomers. Further, FCMs and IBs with proprietary positions in futures or options on 

futures must deduct from their net capital 100% of the margin requirements for such 

positions (or 150% if the FCM is not a clearing member of the organization clearing such 

positions). Also, FCMs’ and IBs’ capital requirements reflect market moves because 

their assets are required to be marked to market. 

4) Are capital standards sufficient to allow an intermediary to absorb some losses and to 

wind down its business over a relatively short period without loss to its customers or 

disrupting the orderly functioning of the markets? 

Yes, as supplemented by the procedures described in the response to Principle 24, 

Question 1. To date, FCMs with customers trading exchange-traded futures and options 

on futures have been able to absorb some losses without causing any loss to their 

customers, and to wind down their business without disrupting the orderly functioning of 

markets, including two very large FCMs that filed for bankruptcy within the past decade, 

Refco LLC and Lehman Bros. Inc. 

5) Are relevant market intermediaries required to maintain records such that capital 

levels can be readily determined at any time? 

Yes. Regulation 1.17(a)(3) expressly provides that each FCM and IB must be in 

compliance with capital requirements “at all times and must be able to demonstrate such 

compliance to the satisfaction of the Commission or the designated SRO”. Other 

165 
relevant recordkeeping requirements relating to the financial condition of FCMs and IBs 

and to the customer funds held by FCMs are summarized below. 

Regulation 1.18 requires FCMs and IBs to prepare and keep current ledgers which show 

each transaction affecting asset, liability, income, expense and capital accounts 

consistently with the Form 1-FR (or the FOCUS Report if a securities broker-dealer). 

Regulation 1.27 requires each FCM that invests customer funds to keep a record which 

shows the details of the investment, including the size and type of investment, the date of 

the investment, and any disposition made of the investment. 

Regulation 1.32 requires an FCM to compute each day the customer funds in segregated 

accounts and the FCM's residual interest in those funds, and to keep a record of each such 

computation. 

Pursuant to Regulation 1.31, all books and records required by the CEA and Commission 

regulations must be kept for a period of five years and to be readily accessible during the 

first 2 years of the 5-year period. All books and records must be open to inspection by 

any representative of the CFTC or DOJ. 

6) Are the detail, format, frequency and timeliness of reporting to the regulator and/or the 

SRO sufficient to reveal a significant deterioration in the capital adequacy position of 

market intermediaries? 

Yes. Regulation 1.10(d) requires that the Form 1-FR that FCMs file on a monthly basis, 

and IBs on a semi-annual basis, include the following: 

• A statement of financial condition as of the date for which the report is made; 

• A statement of changes in ownership equity for the period between the date of the 

most recent statement of financial condition filed with the Commission and the date 

for which the report is made; 

• A statement of changes in liabilities subordinated to claims of general creditors 

for the period between the date of the most recent statement of financial condition 

filed with the Commission and the date for which the report is made; 

• A statement of the computation of the minimum capital requirements pursuant to 

1.17 as of the date for which the report is made; For a FCM only, the statements of 

segregation requirements and funds in segregation for customers trading on U.S. 

commodity exchanges and for customers' dealer options accounts, and the statement 

of secured amounts and funds held in separate accounts for foreign futures and 

foreign options customers in accordance with CFTC Regulation 30.7 as of the date 

for which the report is made; and 

• Such further material information as may be necessary to make the required 

statements and schedules not misleading. 

In addition, Regulation 1.12(g)(1) requires that, if for any reason the net capital of an 

FCM declines by 20% or more from the amount last reported, the FCM must provide 

166 
notice within 2 business days of the event or series of events causing the reduction in net 

capital. 

7) Is the financial position of the intermediary subject to audit by independent auditors to 

provide additional assurance that the financial position reflects the risk that the 

intermediary undertakes? 

Yes. Commission Regulation 1.10 establishes a requirement for review of certain FCM 

operations by outside auditors, as a result of the requirement that FCMs file “certified” 

annual financial reports with the Commission. Commission Regulation 1.16 provides 

that the term “certified” means that a financial report has been audited and reported upon 

with an opinion expressed by an independent certified public accountant. In Regulation 

1.16, the Commission provides that it will recognize any person as a certified public 

accountant who is duly registered and in good standing in the place of his or her 

residence or principal office. Examples of the meaning of the word “independence” are 

also provided in Regulation 1.16. For example, an accountant will not be considered 

independent if he or she had any direct or indirect financial interest with the registrant 

during the period in which the professional engagement occurred, or was otherwise 

connected with the firm as a promoter, underwriter, director, officer, etc., during this 

period. A limited exception exists for former employees of a registrant who have 

“completely disassociated” themselves from the registrant and do not participate in 

auditing financial statements or schedules of the registrant covering any period of their 

employment. 

In order to satisfy the requirements of Regulation 1.16, the audit performed by the 

independent accountant must be conducted in accordance with generally accepted 

auditing standards. The procedures must include a review and appropriate tests of the 

accounting system of the FCM or IB, the FCM's or IB's internal accounting controls, and 

the procedures of the FCM or IB for safeguarding customer and firm assets. These 

procedures must be adequate to provide reasonable assurance that they will discover any 

material deficiencies in the accounting system, in the internal accounting controls, and in 

the FCM's or IB's system for safeguarding customer and firm assets. The accountant must 

also review the FCM's or IB's computations of minimum financial requirements and its 

daily computations of the segregation requirements under Section 4d(a)(2). Deficiencies 

in the FCM's or IB's procedures are considered to be material inadequacies if, in the 

absence of corrective steps, they could reasonably be expected to inhibit the FCM's or 

IB's ability to complete transactions promptly or to discharge responsibilities to 

customers or creditors; to result in material financial loss; to cause material misstatements 

in the FCM's or IB's financial statements and schedules; or to produce violations of the 

Commission's segregation, secured amount, recordkeeping, or financial reporting 

requirements, which could reasonably be expected to result in impediments to meeting its 

obligations, material financial loss, or inaccurate financial reports. 

An accountant who discovers any such material inadequacy in the course of an audit is 

required under Regulation 1.16 to notify the FCM or IB, who, in turn, must notify the 

Commission, NFA and the appropriate DSRO. A copy of the notice must also be given 

167 
to the accountant within three business days after it is filed. The accountant is to advise 

the NFA, in the case of an applicant, or the Commission and the DSRO, in the case of a 

registrant, within three business days if he or she does not receive a copy of the notice 

and must notify those regulatory units of any disagreement with the FCM's submission 

within three business days after receiving the copy of the FCM's notice. 

8) Does the regulator:

a) Regularly review market intermediaries’ capital levels? 

Yes. The Commission itself does not conduct routine on-site direct inspections of 

intermediaries, but may include an on-site visit to a firm as part of the responsive action 

taken when a firm files any early warning or other notification required under CFTC 

regulations. Also, under the CEA, SROs are required to develop programs to assess 

whether FCMs and IBs are in compliance with exchange and Commission minimum 

financial and related reporting requirements. Financial and Segregation Interpretations 

No. 4-1 and 4-2, issued by Commission staff, establish minimum components for a 

DSRO’s financial surveillance program. These interpretations provide that a DSRO 

should conduct an examination of each FCM on a basis no less frequently than once 

every 9 to 15 months. Each examination must assess the FCM’s compliance with 

minimum capital and customer funds protection requirements. Both the Commission and 

the SROs also receive monthly financial reports that include the statement of the 

computation of minimum capital requirements, as described in response to Principle 22, 

Question 6. 

b) Take appropriate action when these reviews indicate material deficiencies? 

Yes. If a review performed by either the SRO or the Commission indicates a material 

deficiency in capital, the Commission may impose the restrictions described in the 

response to Principle 24, Question 1. 

9) Does the regulator have specific authority to impose restrictions on an intermediary’s 

regulated business activities and more stringent capital monitoring and/or reporting 

requirements if an intermediary’s capital deteriorates so as to endanger its capacity to 

fulfill its obligations or when it falls below minimum requirements? Is there evidence that 

the regulator exercises this authority?

Yes. Several Commission regulations enable the Commission to require more frequent 

reporting and/or to impose restrictions on the intermediary’s business: 

Regulation 1.10(b)(4) provides that upon notice of any representative of the Commission, 

an FCM or IB must provide more frequent Form 1-FR information, or such other 

financial information as may be requested by such representative. For example, when 

shares of the parent company of Bear Stearns and Co., a registered FCM, declined by 

more than 45 percent on March 14, 2008, the FCM was required to begin filing financial 

information on a daily basis with the Commission and the DSRO, rather than on a 

monthly basis. 

168 
 

Regulation 1.12(a) requires immediate notice and updated capital computations if the 

FCM’s capital falls below the actual required minimum (as opposed to the capital 

levels that would merely trigger an early warning report under Regulation 1.12(b) 

described above). 

Regulation 1.17(a)(4) provides that an FCM that fails to demonstrate that it holds 

sufficient capital to meet the required minimum must transfer all customer accounts and 

immediately cease doing business as a FCM until such time as the FCM is able to 

demonstrate compliance with the capital requirements. However, the FCM may trade for 

liquidation purposes only during this period unless prohibited from doing so by its DSRO 

or the Commission. Moreover, the Commission or DSRO, at its discretion, may provide 

the FCM with an additional 10 business days to achieve compliance without transferring 

accounts and ceasing business, if the FCM can demonstrate its ability to achieve 

compliance within this period. 

Regulation 1.17(e) was amended in 2007 to provide that the Commission may, by written 

order, temporarily prohibit equity withdrawals by an FCM that would reduce excess 

adjusted net capital by 30 percent or more. Such orders would be based on the 

Commission's determination that the withdrawal transactions could be detrimental to the 

financial integrity of FCMs or could adversely affect their ability to meet customer 

obligations.97

10) Does the capital framework address risks from outside the regulated entity, for 

example from unlicensed affiliates or from off-balance sheet risks? 

Yes. Affiliate risk generally is addressed through reporting and filing requirements 

under Regulation 1.14 and 1.15. However, the capital calculations of FCMs and IBs 

must exclude from their current assets any deposits at affiliates, whether licensed or not. 

Also, as discussed in the response to Principle 22, Question 2, certain off-balance sheet 

items must be reported as non-current assets in the capital computations of FCMs and 

IBs.

 

97 72 FR 1148 (January 10, 2007). 

169 
Principle 23. Market intermediaries should be required to comply with 

standards for internal organization and operational conduct that aim to 

protect the interests of clients, ensure proper management of risk, and under 

which management of the intermediary accepts primary responsibility for 

these matters 

Assessment: Fully Implemented 

1) Is an intermediary required to have: 

a) An appropriate management and organization structure? 

b) Adequate internal controls? 

c) Senior management that is required to bear primary responsibility for ensuring the 

maintenance of appropriate standards of conduct and adherence to proper procedures 

by the whole firm? 

Yes, to all of the above. FCMs and independent IBs (i.e., not guaranteed by an FCM) are 

required to provide certified financial statements prior to registration and on an ongoing 

basis. The certification procedures must include a review and appropriate tests of the 

accounting system of the FCM or IB, the FCM's or IB's internal accounting controls, and 

the procedures of the FCM or IB for safeguarding customer and firm assets. These 

procedures must be adequate to provide reasonable assurance that they will discover any 

material deficiencies in the accounting system, in the internal accounting controls, and in 

the FCM's or IB's system for safeguarding customer and firm assets. The accountant must 

also review the FCM's or IB's computations of minimum financial requirements and its 

daily computations of the segregation requirements under Section 4d(a)(2). Deficiencies 

in the FCM's or IB's procedures are considered to be material inadequacies if, in the 

absence of corrective steps, they could reasonably be expected to inhibit the FCM's or 

IB's ability to complete transactions promptly or to discharge responsibilities to 

customers or creditors; to result in material financial loss; to cause material misstatements 

in the FCM's or IB's financial statements and schedules; or to produce violations of the 

Commission's segregation, secured amount, recordkeeping, or financial reporting 

requirements, which could reasonably be expected to result in impediments to meeting its 

obligations, material financial loss, or inaccurate financial reports. 

An accountant who discovers any such material inadequacy in the course of an audit is 

required under Regulation 1.16 to notify the FCM or IB, who, in turn, must notify the 

Commission, NFA and the appropriate DSRO. A copy of the notice must also be given 

to the accountant within three business days after it is filed. The accountant is to advise 

170 
the NFA, in the case of an applicant, or the Commission and the DSRO, in the case of a 

registrant, within three business days if he or she does not receive a copy of the notice 

and must notify them of any disagreement with the FCM's submission within three 

business days after receiving the copy of the FCM's notice. 

CFTC regulations also include operational requirements addressing risk management in 

connection with the risks that may be posed by FCM affiliates. For example, because 

many FCMs are affiliated with other organizations such as banks and insurance 

companies, the CFTC is authorized to obtain information about affiliates of an FCM that 

might jeopardize the FCM's ability to meet financial requirements or to otherwise remain 

in business. To moderate this risk, Congress amended section 4f of the CEA in 1992 to 

require an FCM to monitor those of its affiliates whose activities are reasonably likely to 

have a material impact on the FCM's financial or operational condition. Under 

Commission Regulations 1.14 and 1.15, all FCMs, with certain limited exemptions must, 

among other things, maintain, preserve and file with the Commission the following 

information: 

• an organizational chart showing its affiliated persons; 

• written policies, procedures or systems concerning methods for monitoring and 

controlling financial and operational risk, capital adequacy, internal controls with 

respect to market, credit and other risks; and 

• fiscal year-end consolidated balance sheets, income statements and cash flow 

statements. 

To help ensure compliance by registrants with these operational conduct requirements, 

Commission Regulation 166.3 requires each registrant (except APs with no supervisory 

duties), to “diligently supervise” the handling by its partners, officers, employees and 

agents of all activities relating to its business as a CFTC registrant. Also, the review of 

FCM internal procedures falls within the scope of SRO audit and surveillance obligations 

under Regulation 1.52. SRO obligations under this regulation include monitoring and 

auditing compliance by FCMs with their minimum financial and related reporting 

requirements, and also receiving the financial reports that all FCMs are required to file. 

The Commission also has issued guidance that emphasizes DSRO examination of the 

internal controls of FCMs, noting that the DSRO’s assessment of such internal controls 

must include a review and evaluation of the procedures followed by an FCM in 

evaluating and minimizing the financial risk to the FCM and its customers. Such 

assessments must take into account the types, size and concentration of customer, noncustomer and proprietary transactions, positions and commitments the FCM carries, on 

exchange and off-exchange, both domestic and foreign. See Interpretative Release 4-2 

(August 20, 1999). 

2) Is an intermediary required to cause an independent, periodic evaluation of its internal 

controls and risk management processes to be performed? Where the firm elects an 

evaluation performed by an independent auditor, is that auditor required to report 

material breakdowns in controls to senior management and to the regulator? 

171 
There is no requirement for an independent periodic evaluation of internal controls and 

risk management processes for FCMs and IBs other than those associated with the 

certified financial reporting requirements. CFTC Regulation 1.10 establishes a 

requirement for review of certain FCM operations by outside auditors, as a result of the 

requirement that FCMs file certified annual financial reports with the Commission. 

Commission Regulation 1.16 provides that the term “certified” means that a financial 

report has been audited and reported upon with an opinion expressed by an independent 

certified public accountant. In Regulation 1.16, the Commission provides that it will 

recognize any person as a certified public accountant who is duly registered and in good 

standing in the place of his or her residence or principal office. Examples of the meaning 

of the word “independence” are also provided in Regulation 1.16. For example, an 

accountant will not be considered independent if he or she had any direct or indirect 

financial interest with the registrant during the period in which the professional 

engagement occurred, or was otherwise connected with the firm as a promoter, 

underwriter, director, officer, etc., during this period. A limited exception exists for 

former employees of a registrant who have “completely disassociated” themselves from 

the registrant and do not participate in auditing financial statements or schedules of the 

registrant covering any period of their employment. 

In order to satisfy the requirements of Regulation 1.16, the audit performed by the 

independent accountant must be conducted in accordance with generally accepted 

auditing standards. The procedures must include a review and appropriate tests of the 

accounting system of the FCM or IB, the FCM's or IB's internal accounting controls, and 

the procedures of the FCM or IB for safeguarding customer and firm assets. These 

procedures must be adequate to provide reasonable assurance that they will discover any 

material deficiencies in the accounting system, in the internal accounting controls, and in 

the FCM's or IB's system for safeguarding customer and firm assets. The accountant must 

also review the FCM's or IB's computations of minimum financial requirements and its 

daily computations of the segregation requirements under Section 4d(a)(2). Deficiencies 

in the FCM's or IB's procedures are considered to be material inadequacies if, in the 

absence of corrective steps, they could reasonably be expected to inhibit the FCM's or 

IB's ability to complete transactions promptly or to discharge responsibilities to 

customers or creditors; to result in material financial loss; to cause material misstatements 

in the FCM's or IB's financial statements and schedules; or to produce violations of the 

Commission's segregation, secured amount, recordkeeping, or financial reporting 

requirements, which could reasonably be expected to result in impediments to meeting its 

obligations, material financial loss, or inaccurate financial reports. 

An accountant who discovers any such material inadequacy in the course of an audit is 

required under Regulation 1.16 to notify the FCM or IB, who, in turn, must notify the 

Commission, NFA and the appropriate DSRO. A copy of the notice must also be given 

to the accountant within three business days if he or she does not receive a copy of the 

notice and must notify these regulatory bodies of any disagreement with the FCM's 

submission within three business days after receiving the copy of the FCM's notice. 

3) Is the intermediary required to provide for an efficient and effective mechanism for the 

resolution of investor complaints? 

172 
Yes. CFTC Regulation 166.5 sets forth the requirements that must be included in a 

customer account agreement with respect to dispute resolution procedures, including the 

use of arbitration procedures. Three fora exist for the resolution of disputes: civil court 

litigation, CFTC reparations proceedings, and arbitration conducted by an SRO or other 

private organization. 

4) If an intermediary has control of, or is otherwise responsible for, assets belonging to a 

customer which it is required to safeguard, are there regulations that require proper 

protection for them (for example, segregation and identification of those assets) by the 

intermediary? Do these measures facilitate the transfer of positions; assist in the orderly 

winding up in the event of financial insolvency and otherwise provide protection from 

misuse by the intermediary? 

Yes. With respect to customer funds held by FCMs, Section 4d(a)(2) of the CEA and 

regulation 1.20 both explicitly state that FCMs must separately account for customer 

funds on their books and records, and segregate such customer funds from their own 

funds and funds of other persons. The FCM is permitted to pool all customer funds in a 

single account, which must be clearly identified as belonging to customers. Customer 

funds must be deposited by the FCM with a bank, trust company, DCO, or another FCM. 

The FCM is further obligated to obtain a letter from the depository acknowledging that 

the funds deposited represent customer assets under the CEA and that the depository may 

not offset any obligation that the depositing FCM may have with the depository by the 

funds maintained in the Section 4d(a)(2) segregated account. 

To be in compliance with the Commission’s segregation requirements, an FCM must 

always maintain in accounts segregated in accordance with Section 4d(a)(2) of the CEA, 

sufficient funds in order to satisfy the net liquidating value of every futures and options 

customer. Each FCM is required to compute a calculation demonstrating its compliance 

with the segregation obligations on a daily basis, and is required to provide the 

Commission and its DSRO with immediate notification if it is not in compliance with its 

segregation obligation. Should an FCM be under its minimum capital requirements under 

CFTC Regulation 1.17, it must cease doing business as an FCM and transfer customer 

accounts. In this instance, the segregation requirements make the quick transfer of 

customer funds and positions between FCMs possible, and, in that circumstance, the 

process is directed and monitored by the DSRO and the CFTC. 

5) Is an intermediary required to obtain and retain basic information from a customer 

about concerns and issues involving investment objectives relevant to the service to be 

provided? 

The Commission’s approach is to mandate disclosure of risks to customers prior to their 

opening accounts, and to require that the FCM or IB receive from the customer a signed 

acknowledgement that the risk disclosure statement has been received and understood. 

The topics covered in the risk disclosure statement required by Regulation 1.55 include 

the risks of futures trading, the possibility of margin calls and the liquidation of positions 

if such calls are not met, the potential loss of funds deposited, the possibility that a 

position cannot be liquidated when desired, the possibility that “stop-loss” orders may not 

173 
be executable, the acknowledgement that spread transactions may not be less risky than 

long or short trades, and the notice that the leverage in futures trading can result in large 

losses as well as large gains. The statement also urges the customer to consider his or her 

own suitability for trading and to study futures trading carefully before committing funds. 

NFA Compliance Rule 2-30 provides that the information to be obtained from the 

customer shall include at least the following: 

(1) the customer's true name and address, and principal occupation or business; 

(2) the customer's current estimated annual income and net worth; 

(3) the customer's approximate age; and 

(4) an indication of the customer's previous investment and futures trading 

experience. 

6) Is an intermediary required to “know its customer” before providing specific advice to 

a customer? 

Yes. See supra, response to Principle 23, Question 5. 

7) Can a customer obtain an agreement or contract or a written form of the general and 

specific business conditions that sets forth the terms on which the customer will be dealing? 

Yes. Although the form and terms of the customer agreement are not prescribed by 

CFTC regulation, transactions must be specifically authorized; customer information as 

discussed above must be obtained; risk disclosure must be provided, signed and retained; 

and monthly account statements and confirmations must be provided. In addition, an 

agreement in advance to submit to settlement procedures (arbitration) must be voluntary 

and the intermediary must not require the customer to waive its right to seek reparations 

under Section 12 of the CEA. 

8) Is an intermediary required to provide general or specific disclosures to customers of 

information needed to make a balanced and informed investment decision? 

Yes. See supra, response to Principle 23, Question 5. 

9) Is an intermediary required to provide a customer with a full and fair statement of 

account (and information regarding remuneration received by the intermediary for 

services provided to the customer)? 

Yes. Pursuant to Regulation 1.33, FCMs must provide each customer with a monthly 

account statement regarding the details of transactions in its account, as well as charges 

and credits to the account. The FCM also must provide confirmation statements of each 

transaction by the next business day following the transaction. 

174 
10) Is the intermediary required to have a person or group of persons responsible for 

monitoring its compliance with legal and regulatory requirements as well as with its 

internal policies and procedures?

To help ensure compliance by registrants with operational conduct requirements, 

Commission Regulation 166.3 requires each registrant (except APs with no supervisory 

duties), to “diligently supervise” the handling by its partners, officers, employees and 

agents of all activities relating to its business as a CFTC registrant. There is also a 

requirement under CFTC Regulation 1.10 for certain signatories with sufficient authority 

to sign off on the submission of regulatory financial filings asserting the accuracy and 

completeness thereof, but there is no requirement that a person or group of persons have 

overall responsibility for regulatory and legal requirements. 

11) Is an intermediary required to create and maintain adequate and reliable books and 

records, including accounting records? Is the intermediary required to maintain those 

books and records in a way that allows full supervision by the regulator? 

Yes. The Commission imposes extensive recordkeeping requirements relating to the 

operations of FCMs and IBs. Pursuant to Regulation 1.31, all books and records required 

by the CEA and Commission regulations must be kept for a period of five years and be 

readily accessible during the first 2 years of the 5-year period. All books and records 

must be open to inspection by any representative of the CFTC or DOJ. The relevant 

recordkeeping provisions of several Commission regulations, which cover records 

pertaining to segregated funds, account activity, financial condition, customer protection, 

and other matters, are summarized below. 

Regulation 1.18 requires FCMs and IBs to prepare and keep current ledgers which show 

each transaction affecting asset, liability, income, expense and capital accounts consistent 

with the classifications specified on the Form 1-FR (or the FOCUS Report if a securities 

broker-dealer). 

Regulation 1.27 requires each FCM that invests customer funds to keep a record showing 

the details of the investment, including the size and type of investment, the date of the 

investment, and any disposition made of the investment. 

Regulation 1.32 requires an FCM to compute each day the customer funds in segregated 

accounts and the FCM's residual interest in those funds, and to keep a record of each such 

computation. 

Regulation 1.33 (a) requires that FCMs prepare a statement for each futures or options 

customer which shows the open contracts acquired or pertinent options transactions and 

their prices, the net unrealized prices in all open contracts marked to the market, any 

customer funds carried with the FCM and a detailed accounting of all credits and charges 

to the customer's account for the month. If there is no activity in an account, an account 

statement need only be prepared every three months. Regulation 1.33 (b) requires that 

each FCM must furnish no later than the next business day: (1) a written confirmation of 

each futures transaction; or (2) a written confirmation of an options transaction 

175 
containing the account identification number, a statement of the commission, premium or 

other applicable option charges, the strike price, the underlying futures contract or 

underlying physical, the final exercise date of the option and the date the transaction was 

executed. 

Regulation 1.34 requires each FCM to prepare a monthly balance of all open positions 

which brings to the closing or settlement price all open futures and option positions. 

Regulation 1.35(a) contains general recordkeeping requirements for FCMs and IBs with 

respect to futures, commodity options, and cash commodity transactions. FCMs and IBs 

must keep full, complete, and systematic records, together with all pertinent data and 

memoranda. Records to be kept include all orders (filled, unfilled, or cancelled), trading 

cards, signature cards, street books, journals, ledgers, cancelled checks, copies of 

confirmations, copies of statements of purchase and sale, and all other records, data and 

memoranda which have been prepared in the course of the firm’s business. 

Regulation 1.35(b) requires that the FCM maintain a financial ledger record for each 

customer account showing credits, debits, deposits, withdrawals or transfers, and charges 

or credits resulting from losses or gains on closed positions, along with a central activity 

record or journal showing all transactions made each day by the FCM, with trade details 

and the identity of the trader. 

Regulation 1.36(a) requires FCMs to maintain records of all securities and property 

received from customers to margin, purchase, guarantee, or secure a futures or exchangetraded option transaction. The records must show where the property is deposited and any 

other disposition of the property. 

Regulation 1.37(a) requires FCMs and IBs to keep a record of each account carried or 

introduced, the name and address of the person for whom such account is carried or 

introduced, and such person’s principal occupation or business. The record must also 

show the name of any person guaranteeing the account or exercising any control over it. 

Regulation 1.37(b) requires each FCM carrying a futures or options omnibus account for 

another FCM, foreign broker, or other person to maintain a daily record of the positions 

in each such account. 

Regulation 1.40 imposes certain recordkeeping requirements relating to crop or market 

information or conditions that affect or tend to affect the price of any commodity. 

12) Is an intermediary required to establish and maintain appropriate systems of 

customer protection, risk management and internal and operational controls, including 

policies, procedures, and controls relating to all aspects of its business intended reasonably 

to ensure: 

a) An effective exchange of information between the firm and its clients, including 

required disclosures of information to clients? 

176 
b) The integrity of the firm’s dealing practices, including the treatment of all clients in 

a fair, honest and professional manner? 

c) The safeguarding of both the firm’s and its clients’ assets against unauthorized use 

or disposition? 

d) The maintenance of proper accounting and other applicable records and the 

reliability of the information? 

e) Compliance with all relevant legal and regulatory requirements? 

f) Appropriate segregation of key duties and functions, particularly those duties and 

functions which, when performed by the same individual, may result in undetected 

errors or may be susceptible to abuses which expose the firm or its clients to 

inappropriate risks? 

In response to (a)-(f), the CEA and Commission regulations impose a number of specific 

requirements relevant to the issue of customer protection risk disclosure, financial and 

other recordkeeping and net capital compliance. The CEA and CFTC regulations do not 

require intermediaries to adopt specific internal and risk management controls outside of 

these requirements, nor do they require the testing of such, other than through the 

certification of financial statement requirements as previously discussed. 

To help ensure compliance by registrants with specific operational conduct requirements 

(as opposed to internal control/risk management requirements), Commission Regulation 

166.3 requires each registrant (except APs with no supervisory duties), to “diligently 

supervise” the handling by its partners, officers, employees and agents of all activities 

relating to its business as a CFTC registrant. 

13) Is an intermediary required: 

a) To endeavor to avoid a conflict of interests arising between its interests and those of 

its customers or between its customers? 

b) Where the potential for conflicts arise, to have mechanisms in place to ensure fair 

treatment of all its customers such as proper disclosure, internal rules of confidentiality, 

declining to act where conflict cannot be avoided? 

Part 155 of the Commission’s regulations requires FCMs and IBs to establish and enforce 

internal rules, procedures and controls to insure, to the extent possible, that orders 

received from customers are transmitted before any order in the same commodity for the 

benefit of a proprietary account. These regulations prevent FCMs and IBs and their 

affiliated persons from using their knowledge of customer orders to the customer’s 

disadvantage and have helped the Commission to deter such practices as “front-running” 

and “trading ahead.” 

177 
Principle 24. There should be a procedure for dealing with the failure of a 

market intermediary in order to minimize damage and loss to investors and to 

contain systemic risk 

Assessment: Fully Implemented 

1) Does the regulator have clear plans for dealing with the eventuality of a firm’s failure, 

including a combination of activities to restrain conduct, to ensure assets are properly 

managed and to provide information to the market as necessary? 

Yes. The CEA and CFTC regulations provide, in conjunction with the Bankruptcy Code, 

a clear framework for the CFTC to follow in managing the failure of an FCM. 

Early Warning Mechanisms. As described above, all FCMs are monitored by a 

DSRO98 for compliance with the CEA and CFTC regulations, including CFTC 

Regulation 1.17 (e.g., minimum capital requirement), as well as Section 4d(a)(2) of the 

CEA and CFTC Regulations 1.20 to 1.30 (e.g., treatment of customer property). 

Additionally, if an FCM is executing transactions on a DCM, then such FCM is required 

to clear such transactions through a DCO.99 In order to clear such transactions, the FCM 

 

98 As mentioned above, an SRO (i.e., a commodity exchange or a registered futures association) has the 

responsibility for ensuring that an FCM complies with the CEA and the Regulations. The term “DSRO” refers to 

the SRO that is primarily responsible for a specific FCM. If an FCM is a member of more than one SRO, all 

relevant SROs may decide among themselves which of them will be primarily responsible for that FCM, and that 

SRO will be appointed the DSRO for that FCM. 

99 See 7 U.S.C. 7(b)(5) (stating that, in order to become designated as a DCM, an entity must “establish and enforce 

rules and procedures for ensuring the financial integrity of transactions entered into by or through the facilities of the 

contract market, including the clearance and settlement of the transactions with a derivatives clearing organization”). 

A DCO is a central counterparty that “interposes itself between counterparties” to commodity contracts, thereby 

“becoming the buyer to every seller and the seller to every buyer.” See Section 1.1 of CPSS-IOSCO 

Recommendations for Central Counterparties, dated as of November 2004. A DCO guarantees that a member with 

net gains on its positions will receive related amounts, even if the DCO cannot collect such amounts from a member 

with net losses on its positions. Thus, a DCO is essential to managing systemic and counterparty risks in the event 

that a member fails. 

To obtain and maintain its registration, a DCO must comply with fourteen core principles established in Section 5b 

of the CEA (7 U.S.C. 7a-1(c)(2)(A)), and Part 39 of the Regulations. Specifically, such core principles address: (i) 

general matters; (ii) financial resources; (iii) participant and product eligibility; (iv) risk management; (v) settlement 

procedures; (vi) treatment of funds; (vii) default rules and procedures; (viii) rule enforcement; (ix) system 

safeguards; (x) reporting; (xi) recordkeeping; (xii) public information; (xiii) information sharing; and (xiv) antitrust 

considerations. 

178 
generally must be a member of the DCO,100 and must therefore comply with the rules of 

the DCO, especially those pertaining to payments and settlements. The FCM is 

monitored by the DCO for compliance with such rules. 

Given the regulatory structure described above, the CFTC has a number of methods for 

ascertaining when an FCM may be experiencing financial distress. First, an FCM has 

affirmative responsibilities under the Regulations to notify the CFTC upon the 

occurrence of one of a number of events, any of which may indicate financial distress. 

For example, pursuant to CFTC Regulation 1.12: 

• An FCM must provide the CFTC with notice within 24 hours, if such FCM knows 

or should know that its capital exceeds its minimum capital requirement, but is less 

than a certain percentage specified in Regulation 1.12;101 

• An FCM must provide the CFTC with immediate notice, if such FCM knows or 

should know that its capital is less than the amount specified in its minimum capital 

requirement;102

• As mentioned above, an FCM must provide the CFTC with immediate notice, if 

such FCM determines that it has insufficient segregated property; 103 and 

 

The CFTC evaluates compliance with the core principles when reviewing DCO applications, and for DCOs that are 

already registered, the CFTC performs periodic reviews to assess their compliance with the core principles on an 

ongoing basis. Such reviews may focus on one or two core principles and assess the compliance of multiple DCOs 

with those particular core principles (horizontal review), or it may focus on a particular DCO and the compliance of 

that DCO with multiple core principles (vertical review). In evaluating DCO applications and performing Core 

Principle reviews, CFTC staff members consider not only documentary information, but also conduct on-site visits 

and independent analysis and testing, if appropriate. CFTC staff members draft memoranda summarizing their 

conclusions with respect to DCO applications and Core Principle reviews, and the CFTC bases its actions on such 

memoranda. 

100 Most large FCMs are members of a DCO. If an FCM is not a member of a DCO (“Non-Clearing FCM”), it may 

become a customer of, and thereby clear transactions through, an FCM that is a member of a DCO (“Clearing 

FCM”). The Clearing FCM monitors the compliance of the Non-Clearing FCM with payment obligations. Pursuant 

to Regulation 1.12(f)(2), the Clearing FCM has an affirmative responsibility to notify the CFTC whenever it 

determines that it must immediately liquidate or transfer the positions of a Non-Clearing FCM, or limit the NonClearing FCM to trading for liquidation only, because the Non-Clearing FCM has failed to meet its payment 

obligations to the Clearing FCM. 

101 Pursuant to Regulation 1.10(b)(1)(i), the FCM must continue to provide, on a monthly basis, certain financial 

information to the CFTC, in a Form 1-FR (or an equivalent SEC report, if the FCM is also a broker-dealer). 

However, the CFTC may require, pursuant to Regulation 1.12, the FCM to provide interim financial information, to 

facilitate CFTC monitoring of such FCM. 

102 Pursuant to Regulation 1.12, the FCM must provide, within twenty-four (24) hours of such notice, certain 

financial information to the CFTC, in a Form 1-FR (or an equivalent SEC report, if the FCM is also a broker-dealer). 

103 See supra, note 95. 

179 
• An FCM must provide the CFTC with immediate notice, if such FCM determines 

that a customer account is undermargined by an amount that exceeds the adjusted net 

capital of such FCM.104 

Second, the CFTC may receive information from a DSRO or a DCO that an FCM is 

either currently not fulfilling its financial obligations, or has a risk profile indicating that 

it may shortly become unable to fulfill such obligations. Third, the CFTC’s Risk 

Surveillance Group (“RSG”) may identify such an FCM.105

 

Management of Potential FCM Failure Pre-Bankruptcy. If the CFTC ascertains, 

from the mechanisms described above, that an FCM may be experiencing financial 

distress, the CFTC will attempt to determine whether there is a significant likelihood that 

the FCM will fail.106 The CFTC first gathers information from the DSRO, any other 

relevant SRO, and the DCO on the financial resources available to the FCM (including 

the liquidity of such resources). The CFTC then gathers information, from the same 

sources, on the potential causes of financial distress at the FCM (e.g., extreme market 

volatility, or concentration of proprietary or customer positions opposite to the direction 

of the market), and on losses that the FCM has already sustained, or will likely sustain, 

from such causes. The CFTC finally considers the extent to which the FCM will be able 

to cover its current or future losses using its available financial resources. 

If the CFTC determines that an FCM is likely to fail, then it will attempt: 

• to effect the transfer of customer accounts. For example, pursuant to Regulation 

1.17(a)(4), if an FCM holds less capital than the amount specified in its minimum 

capital requirement, then it generally must transfer all customer accounts and 

immediately cease conducting business as an FCM, until such time as the FCM is 

able to demonstrate compliance with its minimum capital requirement. The FCM 

itself or its DSRO would actually arrange the transfer of customer accounts. The role 

of the CFTC would be to facilitate such transfer as necessary (e.g., grant relief from 

certain notice requirements applicable to such transfer under Regulation 1.65); 

• to determine the effects that such failure would have on the counterparties of the 

FCM, as well as on the futures markets. In most instances, if the FCM is clearing 

transactions through a DCO, the failure would cause minimal disruption to 

counterparties and the futures markets. See the section below entitled Proper 

Management of Systemic and Counterparty Risks (Whether Pre-Bankruptcy or After 

Bankruptcy).

 

104 Id. 

105 The RSG, as described further below, endeavors on a daily basis: (i) to identify any significant financial risks 

posed by positions in products that (A) an FCM clears through a DCO, and (B) fall within the jurisdiction of the 

CFTC; and (ii) to confirm that such financial risks are being appropriately managed. 

106 In many cases, CFTC staff will receive notice from an FCM for less serious reasons, such as when a clerical error 

causes the capital of an FCM to temporarily fall below the percentage specified in Regulation 1.12. Such notice will 

generally reveal that the error has been corrected. 

180 
If the CFTC determines that an FCM is not likely to fail, then it may permit the FCM to 

continue operations without transferring customer accounts, despite the financial distress 

experienced by the FCM. For example, even if the FCM violates its minimum capital 

requirement, the CFTC or the relevant DSRO has the discretion, pursuant to Regulation 

1.17(a)(4), to allow the FCM a maximum of ten (10) days to achieve compliance with 

such requirement, without transferring customer accounts and ceasing business, provided 

that the FCM immediately demonstrates to the CFTC or the DSRO its ability to achieve 

compliance within that time period. In determining whether the FCM has met its 

demonstration burden, the DSRO and the CFTC are in routine contact and work 

cooperatively. 

Management of FCM Bankruptcy. If an FCM becomes the subject of bankruptcy 

proceedings, then Subchapter IV of Chapter 7 of the Bankruptcy Code (“Subchapter 

IV”), in conjunction with Regulation Part 190 (“Part 190”), would govern such 

proceedings. As described below, Subchapter IV and Part 190 set forth a clear structure 

for the liquidation of a commodity broker, including an FCM. 

Restraints on Conduct. Pursuant to Regulation 190.04(d)(2), the trustee appointed to 

administer the bankruptcy proceedings of an FCM is not permitted to purchase or sell 

new commodity contracts for the customers of such FCM, with the exceptions noted 

below. In general, Regulation 190.04(d)(2) presumes that an FCM subject to bankruptcy 

proceedings is insolvent and, therefore, that such FCM does not have sufficient capital to 

operate its business, which business may include supporting the credit of its customers or 

performing on other obligations. Thus, in restricting the conduct of the trustee, 

Regulation 190.04(d)(2) aims to minimize the risk of loss to customers of the FCM. 

However, Regulation 190.04(d)(2) recognizes that, even where an FCM is insolvent, 

certain purchases or sales of new commodity contracts may be risk-reducing, and thus 

may prevent material erosion in value of open commodity contracts constituting customer 

assets. Therefore, Regulation 190.04(d)(2) permits the trustee to engage in such 

purchases or sales to achieve any of the following purposes: (i) to offset an open 

commodity contract; (ii) to transfer any transferable notice applicable to an open 

commodity contract; or (iii) to cover or partially cover, with the approval of the CFTC, 

inventory or commodity contracts of the FCM that cannot be immediately liquidated due 

to market conditions (including price limits). 

Proper Management of Assets. 

Pre-Petition Transfers. If, pursuant to Regulation 1.17(a)(4), the FCM had 

transferred customer accounts before becoming subject to bankruptcy 

proceedings, then Section 764(b) of the Bankruptcy Code, in conjunction with 

Regulation 190.06(g)(1)(i), would protect such transfer from avoidance by the 

trustee. Specifically, Section 764(b) of the Bankruptcy Code prohibits a trustee 

from avoiding a transfer of customer positions in a commodity contract (and the 

collateral securing such positions), if the FCM made such transfer prior to seven 

181 
(7) calendar days after becoming subject to bankruptcy proceedings, and if the 

CFTC had approved such transfer by rule or order. In general, the CFTC has 

approved such transfer by promulgating Regulation 190.06(g)(1)(i), which 

prohibits a trustee from avoiding a transfer of customer accounts pursuant to 

Regulation 1.17(a)(4), unless the CFTC has specifically disapproved such 

transfer. 

Post-Petition Transfer. An FCM may become subject to bankruptcy 

proceedings before it transfers customer accounts pursuant to Regulation 

1.17(a)(4). In that case, Regulation 190.02(e) requires the trustee to immediately 

use its best efforts to transfer eligible customer accounts, as determined in 

accordance with Regulation 190.06(e) and (f). If the trustee makes such transfer 

prior to seven (7) calendar days after the FCM becomes subject to bankruptcy 

proceedings, then Section 764(b) of the Bankruptcy Code, in conjunction with 

Regulation 190.06(g)(2), would protect such transfer from later attempts at 

avoidance. 

Distribution of Assets in Customer Accounts. If the trustee determines, in 

accordance with Regulation 190.06(e) and (f), that customer accounts are not 

eligible for transfer, then the trustee must liquidate, in accordance with Regulation 

190.02(f), the positions and accompanying collateral held in such accounts. 

After such liquidation, the trustee must distribute the proceeds. Section 761(10) 

of the Bankruptcy Code characterizes such proceeds as “customer property.” 

Section 766(h) of the Bankruptcy Code requires the trustee to distribute 

“customer property” to customers of the FCM, “in priority to all other claims,” 

except claims attributed to the administration of such property. Therefore, under 

Section 766(h) of the Bankruptcy Code, the claims held by customers of an FCM 

will be satisfied from “customer property,” before the claims held by other 

creditors of such FCM are satisfied, with the exception of claims attributed to the 

administration of “customer property.” 

Section 766(h) of the Bankruptcy Code further requires the trustee to allocate 

“customer property” between customers of an FCM on the basis of “allowed net 

equity claims.” Regulation 190.08 specifies the manner in which the trustee must 

calculate such claims for each customer, and essentially defines “allowed net 

equity” as pro rata allocation. Pro rata allocation provides a method for 

mutualizing any shortfalls in “customer property” in an impartial and fair manner. 

As described above, Section 4d(a)(2) of the CEA ensures the integrity of 

“customer property” by requiring that an FCM: (i) treat all collateral securing the 

positions of a customer, as well as all amounts accruing to such positions, as 

belonging to such customer; (ii) separately account for such collateral and 

amounts; and (iii) refrain from (A) commingling such collateral and amounts with 

proprietary funds, and (B) using the collateral and amounts belonging to one 

customer to margin or guarantee the transactions of, or to secure or extend credit 

182 
to, another customer. As described above, the CFTC implemented Section 

4d(a)(2) of the CEA by promulgating Regulations 1.20 to 1.30, which address the 

treatment of customer property, including investments of such property by an 

FCM. 

Provision of Information to the Market. Regulation 190.02(a) requires: (i) an FCM 

filing a voluntary bankruptcy petition to notify the CFTC, as well as its DSRO, upon or 

before making such filing; and (ii) an FCM subject to an involuntary bankruptcy petition 

to notify the CFTC, as well as its DSRO, no later than one (1) business day after the FCM 

receives information of such petition. Upon receiving such notification, both the CFTC 

and the DSRO will have the ability to provide information regarding such bankruptcy 

petition to the public, as necessary. 

Proper Management of Systemic and Counterparty Risks (Whether PreBankruptcy or After Bankruptcy). In general, if a DCO currently cannot collect 

payments from a member, or if a DCO believes that it will shortly be unable to collect 

such payments,107 the DCO will declare the member to be in default. The rules of the 

DCO would govern the management of such default. Usually, such rules would permit: 

(i) the DCO to liquidate or transfer positions carried by the defaulting member; (ii) the 

DCO to access all property held in the proprietary accounts of the defaulting member; 

(iii) the DCO to access all property held in the customer account of the defaulting 

member, if the default of the member to the DCO resulted from the default of a customer 

to the member; and (iv) the DCO to access any amounts that the defaulting member had 

contributed to the guarantee fund. If the proceeds from (i) through (iv) do not cover all 

DCO losses, then the rules of the DCO may permit: (A) the DCO to access the amounts 

that non-defaulting members had contributed to the guarantee fund; (B) the DCO to look 

to its own capital; and (C) the DCO to levy an assessment on all members. 

2) Are there early warning systems or other mechanisms in place to give the regulator 

notice of a potential default by a market intermediary and time to address the problem and 

to take corrective actions? 

Yes. See supra, response to Principle 24, Question 1. 

3) Does the regulator have the power to take appropriate actions: In particular, can it: 

a) Restrict activities by the intermediary with a view to minimizing damage and loss to 

investors? 

Yes. See supra, response to Principle 24, Question 1. 

b) Require the intermediary to take specific actions, for example, moving client 

accounts to another intermediary? 

 

107 In general, if a DCO suspects that a member will shortly be unable to make scheduled payments, a DCO would 

request that such member deposit additional performance bond. If the member is unable to make such deposit, then 

the DCO would declare such member to be in default. 

183 
Yes. See supra, response to Principle 24, Question 1. 

c) Request appointment of a monitor, receiver, curator or other administrator or, in 

the absence of such power, can the regulator apply to the relevant authorities to take 

possession or control of the assets held by the intermediary or by a third party on 

behalf of the intermediary? 

Yes. Pursuant to Section 6(c) of the CEA, the CFTC has the authority to request the 

appointment of a monitor, receiver, curator or other administrator, with respect to an 

FCM that the CFTC has reason to believe is violating or has violated any provision in the 

CEA and the Regulations. 

d) Require that relevant information concerning a firm’s failure (i.e. a firm’s trading 

status) be disclosed to the market? 

Yes. See supra, response to Principle 24, Question 1. 

e) Apply other available measures intended to minimize customer, counterparty and 

systemic risk in the event of intermediary failure, such as customer and settlement 

insurance schemes or guarantee funds? 

Yes. See supra, response to Principle 24, Question 1. 

4) Do the regulator’s processes and procedures for addressing financial disruption include 

communication and cooperation with other regulators, both domestic and foreign, where 

appropriate, and is there evidence that contact arrangements are in place and that such 

cooperation occurs? 

As a routine matter, the CFTC consults with other regulators, both domestic and foreign, 

on areas of mutual interest. Domestically, the CFTC regularly interacts with other 

financial regulatory agencies on an informal basis. The CFTC also formally interacts 

with other financial regulatory agencies through its participation in the President’s 

Working Group on Financial Markets. The CFTC further enters into formal memoranda 

of understanding with other financial regulatory agencies, if appropriate. 

Internationally, the CFTC has entered into bilateral MOUs with numerous foreign 

regulators, each of which calls for the sharing of information. The CFTC has posted such 

MOUs on its Web site, at 

http://www.cftc.gov/international/memorandaofunderstanding/index.htm. Additionally, 

the CFTC is a signatory of the multilateral Declaration on Cooperation and Supervision 

of International Futures Exchanges and Clearing Organizations and the IOSCO MMOU.

184 
SECONDARY MARKETS

PRINCIPLES 25-29

185 
Principle 25. The establishment of trading systems including securities 

exchanges should be subject to regulatory authorization and oversight 

Assessment: Fully Implemented 

1) Does the establishment of an exchange or trading system require authorization? 

Yes. Any market that seeks to provide a trading facility to trade futures, options on 

futures or options on commodities must apply to the Commission to become a DCM or to 

be registered as a DTEF, unless some exemption or exclusion would apply to the facility. 

The CFTC is the authority that analyzes the DCM or DTEF application and grants the 

authorization. Section 4(a) of the CEA establishes the basis for requiring markets to 

register. Section 4(a) of the CEA states in part that: 

Unless exempted by the Commission pursuant to subsection (c), it shall be 

unlawful for any person to offer to enter into, to enter into, to execute, to confirm 

the execution of, or to conduct any office or business anywhere in the United 

States, its territories or possessions, for the purpose of soliciting, or accepting any 

order for, or otherwise dealing in, any transaction in, or in connection with, a 

contract for the purchase or sale of a commodity for future delivery (other than a 

contract which is made on or subject to the rules of a board of trade, exchange, or 

market located outside the United States, its territories or possessions) unless--- 

(1) such transaction is conducted on or subject to the rules of a board of trade 

which has been designated or registered by the Commission as a contract market 

or DTEF for such commodity . . . . 

The CFTC does not rely on the judgments of another authority in granting contract 

market designation or registering a market as a DTEF. 

The CEA is available at http://www.cftc.gov/lawandregulation/index.htm. 

2) Are there criteria for the authorization of exchange and trading system operators that: 

a) Require analysis and authorization of the market by a competent authority? 

Yes. 

Statutory and administrative standards for DCM status. Criteria, procedures and 

requirements for designation as a DCM are set forth in Section 5 of the CEA, 7 U.S.C. 7, 

and Part 38 of the CFTC's regulations. Appendix A and B to Part 38 provide specific 

information on these requirements and guidance to applicants seeking to become 

designated as DCMs. 

186 
Products Eligible for Trading. Boards of trade designated as a contract market may list 

for trading futures or option contracts based on any underlying commodity, index or 

instrument. However, there are special requirements for security futures products, which 

are subject to joint CFTC/SEC oversight under rules promulgated by these agencies in 

2001. 

Criteria for DCM Status. The criteria for designation as a contract market are set forth 

in Section 5(b) of the CEA and Part 38 of the CFTC's regulations. The criteria relate to 

the following standards: 

(1) General Demonstration of Adherence to Designation Criteria; 

(2) Prevention of Market Manipulation; 

(3) Fair and Equitable Trading; 

(4) Enforcement of Rules on the Trade Execution Facility; 

(5) Financial Integrity of Transactions; 

(6) Disciplinary Procedures; 

(7) Public Access to Information on the Contract Market; and 

(8) Ability of the Contract Market to Obtain Information. 

Appendix A to Part 38 provides more specific information on these designation 

requirements as well as guidance to applicants seeking to become DCMs. 

Ongoing compliance with core principles. In addition to the above requirements for 

designation, a DCM must comply, on a continuing basis, with the following 18 core 

principles. Appendix B to Part 38 provides additional information and guidance to 

applicants on how DCMs can remain in compliance with these core principles. 

1. In general 7. Availability of 

general information

13. Dispute resolution

2. Compliance with 

rules 

8. Daily publication 

of trading 

information 

14. Governance fitness 

standards 

3. Contracts not readily 

subject to manipulation 

9. Execution of 

transactions 

15. Conflicts of 

interest 

4. Monitoring of 

trading 

10. Trade 

information 

16. Composition of 

boards of mutually 

owned markets 

5. Position limits or 11. Financial 17. Record-keeping 

187 
accountability integrity of contracts

6. Emergency authority 12. Protection of 

market participants

18. Antitrust 

considerations 

Application Process. The CFTC encourages applicants to contact CFTC staff for 

guidance and assistance in preparing an application for designation. Potential applicants 

are encouraged to submit a draft application to the CFTC for review and feedback by the 

staff prior to submission of a formal application. 

Part 38 Application Procedures. Under Part 38 of the CFTC's Regulations, an 

application for contract market designation should include: 

• A statement that the applicant is applying to become a DCM pursuant to Part 38; 

• A copy of the applicant's rules, as defined in CFTC Regulation 40.1, and any 

technical manuals, other guides or instructions for users of, or participants in, the 

market, including minimum financial standards for members or market participants; 

• A description of the trading system, algorithms, security and access limitation 

procedures with a timeline for an order from input through settlement, and a copy of 

any system test procedures, tests conducted, test results, and contingency or disaster 

recovery plans; 

• A copy of any documents describing the applicant’s legal status and governance 

structure, including fitness information; 

• A signed copy of any agreements or contracts entered into by the applicant, 

including partnership or limited liability company, third-party regulatory service, or 

member or user agreements, that enable or empower the applicant to comply with a 

designation criterion or Core Principle (a final draft copy of such agreements may be 

submitted with the application; however, signed copies of such documents must be 

submitted prior to designation); 

• A copy of any manual or other document describing, with specificity, the manner 

in which the applicant will conduct trade practice, market and financial surveillance; 

• A regulatory chart or other document that describes the manner in which the 

applicant shall comply with each designation criterion and Core Principle; 

• To the extent that any aspect of the application raises issues that are novel, or for 

which compliance with a designation criterion or a Core Principle is not self-evident, 

an explanation as to how the Designation Criteria or core principles are satisfied; and 

• A detailed description of any information in the application for which confidential 

treatment is requested. 

Except as provided under the 90-day review procedures described below, the 

Commission will review an application for designation as a contract market pursuant to 

the 180-day time frame and procedures specified in Section 6(a) of the CEA, 7 U.S.C. 

8(a). The Commission will approve or deny the application or, if deemed appropriate, 

designate the applicant as a contract market subject to conditions. 

An applicant may request that its application be reviewed on an expedited basis and that 

the applicant be designated as a contract market not later than 90 days after the date of 

188 
receipt of the application. The 90-day period begins on the first business day (during the 

business hours as defined in CFTC Regulation 40.1) that the Commission is in receipt of 

the final application. 

Unless the Commission notifies the applicant during the 90-day period that the expedited 

review has been terminated as described below, the Commission will designate the 

applicant as a contract market during the 90-day period. If deemed appropriate by the 

Commission, the designation may be subject to such conditions as the Commission may 

stipulate. 

To receive expedited review, an applicant must demonstrate compliance with the criteria 

for designation of Section 5(b) of the CEA, the core principles for operation of Section 

5(d) of the CEA, and the provisions of Part 38. The application must include the 

necessary information and documents related to the items listed above, and the applicant 

must not amend or supplement the application, except as requested by the Commission or 

for correction of typographical errors, renumbering or other non-substantive revisions, 

during the 90-day review period. 

The Commission may terminate expedited review and review the application under the 

180-day time period and procedures of Section 6(a) of the CEA. Such action may be 

taken if it appears to the Commission that the application: (i) is materially incomplete, (ii) 

fails in form or substance to meet the requirements of this part, (iii) raises novel or 

complex issues that require additional time for review, or (iv) is amended or 

supplemented in a material manner that has not been requested by the Commission. In 

addition, the Commission shall terminate expedited review if requested in writing to do 

so by the applicant. If expedited review is terminated, the Commission will provide a 

written notification to the applicant specifying the reasons for this action. 

A complete description of the requirements for designation as a contract market is found 

in Part 38 of the CFTC's rules. Appendix A to Part 38 provides guidance to applicants on 

how the specific conditions for initial designation may be met by an applicant. Appendix 

B to Part 38 provides guidance to applicants on how DCMs can remain in compliance 

with the core principles. 

See How to Become a Contract Market at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/d

cmhowto.html. 

b) Seek evidence of operational or other competence of the operator of an exchange or 

trading system as a secondary market? 

Yes. The competency of system or market operators who apply for designation of the 

board of trade as a contract market will be demonstrated through the process whereby 

they demonstrate their capacity to operate in compliance with the core principles under 

CEA Section 5(d) and CFTC Regulation 38.3. See Appendix B to Part 38 – Guidance on, 

and Acceptable Practices In, Compliance with core principles (DCM Core Principle 1). 

189 
Once a market receives designation, DCM Core Principle—14 Governance Fitness 

Standards—requires the board of trade to establish and enforce appropriate fitness 

standards for directors, members of any disciplinary committee, members of the contract 

market, and any other persons with direct access to the facility. 

The CFTC’s guidance provides, in part, that minimum standards of fitness for persons 

who have member voting privileges, governing obligations or responsibilities, or who 

exercise disciplinary authority are bases for refusal to register a person under Section 

8a(2) of the CEA. In addition, persons with governing obligations or responsibilities, or 

who exercise disciplinary authority, should not have a significant history of serious 

disciplinary offenses such as those that would be disqualifying under Regulation 1.63. 

See Appendix B to Part 38 – Guidance on, and Acceptable Practices In, Compliance with 

DCM core principles (DCM Core Principle 14 discussion).

c) Require the operator of an exchange or trading system that assumes principal, 

settlement, guarantee or performance risk to comply with prudential and other 

requirements designed to reduce the risk of non-completion of transactions (e.g., 

mandatory margin assessment and collection, capital or financial resources, member 

contributions, guaranty fund, credit or position limits)? 

Yes. Boards of trade seeking contract market designation are required to adopt and 

enforce rules for ensuring the financial integrity of transactions. 

Designation Criterion 5 of Section 5(b) of the CEA provides that: 

The board of trade shall establish and enforce rules and procedures for ensuring 

the financial integrity of transactions entered into by or through the facilities of 

the contract market, including the clearance and settlement of the transactions 

with a DCO. 

Appendix A to Part 38 provides the following CFTC guidance on Core Principle 5 of 

Section 5(b): 

(a) A DCM should provide for the financial integrity of transactions by setting 

appropriate minimum financial standards for members and non-intermediated 

market participants, margining systems, appropriate margin forms and appropriate 

default rules and procedures. Absent Commission action pursuant to its exemptive 

authority under Section 4(c) of the CEA, transactions executed on the contract 

market (other than stock futures products), if cleared, must be cleared through a 

derivatives clearing organization registered as such with the Commission. The 

Commission believes ensuring and enforcing the financial integrity of transactions 

and intermediaries, and the protection of customer funds, should include 

monitoring compliance with the contract market's minimum financial standards. In 

order to monitor for minimum financial requirements, a contract market should 

routinely receive and promptly review financial and related information. 

190 
(b) A DCM should have rules concerning the protection of customer funds that 

address appropriate minimum financial standards for intermediaries, the 

segregation of customer and proprietary funds, the custody of customer funds, the 

investment standards for customer funds, related recordkeeping procedures and 

related intermediary default procedures. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

d) Permit the regulator to impose ongoing conditions (as appropriate) on the operator 

of an authorized exchange or regulated trading system, such as the obligation to 

establish rules, policies and procedures to prevent fraudulent behavior, treat all 

members or participants fairly, and have the capacity to carry out the market’s and the 

competent authority’s obligations? 

Yes. A Board of Trade applying for designation as a contract market must satisfactorily 

demonstrate its capacity to operate in compliance with the core principles and 

Designation Criteria on an ongoing basis under CEA Section 5(b) and Section 5(d), and 

CFTC Regulation 38.3. See Appendix B to Part 38 – Guidance on, and Acceptable 

Practices In, Compliance with DCM core principles (DCM Core Principle 1 discussion). 

3) Does regulation require an assessment of: 

a) The reliability of all arrangements made by the operator for the monitoring, 

surveillance and supervision of an exchange or trading system and its members or 

participants to ensure fairness, efficiency, transparency and investor protection, as well 

as compliance with securities legislation? 

Yes. The Commission’s review of the designation requirements of Section 5(b) of the 

CEA and the capacity of the applicant to meet the continuing obligation requirements of 

Section 5(d) of the CEA (required at time of application under Guidance to Section 5(d), 

Appendix B to part 38) require a DCM to demonstrate that it can implement a trade 

practice monitoring system to monitor trading and supervise rule compliance by 

members; a market surveillance system to deter, detect and address manipulation; and a 

disciplinary process to address violations of exchange rules. 

Assessing applications. An applicant must submit information that demonstrates 

compliance with all of the objective requirements of Section 5(b) of the CEA and the 

CFTC’s guidance (Appendix A to Part 38) and that demonstrates the capacity to meet the 

ongoing requirements of Section 5(d) of the CEA and the CFTC’s guidance (Appendix B 

to Part 38). CFTC Regulation 38.3 requires an applicant to provide the CFTC with a 

copy of all rules, technical manuals, other guides or instructions for users of, or 

participants in, the market; a description of the trading system, algorithms, security and 

access limitation procedures; and copies of any agreements that enable or empower the 

applicant to comply with the Designation Criteria. The CFTC decides whether the 

application meets the objective criteria of CEA Section 5 and Part 38 of the CFTC’s 

regulations. 

191 
Note: The CEA imposes statutory continuing obligations on DCMs, and the CFTC 

supervises the implementation of the exchange’s mechanisms and programs to meet those 

obligations. 

The applicant must demonstrate the means to monitor trading conduct, to supervise the 

system, and to address disorderly trading conditions. 

Designation Criterion 2 of Section 5(b) of the CEA states: 

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. 

Appendix A to Part 38 provides the following CFTC guidance on Designation Criterion 2 

of Section 5(b): 

A designation application should demonstrate a capacity to prevent market 

manipulation, including that the contract market has trading and participation 

rules deterring abuses and a dedicated regulatory department, or an effective 

delegation of that function. 

Designation Criterion 4 of Section 5(b) of the CEA: 

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 trade execution facility operates in accordance with the 

rules or specifications. 

Appendix A to Part 38 provides the following CFTC guidance on Designation Criterion 4 

of Section 5(b): 

(a) An application of a board of trade to be designated as a contract market 

should include the system's trade-matching algorithm and order entry procedures. 

An application involving a trade-matching algorithm that is based on order priority 

factors other than price and time should include a brief explanation of the 

algorithm. 

(b) A DCM's specifications on initial and periodic objective testing and review of 

proper system functioning, adequate capacity and security for any automated 

systems should be included in its application. A board of trade should submit in 

the contract market application, information on the objective testing and review 

192 
carried out on its automated system. The Commission believes that the guidelines 

issued by the International Organization of Securities Commissions (IOSCO) in 

1990 ("Principles for Screen-Based Trading Systems"), and adopted by the 

Commission on November 21, 1990 (55 FR 48670), as supplemented in October, 

2000, are appropriate guidelines for an electronic trading facility to apply to 

electronic trading systems. Any program of objective testing and review of the 

system should be performed by a qualified independent professional (but not 

necessarily a third-party contractor). 

Designation Criterion 5 of Section 5(b) of the CEA provides that: 

The board of trade shall establish and enforce rules and procedures for ensuring 

the financial integrity of transactions entered into by or through the facilities of 

the contract market, including the clearance and settlement of the transactions 

with a derivatives clearing organization. 

Appendix A to Part 38 provides the following CFTC guidance on Designation Criterion 

5 of Section 5(b): 

 (a) A DCM should provide for the financial integrity of transactions by setting 

appropriate minimum financial standards for members and non-intermediated 

market participants, margining systems, appropriate margin forms and appropriate 

default rules and procedures. Absent Commission action pursuant to its exemptive 

authority under Section 4(c) of the CEA, transactions executed on the contract 

market (other than stock futures products), if cleared, must be cleared through a 

derivatives clearing organization registered as such with the Commission. The 

Commission believes ensuring and enforcing the financial integrity of 

transactions and intermediaries, and the protection of customer funds, should 

include monitoring compliance with the contract market's minimum financial 

standards. In order to monitor for minimum financial requirements, a contract 

market should routinely receive and promptly review financial and related 

information. 

(b) A DCM should have rules concerning the protection of customer funds that 

address appropriate minimum financial standards for intermediaries, the 

segregation of customer and proprietary funds, the custody of customer funds, the 

investment standards for customer funds, related recordkeeping procedures and 

related intermediary default procedures. 

Designation Criterion 6 of Section 5(b) of the CEA provides that: 

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. 

193 
Appendix A to Part 38 provides the following CFTC guidance on designation criterion 6 

of Section 5(b): 

The disciplinary procedures established by a DCM should give the contract 

market both the authority and ability to discipline and limit or suspend a member's 

activities as well as the authority and ability to terminate a member's activities 

pursuant to clear and fair standards. The authority to discipline or limit or suspend 

the activities of a member or of a market participant could be established in a 

contract market's rules, user agreements or other means. An organized exchange 

or a trading facility could satisfy this criterion for a member with trading 

privileges but having no, or only nominal, equity, in the facility and for a nonmember market participant by expelling or denying future access to such persons 

upon a finding that such a person has violated the board of trade's rules. 

See Appendix A to Part 38 at: 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 4 of Section 5(d) of the CEA: 

The board of trade shall monitor trading to prevent manipulation, price distortion, 

and disruptions of the delivery or cash-settlement process. 

(a) Application Guidance. A contract market could prevent market manipulation 

through a dedicated regulatory department or by delegation of that function to an 

appropriate third party. 

(b) Acceptable Practices. 

(1) An acceptable program for monitoring markets will generally involve the 

collection of various market data, including information on traders' market 

activity. Those data should be evaluated on an ongoing basis in order to make 

an appropriate regulatory response to potential market disruptions or abusive 

practices. 

(2) The DCM should collect data in order to assess whether the market price 

is responding to the forces of supply and demand. Appropriate data usually 

include various fundamental data about the underlying commodity, its supply, 

its demand, and its movement through marketing channels. Especially 

important are data related to the size and ownership of deliverable supplies -- 

the existing supply and the future or potential supply, and to the pricing of the 

deliverable commodity relative to the futures price and relative to similar, but 

nondeliverable, kinds of the commodity. For cash-settled markets, it is more 

appropriate to pay attention to the availability and pricing of the commodity 

making up the index to which the market will be settled, as well as monitoring 

the continued suitability of the methodology for deriving the index. 

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(3) To assess traders' activity and potential power in a market, at a minimum, 

every contract market should have routine access to the positions and trading 

of its market participants and, if applicable, should provide for such access 

through its agreements with its third-party provider of clearing services. 

Although clearing member data may be sufficient for some contract markets, 

an effective surveillance program for contract markets with substantial 

numbers of customers trading through intermediaries should employ a much 

more comprehensive large-trader reporting system (LTRS). 

Core Principle 10 (Trade Technology) of Section 5(d) of the CEA provides that: 

The board of trade shall maintain rules and procedures to provide for the 

recording and safe storage of all identifying trade information in a manner that 

enables the contract market to use the information 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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 10 of 

Section 5(b): 

 (a) Application Guidance. A DCM should have arrangements and resources for 

recording of full data entry and trade details and the safe storage of audit trail 

data. A DCM should have systems sufficient to enable the contract market to use 

the information for purposes of assisting in the prevention of customer and market 

abuses through reconstruction of trading. 

(b) Acceptable Practices. 

(1) The goal of an audit trail is to detect and deter customer and market 

abuse. An effective contract market audit trail should capture and retain 

sufficient trade-related information to permit contract market staff to detect 

trading abuses and to reconstruct all transactions within a reasonable period of 

time. An audit trail should include specialized electronic surveillance 

programs that would identify potentially abusive trades and trade patterns, 

including, for instance, withholding or disclosing customer orders, trading 

ahead, and preferential allocation. An acceptable audit trail must be able to 

track a customer order from time of receipt through fill allocation or other 

disposition. The contract market must create and maintain an electronic 

transaction history database that contains information with respect to 

transactions executed on the DCM. 

(2) An acceptable audit trail should include the following: original source 

documents, transaction history, electronic analysis capability, and safe storage 

capability. A contract market whose audit trail satisfies the following 

acceptable practices would satisfy Core Principle 10. 

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(i) Original Source Documents. Original source documents include 

unalterable, sequentially identified records on which trade execution 

information is originally recorded, whether recorded manually or 

electronically. For each customer order (whether filled, unfilled or 

cancelled, each of which should be retained or electronically captured), 

such records reflect the terms of the order, an account identifier that 

relates back to the account(s) owner(s), and the time of order entry. (For 

floor-based contract markets, the time of report of execution of the order 

should also be captured.) 

(ii) Transaction History. A transaction history which consists of an 

electronic history of each transaction, including 

(a) all data that are input into the trade entry or matching system for 

the transaction to match and clear; 

(b) the categories of participants for which such trades are executed, 

including whether the person executing a trade was executing it for 

his/her own account or an account for which he/she has discretion, 

his/her clearing member’s house account, the account of another 

member, including market participants present on the floor, or the 

account of any other customer; 

(c) timing and sequencing data adequate to reconstruct trading; and 

(d) the identification of each account to which fills are allocated. 

(iii) Electronic Analysis Capability. An electronic analysis capability that 

permits sorting and presenting data included in the transaction history so 

as to reconstruct trading and to identify possible trading violations with 

respect to both customer and market abuse. 

(iv) Safe Storage Capability. Safe storage capability provides for a 

method of storing the data included in the transaction history in a manner 

that protects the data from unauthorized alteration, as well as from 

accidental erasure or other loss. Data should be retained in accordance 

with the recordkeeping standards of Core Principle 17. 

Core Principle 17 of Section 5(d) of the CEA provides that: 

The board of trade shall maintain 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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 17 of 

Section 5(b): 

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Acceptable Practices. Regulation 1.31 governs recordkeeping obligations under 

the Act and the Commission's regulations thereunder. In order to provide broad 

flexible performance standards for recordkeeping, Regulation 1.31 was updated 

and amended by the Commission in 1999. Accordingly, Regulation 1.31 itself 

establishes the guidance regarding the form and manner for keeping records. 

See Appendix B to Part 38 at: 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

b) The market’s dispute resolution and appeal procedures or arrangements as 

appropriate, its technical systems standards and procedures related to operational 

failure, information on its record keeping system, reports of suspected breaches of law, 

arrangements for holding client funds and securities, if applicable, and information on 

how trades are cleared and settled? 

Yes. See supra, response to Principle 25, Questions 2(a-b) and 3(a).

c) The mechanisms that must be in place to identify and address disorderly trading 

conditions and to deal with any contravening conduct that is detected, including details 

of procedures for trading halts, other trading limitations and assistance available to the 

regulator in circumstances of potential trading disruption on the system? 

Yes. DCM Core Principle 6 requires DCMs to adopt rules to provide for the exercise of 

emergency authority, in consultation or cooperation with the Commission, where 

necessary and appropriate. 

Core Principle 6 of Section 5(d) of the CEA provides that: 

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. 

 (a) Application guidance. A DCM should have clear procedures and 

guidelines for contract market decision-making regarding emergency 

intervention in the market, including procedures and guidelines to avoid 

conflicts of interest while carrying out such decision-making. A contract 

market should also have the authority to intervene as necessary to maintain 

markets with fair and orderly trading as well as procedures for carrying out 

the intervention. Procedures and guidelines should include notifying the 

Commission of the exercise of a contract market's regulatory emergency 

authority, explaining how conflicts of interest are minimized, and 

documenting the contract market's decision-making process and the reasons 

for using its emergency action authority. Information on steps taken under 

such procedures should be included in a submission of a certified rule and any 

197 
related submissions for rule approval pursuant to Part 40, when carried out 

pursuant to a contract market's emergency authority. To address perceived 

market threats, the contract market, among other things, should be able to 

impose position limits in the delivery month, impose or modify price limits, 

modify circuit breakers, call for additional margin either from customers or 

clearing members, order the liquidation or transfer of open positions, order the 

fixing of a settlement price, order a reduction in positions, extend or shorten 

the expiration date or the trading hours, suspend or curtail trading on the 

market, order the transfer of customer contracts and the margin for such 

contracts from one member (including non-intermediated market participants) 

of the contract market to another, or alter the delivery terms or conditions, or, 

if applicable, should provide for such actions through its agreements with its 

third-party provider of clearing services. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

4) With respect to securities and market participants: 

a) Is the regulator informed of the types of securities to be traded and does it approve 

the rules governing the admission of the securities to trading or listing? 

Yes. The CFTC is required to be informed of the types of products to be traded through 

the two listing methods – self-certification and CFTC prior approval (voluntary and 

required for certain enumerated agricultural commodities). Contracts listed by 

certification are represented by an exchange to comply with all CFTC requirements, 

which include the contract design Guidance of Guideline 1. There are also formal listing 

requirements that must be satisfied for security futures products. 

DCMs may list for trading new contracts by filing a self-certification with the 

Commission that the new contract complies with the CEA and the Commission’s 

regulations. DTEFs may list for trading new contracts for trading by filing a notification 

of the new product listing with the Commission or by requesting Commission approval. 

To meet its statutory mission of ensuring market integrity and customer protection with 

respect to products listed under self-certification procedures, the CFTC places greater 

reliance on its oversight authority, including market surveillance, RERs, reviews of 

contract terms, dialogue with the regulated entities, and enforcement actions. For 

contracts filed under self-certification procedures, the regulated entities are required to 

assume primary responsibility for ensuring that the contracts meet, on a continuing basis, 

the applicable statutory and regulatory requirements. 

Listing by certification. A DCM may list new products for trading by filing with the 

CFTC the contract’s terms and conditions and a certification that the contract complies 

with the CEA and CFTC regulations and policies. Similarly, for contracts that have 

become dormant, a DCM may reactivate trading in such contract by filing a certification 

198 
that the contract complies with the CEA and CFTC regulations and policies. A selfcertification filing must be received at the CFTC’s Washington, DC headquarters no later 

than the close of business the day before the product is listed for trading. See infra, 

section entitled Listing of Products by Self-Certifications. 

Rules and rule amendments by certification. A DCM may implement most new rules 

and rule amendments by filing with the CFTC a certification that the amended rule 

complies with the CEA and CFTC regulations and policies. Self-certification of new 

rules and rule amendments to terms and conditions of contracts based on enumerated 

agricultural commodities is not permitted for material amendments having open interest. 

The CFTC’s requirements and procedures for self-certification filings for listing new 

products and for implementing rule amendments are set forth in CFTC Regulation 40.2 

and CFTC Regulation 40.6, respectively. See infra, section entitled Rule Approval by 

Self-Certification. 

Voluntary approval of products and rules: A contract market may request CFTC approval 

of its futures or option products under the provisions of CFTC Regulation 40.3. Product 

approval requests may be submitted concurrently with the filing of a contract under selfcertification procedures or any time later. A contract market also may request CFTC 

approval of its rules under the provisions of CFTC Regulation 40.5. 

The requirements for approval of a product are contained in the CFTC's "Guideline No. 

1" (Appendix A to Part 40). This guideline provides exchanges with more specific 

information regarding initial and continued compliance with the Act and the CFTC's 

rules and policies for listing contracts. 

Additional detail is provided below on the following topics: 

1) Listing of products by self-certification 

2) Rule approval by self-certification 

3) CFTC approval of rules and rule amendments 

4) Rules of enumerated agricultural commodities required to be submitted for prior 

CFTC approval 

5) Special listing standards for security futures products 

Listing of Products by Self-Certification

Under CFTC Regulation 40.2, DCMs may list products for trading without prior CFTC 

approval by filing a written self-certification with the CFTC. Registered DTEFs, under 

regulation 37.7(a), need only notify the CFTC of: (1) the listing of new products for 

trading; (2) the posting of new product descriptions, terms and conditions or trading 

protocols; or (3) providing for a new system product functionality. 

With one exception involving enumerated agricultural commodities, DCMs also may 

adopt new rules or amend existing rules of products without prior CFTC approval, by 

199 
filing a written self-certification with the CFTC. CFTC regulations 38.4 and 40.6 set 

forth the procedures for rule self-certification filings. DCMs may also voluntarily request 

CFTC approval of rules submitted under self-certification procedures. The procedures 

for the approval of rules or rule amendments are set forth in CFTC Regulation 40.5. 

Registered DTEFs, as provided in CFTC Regulation 37.7(b), need not certify rules or 

rule amendments and must only notify the CFTC prior to placing into effect or amending 

their rules, including trading protocols. 

Timing of Notification. To self-certify a new product, a DCM must file its submission 

with the CFTC no later than the opening of business on the Commission’s business day 

preceding the Commission’s business day of the initial listing (or re-listing in the case of 

dormant contracts) of the product. 

Required Information. A product self-certification filing should include: 

• A copy of the submission cover sheet; 

• A statement that the filing is made pursuant to CFTC Regulation 40.2; 

• The text of the product’s rules, including those relating to terms and conditions; 

and 

• A certification that the product or instrument complies with the CEA and CFTC 

regulations thereunder. 

In making a self-certification submission, a DCM certifies that the product does not 

violate any provision of the CEA or the CFTC’s regulations and policies adopted 

thereunder. Guideline No. 1, Appendix A to Part 40 of the CFTC’s regulations, contains 

the applicable economic requirements for rules related to the terms and conditions of a 

contract. Guideline No. 1 also provides exchanges with specific criteria for initial and 

continued compliance with the CEA and the CFTC's regulations and policies for 

products listed on regulated entities. 

Security Futures Products. The listing of security futures products (SFPs) is subject to 

additional requirements and procedures. 

Requests for CFTC Approval of Products. DCMs or DTEFs may voluntarily request 

CFTC approval of a new product. The new product may be listed prior to approval if it 

also is filed with the CFTC under the self-certification procedures described above. 

Approval requests for contracts filed under self-certification procedures may be 

submitted concurrently with a self-certification filing or at any time thereafter, including 

after initial listing of the product. A request for approval must be accompanied with the 

appropriate approval filing fee. 

A product request for approval filing must: 

• Include a copy of the submission cover sheet; 

• Include the text of the product’s rules, including those relating to terms and 

conditions; and 

• Comply with the requirements of Guideline No. 1, including a demonstration of 

200 
compliance. 

Guideline No. 1, Appendix A to Part 40 of the CFTC’s regulations, contains the 

applicable economic requirements for rules related to the terms and conditions of a 

contract. Guideline No. 1 also provides exchanges with specific criteria for initial and 

continued compliance with the CEA and the CFTC's regulations and policies for 

products listed on regulated entities. 

Timing of Approval. All products submitted for Commission approval are deemed 

approved by the Commission 45 days after receipt by the Commission or at the 

conclusion of an extended period if: 

• The submission complies with the requirements of CFTC Regulation 40.3(a); 

• The submitting entity does not amend the terms or conditions of the product or 

supplement the request for approval, except as requested by the Commission or for 

non-substantive revisions, during the review period. 

The Commission may extend the 45-day review period for an additional 45 days if the 

product raises novel or complex issues that require additional time for review or is of 

major economic significance. 

Section 5c(c) of the CEA, 7 U.S.C. 7a-2(c), requires the CFTC to approve any such new 

contract unless the CFTC finds that the new product would violate the CEA. In addition, 

the CEA requires the CFTC to take final action on an approval request no later than 90 

days after the filing is received by the CFTC unless the person making the filing agrees 

to an extension of the review period. 

See Procedures for Listing Products at 

http://www.cftc.gov/industryoversight/contractsandproducts/listingprocedures.html. 

Adoption of Rules and Rule Amendments Via Self-Certification 

DCMs and DCOs. DCMs and DCOs may, with one exception noted below, adopt new 

rules or amend existing rules without prior CFTC approval, by filing a written selfcertification with the CFTC. CFTC Regulations 38.4 and 40.6 set forth the procedures 

for rule self-certification filings. 

DTEFs. DTEFs, as provided in CFTC Regulation 37.7(b), need not certify rules or rule 

amendments and must only notify the CFTC prior to placing into effect or amending 

their rules, including trading protocols. 

Approval of Rules. For rules and rule amendments filed with the CFTC under selfcertification procedures, CFTC Regulations 38.4(a) and 40.5 provide that a DCM may 

request CFTC approval of its rules and rule amendments prior to implementation, 

201 
including concurrently with or subsequent to a self-certification filing. 

Listing of Products. DCMs may also list new products for trading without prior 

approval, by filing a written self-certification with the CFTC. The procedures for the 

self-certification of products are set forth in CFTC Regulations 38.4(b) and 40.2. DTEFs, 

under CFTC Regulation 37.7(a), need only notify the CFTC of: (1) the listing of new 

products for trading; (2) the posting of new product descriptions, terms and conditions or 

trading protocols; or (3) providing for a new system product functionality. 

CFTC Oversight. To meet its statutory mission of ensuring market integrity and 

customer protection with respect to rules and rule amendments implemented under selfcertification procedures, the CFTC places greater reliance on its oversight authorities, 

including market surveillance, RERs, reviews of contract terms, dialogue with the 

regulated entities, and enforcement actions. For rules and amendments adopted under 

self-certification procedures, the regulated entities are required to assume primary 

responsibility for ensuring that the rules and rule amendments meet, on a continuing 

basis, the applicable statutory and regulatory requirements. 

Rules and Amendments Not Required to be Certified. DCMs may place certain rules 

or rule amendments into effect without a self-certification. A DCM need only provide a 

weekly notification of all rule changes involving: 

• nonmaterial revisions (e.g., renumbering); 

• delivery standards set by third parties; 

• routine changes in index products (e.g., composition or computation) made by 

independent third parties; and 

• changes to option contract terms relating to strike prices (e.g., strike price 

intervals). 

Certain other rules may be implemented without either self-certification or notice to the 

CFTC, provided only that the DCM maintain documentation of all rule changes. Rules 

subject to this procedure include those that govern: 

• transfer of ownership or membership; 

• administrative procedures (e.g., organization of boards and committees); 

• administration (e.g., direction of employees, declaration of holidays); and 

• standards of decorum. 

Rules and Amendments Requiring Prior CFTC Approval. The only DCM rules and 

rule amendments not eligible for self-certification are those that materially change a term 

or condition of a contract for future delivery of an enumerated agricultural commodity as 

listed in Section 1a(4) of the CEA, 7 U.S.C. Section 1a(4), or an option on such a 

contract or commodity, in a delivery month having open interest. Under 

CFTC Regulation 40.4, such rules or rule amendments must be submitted to the CFTC 

for prior approval under the procedures of CFTC Regulation 40.5. A DCM may elect to 

submit any such new rule or rule amendment to the CFTC under the ten-day review 

202 
procedure of CFTC Regulation 40.4 for a determination as to whether such rule must be 

submitted for prior approval. 

However, CFTC Regulation 40.4 specifies that certain categories of new rules and rule 

amendments affecting a term or condition of a futures contract on an enumerated 

agricultural commodity are deemed not to be material and thus do not require prior 

CFTC approval. DCMs, therefore, may implement any new rule or rule change falling 

within these categories pursuant to self-certification provisions. 

The categories of new rules and rule amendments deemed to be not material for this 

purpose are: 

• changes in trading hours; 

• changes in lists of delivery facilities pursuant to previously set standards or 

criteria; 

• changes in option contracts other than those relating to last trading day, 

expiration date, strike price de-listings, and speculative position limits; 

• reductions in the minimum price tick; 

• changes required by a court, or by a regulation of the CFTC or another Federal 

agency; 

• fees or fee changes of less than $1.00 per contract; and 

• fees or fee changes of $1.00 or more that are established by an independent third 

party or are unrelated to delivery, trading, clearing, or dispute resolution. 

Timing of Self-certification. DCMs must file self-certification submissions with the 

CFTC no later than the opening of business on the business day preceding 

implementation of the rule or rule amendment. 

Emergencies. Rules or rule amendments implemented under procedures of the 

governing board to respond to an emergency, as defined in CFTC Regulation 40.1, shall, 

if practicable, be filed with the CFTC prior to implementation of the rule or rule 

amendment, or, if not practicable, shall be filed with the CFTC at the earliest possible 

time but in no event more than 24 hours after implementation. 

Required Information. A rule or rule amendment self-certification filing must include: 

a. A Submission Cover Sheet that must be filled out in accordance with the 

instructions in Appendix D to Part 40 of the CFTC’s regulations; 

b. The text of the rule (in the case of a rule amendment, deletions and additions 

must be indicated); 

c. The date of implementation; 

d. A brief explanation of any substantive opposing views expressed to the 

registered entity by governing board or committee members, members of the 

203 
entity or market participants that were not incorporated into the rule; and 

e. A certification by the DCM that the rule complies with the CEA and the 

regulations thereunder. 

In making a self-certification filing, the DCM is certifying that the rule or rule 

amendment does not violate any provision of the CEA or the CFTC’s regulations and 

policies adopted thereunder. The applicable economic requirements related to rules 

associated with the terms and conditions of a futures or option contract are contained in 

the CFTC's "Guideline No. 1" (Appendix A to Part 40). 

CFTC Review. The CFTC may stay the effectiveness of a rule implemented pursuant to 

these self-certification procedures during the pendency of CFTC proceedings for filing a 

false self-certification or to alter or amend the rule pursuant to Section 8a(7) of the CEA, 

7 U.S.C. 12a(7). The decision to stay the effectiveness of a rule in such circumstances is 

not delegable to any employee of the CFTC. 

See Rule and Rule Amendments at 

http://www.cftc.gov/industryoversight/rulesandruleamendments/index.htm. 

CFTC Approval of Rules and Rule Amendments

Procedures for Requesting CFTC Approval of Rules and Amendments. See CFTC 

Regulation 40.5, which establishes procedures for a DCM or registered DTEF to request 

CFTC approval of a new rule or a rule amendment regarding exchange trading or listing 

of exchange products. These same procedures are applicable to those amendments to the 

terms and conditions of contracts on enumerated agricultural commodities that are 

required to be submitted for prior CFTC approval pursuant to CFTC Regulation 40.4. 

Procedures for Listing Products. The request must: 

a. Include a Submission Cover Sheet which must be filled out in accordance with 

the instructions in Appendix D to 17 C.F.R. Part 40; 

b. Set forth the text of the proposed rule or rule amendment (in the case of a rule 

amendment, deletions and additions must be indicated); 

c. Describe the proposed effective date of a proposed rule and any action taken or 

anticipated to be taken to adopt the proposed rule by the DCM or DTEF or by its 

governing board or by any committee thereof, and cite the rules of the entity that 

authorizes the adoption of the proposed rule; 

d. Explain the operation, purpose, and effect of the proposed rule, including, as 

applicable, a description of the anticipated benefits to market participants or 

others, any potential anticompetitive effects on market participants or others, how 

the rule fits into the DCM’s and DTEF’s framework of self-regulation, and any 

204 
other information which may be beneficial to the CFTC in analyzing the proposed 

rule (if a proposed rule affects, directly or indirectly, the application of any other 

rule of the submitting registered entity, set forth the pertinent text of any such rule 

and describe the anticipated effect); 

e. Briefly describe any substantive opposing views expressed to the DCM or 

DTEF by governing board or committee members, members of the entity or 

market participants with respect to the proposed rule that were not incorporated 

into the proposed rule; 

f. Identify any CFTC Regulation that the CFTC may need to amend, or Sections 

of the CEA or CFTC regulations that the CFTC may need to interpret, in order to 

approve the proposed rule. To the extent that such an amendment or interpretation 

is necessary to accommodate a proposed rule, the submission should include a 

reasoned analysis supporting the amendment to the CFTC Regulation or the 

interpretation; and 

g. Identify with particularity information in the submission that will be subject to 

a request for confidential treatment and support that request for confidential 

treatment with reasonable justification. 

Timing for Review. In general, the review period is 45 days. To qualify for 45-day 

review, the request must comply with the requirements discussed above, and the DCM 

or DTEF must not amend the proposed rule or supplement the submission, except as 

requested by the CFTC, during the pendency of the review period. Any amendment or 

supplementation not requested by the CFTC will be treated as the submission of a new 

filing. 

Extensions of Time. The CFTC may extend the review period for: 

1. An additional 45 days, if the proposed rule raises novel or complex issues that 

require additional time for review or is of major economic significance, in which 

case the CFTC would notify the submitting DCM or DTEF within the initial 45-

day review period and would briefly describe the nature of the specific issues for 

which additional time for review would be required; or 

2. Such additional period as the submitting DCM or DTEF requests in writing. 

Standard of Review. Section 5c(c)(3) of the CEA, 7 U.S.C. 7a-2(c)(3), provides that 

the CFTC shall approve any new rule or rule amendment unless it finds that the rule or 

rule amendment would violate the CEA. The general requirements for DCMs are found 

in Section 5 of the CEA, 7 U.S.C. 7, and Part 38 of the CFTC's regulations. DTEFs are 

governed by Section 5a of the CEA and Part 37 of the CFTC's regulations. The 

particular requirements for approval of rules and rule amendments related to the 

economic terms and conditions of a contract are contained in the CFTC's Guideline No. 

1, Appendix A to Part 40 of the CFTC’s regulations. 

205 
What if CFTC Does not Approve. The CFTC, at any time during its review under this 

Section, may notify the DCM or DTEF that it will not, or is unable to, approve the 

proposed rule or rule amendment. This notification will briefly specify the nature of the 

issues raised and the specific provision of the CEA or regulations, including the form or 

content requirements of this Section, that the proposed rule would violate, appears to 

violate, or the violation of which cannot be ascertained from the submission. 

This notification shall be presumptive evidence that the DCM or DTEF may not 

truthfully certify that the same, or substantially the same, proposed rule or rule 

amendment does not violate the CEA or regulations thereunder. 

However, this notification does not prejudice the entity from subsequently submitting a 

revised version of the proposed rule or rule amendment for CFTC approval or from 

submitting the rule or rule amendment as initially proposed pursuant to a supplemented 

submission. 

CFTC Regulation 40.5(f) provides for a procedure whereby amendments to the terms 

and conditions of a product may qualify for "Expedited Approval." To be eligible for this

expedited approval procedure, the changes must be consistent with the CEA and CFTC 

regulations and with standards approved or established by the CFTC in a written 

notification to the DCM or DTEF. 

See Requesting Prior Approval of a New DCM or DTEF Rule or Rule Amendment at 

http://www.cftc.gov/industryoversight/rulesandruleamendments/rulerequestapprovaldcm

dtef.html. 

Rules of Enumerated Agricultural Commodities required to be submitted for prior 

CFTC Approval.

DCMs must submit to the CFTC, and receive CFTC approval prior to implementation, 

all new rules and rule amendments that materially change the terms and conditions of 

contracts on commodities enumerated in Section 1a(4) of the CEA, 7 U.S.C. 1a(4), and 

that will apply to contracts with open interest. 

Such new rules and rule amendments cannot be implemented pursuant to the 

certification procedures of CFTC Regulation 40.6, 17 C.F.R. 40.6, but must be submitted 

to the Commission for approval under CFTC Regulation 40.4 and CFTC Regulation 

40.5, 17 C.F.R. 40.4 and 40.5, or for a determination as to whether such rules or rule 

amendments materially change the terms and conditions of the affected contracts 

pursuant to CFTC Regulation 40.4(b)(9), 17 C.F.R. 40.4(b)(9). 

Staff reviews new rules and rule amendments submitted for approval to ensure that they 

do not violate any provision of the CEA or the CFTC's regulations and policies adopted 

thereunder. The general requirements for DCM rules are found in Section 5 of the CEA, 

7 U.S.C. 7, and Part 38 of the CFTC's regulations, 17 C.F.R. Part 38. The particular 

requirements for approval of new rules and rule amendments related to the economic 

206 
terms and conditions of a futures or option contract are contained in the CFTC's 

Guideline No. 1, Appendix A to Part 40 of the CFTC’s regulations. 

If the CFTC determines that a new rule or rule amendment is consistent with the 

requirements of the CEA and the CFTC’s regulations and policies, the new rule or rule 

amendment is deemed approved 45 days after CFTC receipt of the approval request, or 

at the conclusion of any extended review period, as provided under CFTC Regulation 

40.5(b) and CFTC Regulation 40.5(c). If the CFTC determines that it will not, or is 

unable to, approve the new rule or rule amendment, it will provide a Notice of NonApproval to the DCM, as provided under CFTC Regulation 40.5(d). In this Notice of 

Non-Approval, the CFTC will briefly specify the nature of the issues identified and the 

specific provision of the CEA or CFTC regulations that the new rules or rule 

amendments violate. 

A DCM receiving a Notice of Non-Approval may not certify the same, or substantially 

the same, new rules or rule amendments under the certification procedures of CFTC 

Regulation 40.6, 17 C.F.R. 40.6. However, the DCM may submit revised new rules or 

rule amendments for approval under these same procedures. 

Rules Deemed Not To Be Material. CFTC Regulation 40.4(b), 17 C.F.R. 40.4(b), 

specifies eight categories of new rules and rule amendments for contracts based on 

enumerated agricultural commodities that are deemed not to be material and thus are not 

required to be submitted to the CFTC for approval prior to implementation. New rules 

and rule amendments that are deemed not to be material for this purpose are: 

1. Changes in trading hours; 

2. Changes in lists of approved delivery facilities pursuant to previously set 

standards or criteria; 

3. Changes to the terms and conditions of options on futures, other than those 

relating to the last trading day, expiration date, option strike price de-listings, and 

speculative position limits; 

4. Reductions in the minimum price fluctuation (or “tick”); 

5. Changes required to comply with a binding order of a court of competent 

jurisdiction, or a rule, regulation, or order of the Commission, or of another 

Federal regulatory authority; 

6. Corrections of typographical errors, renumbering, periodic routine updates to 

identifying information about approved entities, and such other non-substantive 

revisions of a product’s terms and conditions that have no effect on the economic 

characteristics of the product; 

207 
7. Fees or fee changes of less than $1.00 per contract; and 

8. Fees or fee changes that are $1.00 or more per contract and are established by 

an independent third party or are unrelated to delivery, trading, clearing, or 

dispute resolution. 

A DCM wishing to implement new rules or rule amendments falling within any of the 

above eight categories may implement such provisions under the certification procedures

of CFTC Regulation 40.6. 

Rules Determined Not To Be Material Under the Ten-day Review Procedure. 

CFTC Regulation 40.4(b)(9), 17 C.F.R. 40.4(b)(9), establishes a ten-day review 

procedure for DCMs wishing to apply a new rule or rule amendment to contracts having 

open interest in enumerated agricultural commodities that do not fall within any of the 

above eight categories. This procedure provides DCMs which are uncertain as to 

whether a new rule or rule amendment is material with a mechanism for obtaining a 

CFTC determination as to whether such new rule or rule amendment materially changes 

the terms and conditions of the affected contracts. 

Under this procedure, a DCM must submit the new rules or rule amendments to the 

CFTC at least ten business days prior to the anticipated implementation date. 

If the CFTC determines that the new rule or rule amendment is not material, CFTC staff 

will advise the DCM of this non-materiality determination the day after the ten-day 

review period expires. The DCM may then implement the new rule or rule amendment 

pursuant to the self-certification provisions of CFTC Regulation 40.6. If the CFTC 

determines that the new rule or rule amendment is material, it will advise the DCM of 

that finding and commence reviewing the new rule or rule amendment under the 

approval procedures set forth in CFTC Regulation 40.5, 17 C.F.R. 40.5. 

Enumerated Agricultural Commodities. The agricultural commodities listed here are 

commonly referred to as the enumerated commodities of the CEA: wheat, cotton, rice, 

corn, oats, barley, rye, flaxseed, grain, sorghums, mill feeds, butter, eggs, Solanum 

tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, 

cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed, cottonseed 

meal, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen 

concentrated orange juice. 

See Rules of Enumerated Agricultural Commodities at 

http://www.cftc.gov/industryoversight/rulesandruleamendments/enumeratedagcommoditi

es.html. 

Special Listing Standards for Security Futures Products

Security futures products include futures on single stocks and futures on narrow-based 

security indexes. Before a board of trade may list for trading a security futures product, 

208 
the board of trade must meet a number of requirements and make a filing to the CFTC. 

Security futures products may be traded on any DCM or DTEF that also is notice 

registered with the SEC as a securities exchange. In addition, security futures products 

may be traded on any SEC-registered national securities exchange, national securities 

association, or alternative trading system (ATS) that is notice designated as a contract 

market by the CFTC. 

Requirements for Underlying Securities. A futures contract based on a single security 

may be traded only if: 

• The underlying security is registered pursuant to Section 12 of the Securities 

Exchange Act of 1934; 

• The underlying security is common stock, or another security as the CFTC and 

the SEC jointly deem appropriate (the CFTC and the SEC have jointly determined

that American Depositary Receipts (ADRs), Exchange-Traded Funds (ETFs), Trust 

Issued Receipts (TIRs), Closed-End Fund shares, and debt securities also may 

underlie security futures products); and 

• The underlying security conforms to the listing standards for the SFP that the 

DCM or registered DTEF has filed with the SEC. Listing standards are discussed 

below. 

A futures contract based on an index of two or more securities may be traded as a 

security future only if: 

• The index is a narrow-based security index; 

• The underlying securities are registered pursuant to Section 12 of the Securities 

Exchange Act of 1934; 

• The underlying securities are common stock or other securities as the CFTC and 

the SEC jointly deem appropriate (the CFTC and the SEC have jointly determined

that American Depositary Receipts (ADRs), Exchange-Traded Funds (ETFs), Trust 

Issued Receipts (TIRs), Closed-End Fund shares, and debt securities also may 

underlie security futures products); and 

• The underlying securities conform to the listing standards for SFPs that the DCM 

or registered DTEF has filed with the SEC. Listing standards are also discussed 

below. 

CFTC Procedures for Listing Security Futures Products. Before a board of trade 

lists a new SFP for trading, the board of trade must file with the CFTC, a filing that 

contains the following items: 

• A copy of the product’s rules, including the terms and conditions; 

• The required certifications enumerated below under “Required Certifications for 

Listing SFPs”; 

• A certification that the terms and conditions of the contract meet CFTC 

requirements regarding speculative position limits, cash settlement, and trading halts 

209 
procedures; and 

• A certification that the security futures product complies with the CEA and the 

CFTC rules. 

A board of trade may request voluntarily Commission approval of any security futures 

product by following the procedures set forth in CFTC Regulation 40.3, 17 C.F.R. 40.3. 

A board of trade may request Commission approval for any rule or rule change relating 

to a security futures product by following the procedures of CFTC Regulation 40.5. 

Required Certifications for Listing Security Futures Products. A board of trade’s 

filing with the CFTC to list for trading a futures contract on a single stock or on a 

narrow-based security index must include the following certifications: 

• The security or securities that underlie the SFP meet the requirements discussed 

above regarding SEC registration, type of security, and make-up of the security 

index, if applicable. 

• If the SFP is settled through physical delivery, arrangements are in place with a 

clearing agency registered with the SEC for the payment and delivery of the 

underlying security or securities. 

• Only FCMs, IBs, CTAs, CPOs or associated persons may solicit, accept any 

order for, or otherwise deal in any transaction in or in connection with the SFP. 

• Dual trading is restricted in accordance with CFTC Regulation 41.27. 

• Trading in the SFP is not readily susceptible to price manipulation. 

• In order to detect manipulation and insider trading, the board of trade has 

coordinated surveillance among the board of trade, any market on which any 

underlying security trades, and any other market on which any related security is 

traded. This coordinated surveillance requirement may be satisfied by certifying that: 

• The board of trade is a Full Member of the Intermarket Surveillance Group

(ISG); 

• The board of trade is an Affiliate Member of the ISG and has entered into 

supplemental information-sharing agreements with Full Members and other Affiliate 

Members; or 

• The board of trade has entered into bilateral agreements with all necessary boards 

of trade to share information and such agreements should require the same type of 

information sharing that takes place between Full Members of the ISG (a board of 

trade that is an ATS does not need to make this certification, provided that the ATS 

is a member of a national securities association or national securities exchange, and 

the national securities association or national securities exchange has coordinated 

surveillance procedures); 

• The board of trade has an audit trail in place to facilitate the coordinated 

surveillance (a board of trade that is an ATS does not need to make this certification, 

provided that the ATS is a member of a national securities association or national 

securities exchange, and the national securities association or national securities 

exchange has an audit trail in place); 

• The board of trade has procedures in place to coordinate regulatory trading halts 

210 
between the board of trade, markets on which any underlying security is traded, and 

markets on which any related security is traded (a board of trade that is an ATS does 

not need to make this certification, provided that the ATS is a member of a national 

securities association or national securities exchange, and the national securities 

association or national securities exchange has procedures to coordinate trading 

halts); 

• The board of trade’s margin requirements for security futures products comply 

with CFTC Regulations 41.42 through 41.49; and 

• Coordinated trading halts. 

b) Where applicable, does the regulator or the market take product design and trading 

conditions into account in order to admit a product for trading? 

Yes. Express authorization prior to trading is required only for contracts based on 

enumerated agricultural commodities. As explained in response to Principle 25, Question 

4(a), a DCM may list new products for trading by filing with the CFTC the contract’s 

terms and conditions and a certification that the contract complies with the CEA and 

CFTC regulations and policies. The CFTC’s requirements and procedures for selfcertification filings for listing new products and for implementing rule amendments are 

set forth in CFTC Regulation 40.2 and CFTC Regulation 40.6, respectively. However, 

self-certification of rule amendments to terms and conditions is not permitted for material 

amendments to contracts based on enumerated agricultural commodities having open 

interest. A contract market may request CFTC approval of its futures or option products 

under the provisions of CFTC Regulation 40.3. 

Standards for contract design. The requirements for approval of a product are 

contained in the CFTC's "Guideline No. 1" (Appendix A to Part 40). This guideline 

provides exchanges with more specific information regarding initial and continued 

compliance with the Act and the CFTC's rules and policies for listing contracts. 

To be an effective economic tool for hedging and price discovery, commodity contracts 

must accurately reflect the operation of the cash market. Where contract terms are not 

consistent with commercial practices or contain features that interfere with or bias the 

delivery process there is an increase in the likelihood of nonconvergence of cash and 

commodity prices, of manipulation or a disorderly market. Such conditions reduce the 

economic utility, and therefore, the success of the contract. Guideline 1 helps to ensure 

that the design of a commodity contract accurately reflects the operation of the cash 

market in question and does not contain factors which may inhibit or bias the delivery 

process. 

c) Does the regulatory framework provide for fair access to the exchange or trading 

system through oversight of the related rules for participation? 

Yes. The following statutory DCM Designation Criteria and core principles ensure that 

access to a trading system or exchange is fair and objective: 

Designation Criterion 3 of Section 5(b) of the CEA provides that: 

211 
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. The rules may 

authorize— 

(A) transfer trades or office trades; 

(B) an exchange of— 

(i) futures in connection with a cash commodity transaction; 

(ii) futures for cash commodities; or 

(iii) futures for swaps; or 

(C) a FCM, acting as principal or agent, to enter into or confirm the 

execution of a contract for the purchase or sale of a commodity for future 

delivery if the contract is reported, recorded, or cleared in accordance with the 

rules of the contract market or a derivatives clearing organization. 

Appendix A to Part 38 provides the following CFTC guidance on Designation 

Criterion 3 of Section 5(b): 

(a) Establishing and enforcing trading rules to ensure fair and equitable trading 

on a contract market, among other things, includes providing to market 

participants, on a fair, equitable and timely basis, information regarding, prices, 

bids and offers, as applicable to the market. 

(b) Such trading rules should be designed with adequate specificity. 

(c) A contract market that authorizes transfer trades or office trades; an exchange 

of futures for physicals or futures for swaps; or any other non-competitive 

transactions, including block trades, should have rules particularly authorizing 

such transactions and establishing appropriate recordkeeping requirements. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Designation Criterion 7 of Section 5(b) of the CEA provides that: 

The board of trade shall provide the public with access to the rules, regulations, 

and contract specifications of the board of trade. 

Appendix A to Part 38 provides the following CFTC guidance on Designation 

Criterion 7 of Section 5(b): 

212 
A board of trade operating as a contract market may provide information to the 

public by placing the information on its web site. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 12 of Section 5(d) of the CEA provides that: 

The board of trade shall establish and enforce rules to protect market participants 

from abusive practices committed by any party acting as an agent for the participants. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 12 of 

Section 5(d): 

(a) Application Guidance. A DCM should have rules prohibiting conduct by 

intermediaries that is fraudulent, noncompetitive, unfair, or an abusive practice in 

connection with the execution of trades and a program to detect and discipline 

such behavior. The contract market should have methods and resources 

appropriate to the nature of the trading system and the structure of the market to 

detect trade practice abuses. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 18 of Section 5(d) of the CEA provides that: 

Unless necessary or appropriate to achieve the purposes of this Act, the board of 

trade shall endeavor to avoid— 

(A) adopting any rules or taking any actions that result in any unreasonable 

restraints of trade; or 

(B) imposing any material anticompetitive burden on trading on the contract 

market. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 18 of 

Section 5(d): 

(a) Application Guidance. An entity seeking designation as a contract market may 

request that the Commission consider under the provisions of Section 15(b) of the 

CEA any of the entity's rules, including trading protocols or policies, and 

including both operational rules and the terms or conditions of products listed for 

trading, at the time of designation or thereafter. The Commission intends to apply 

Section 15(b) of the CEA to its consideration of issues under this Core Principle 

in a manner consistent with that previously applied to contract markets. 

213 
See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

5) With respect to fairness of order execution procedures: 

a) Are order routing procedures clearly disclosed, applied fairly and not inconsistent 

with relevant securities regulation (e.g., requirements with respect to precedence of 

client orders and prohibition of front-running or trading ahead of customers)? 

Yes. The statutory duties and CFTC guidance regarding the requirement to offer fair and 

objective access discussed in the response to Principle 25, Question 5(c), below, and the 

requirement to apply execution rules fairly to all participants is discussed in response to 

Principle 25, Question 5(b), below. These requirements operate to ensure that a system’s 

order routing procedures are clearly disclosed to the regulator and to market participants, 

are applied fairly and are not inconsistent with relevant securities regulations. See also

DCM Core Principle 12—Protection Of Market Participants, requiring that a board of 

trade shall establish and enforce rules to protect market participants from abusive 

practices committed by any party acting as agent for the participants. Appendix B to Part 

38 of the CFTC’s regulations provides guidance on, and acceptable practices in, 

compliance with the core principles.

b) Are execution rules disclosed to the regulator and to market participants, and 

consistently applied to all participants? 

Yes. Boards of trade applying for contract market designation must meet statutory 

requirements that execution rules are disclosed to the regulator and to market 

participants, and are fairly applied to all participants. 

The CEA standard is “fair and equitable” as set forth in Designation Criterion 3 of 

Section 5(b) of the CEA and “competitive, open and efficient” under Core Principle 9 of 

Section 5(d). CEA Section 5(d)(12) Core Principle requires that a board of trade shall 

establish and enforce rules to protect market participants from abusive practices 

committed by any party acting as agent for the participants. CFTC Regulation 1.38, 

which applies to contract markets pursuant to rule 38.2, requires competitive execution. 

Note: CFTC Regulation 1.38 permits certain noncompetitive trades that are executed 

pursuant to rules that have been approved by the CFTC. 

Designation Criterion 3 of Section 5(b) of the CEA provides that: 

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. The rules may 

authorize— 

(A) transfer trades or office trades; 

214 
(B) an exchange of— 

(i) futures in connection with a cash commodity transaction; 

(ii) futures for cash commodities; or 

(iii) futures for swaps; or 

(C) FCM, acting as principal or agent, to enter into or confirm the execution 

of a contract for the purchase or sale of a commodity for future delivery if the 

contract is reported, recorded, or cleared in accordance with the rules of the 

contract market or a derivatives clearing organization. 

Appendix A to Part 38 provides the following CFTC guidance on Designation 

Criterion 3 of Section 5(b): 

(a) Establishing and enforcing trading rules to ensure fair and equitable trading 

on a contract market, among other things, includes providing to market 

participants, on a fair, equitable and timely basis, information regarding, prices, 

bids and offers, as applicable to the market. 

(b) Such trading rules should be designed with adequate specificity. 

(c) A contract market that authorizes transfer trades or office trades; an 

exchange of futures for physicals or futures for swaps; or any other noncompetitive transactions, including block trades, should have rules particularly 

authorizing such transactions and establishing appropriate recordkeeping 

requirements. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 9 of Section 5(d) of the CEA provides that: 

The board of trade shall provide a competitive, open, and efficient market and 

mechanism for executing transactions. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 9 of 

Section 5(d): 

(a) Application Guidance. 

(1) A competitive, open and efficient market and mechanism for executing 

transactions includes a board of trade’s methodology for entering orders and 

executing transactions. 

215 
(2) Appropriate objective testing and review of any automated systems should 

occur initially and periodically to ensure proper system functioning, adequate 

capacity and security. A DCM's analysis of its automated system should 

address appropriate principles for the oversight of automated systems, ensuring 

proper system function, adequate capacity and security. The Commission 

believes that the guidelines issued by the International Organization of 

Securities Commissions (IOSCO) in 1990 ("Principles for Screen-Based 

Trading Systems"), and adopted by the Commission on November 21, 1990 

(55 FR 48670), as supplemented in October 2000, are appropriate guidelines 

for a DCM to apply to electronic trading systems. Any program of objective 

testing and review of the system should be performed by a qualified 

independent professional. The Commission believes that information gathered 

by analysis, oversight or any program of objective testing and review of any 

automated systems regarding system functioning, capacity and security should 

be made available to the Commission. 

(3) A DCM that determines to allow block trading should ensure that the 

block trading does not operate in a manner that compromises the integrity of 

prices or price discovery on the relevant market. 

(b) Acceptable Practices. A professional that is a certified member of the 

Information Systems Audit and Control Association experienced in the industry 

would be an example of an acceptable party to carry out testing and review of an 

electronic trading system. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

CFTC Regulation 1.38 requires contract market transactions to be executed openly and 

competitively by open outcry or posting of bids and offers or by other equally open and 

competitive methods. Regulation 1.38 permits certain noncompetitive trades that are 

executed pursuant to rules that have been approved by the CFTC. 

In order to maintain designation, Core Principle 12 of Section 5(d) of the CEA provides 

that: 

The board of trade shall establish and enforce rules to protect market participants 

from abusive practices committed by any party acting as an agent for the participants. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 12 of 

Section 5(d): 

(a) Application Guidance. A DCM should have rules prohibiting conduct by 

intermediaries that is fraudulent, noncompetitive, unfair, or an abusive practice 

in connection with the execution of trades and a program to detect and 

discipline such behavior. The contract market should have methods and 

216 
resources appropriate to the nature of the trading system and the structure of 

the market to detect trade practice abuses. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

c) Where applicable, does the regulator review the trade matching or execution 

algorithm of automated trading systems for fairness? 

Yes. The CFTC reviews the trade matching or execution algorithm according to IOSCO 

standards for screen-based trading systems. 

Designation Criterion 4 of Section 5(b) of the CEA provides that: 

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 trade execution facility operates in accordance with the 

rules or specifications. 

Appendix A to Part 38 provides the following CFTC guidance on Designation 

Criterion 4 of Section 5(b): 

 (a) An application of a board of trade to be designated as a contract market 

should include the system's trade-matching algorithm and order entry procedures. 

An application involving a trade-matching algorithm that is based on order 

priority factors other than price and time should include a brief explanation of the 

algorithm. 

(b) A DCM's specifications on initial and periodic objective testing and review 

of proper system functioning, adequate capacity and security for any automated 

systems should be included in its application. A board of trade should submit in 

the contract market application, information on the objective testing and review 

carried out on its automated system. The Commission believes that the guidelines 

issued by the International Organization of Securities Commissions (IOSCO) in 

1990 ("Principles for Screen-Based Trading Systems"), and adopted by the 

Commission on November 21, 1990 (55 FR 48670), as supplemented in October, 

2000, are appropriate guidelines for an electronic trading facility to apply to 

electronic trading systems. Any program of objective testing and review of the 

system should be performed by a qualified independent professional (but not 

necessarily a third-party contractor). 

217 
See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

6) With respect to trading information: 

a) Do similarly situated market participants have equitable access to market rules and 

operating procedures? 

Yes. The statutory designation requirements of Section 5(b) of the CEA and the ongoing 

requirements of Section 5(d) of the CEA (which a market must demonstrate its capacity 

to meet) ensure that that all market rules and operating procedures are available to market 

participants. 

Designation Criterion 7 of Section 5(b) of the CEA provides that: 

The board of trade shall provide the public with access to the rules, regulations, 

and contract specifications of the board of trade. 

Appendix A to Part 38 provides the following CFTC guidance on Designation 

Criterion 7 of Section 5(b): 

A board of trade operating as a contract market may provide information to the 

public by placing the information on its web site. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 7 of Section 5(d) of the CEA provides that: 

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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 7 of 

Section 5(d): 

 (a) Application guidance. A DCM should have arrangements and resources for 

the disclosure of contract terms and conditions and trading mechanisms to the 

Commission, market participants and the public. Procedures should also include 

providing information on listing new products, rule amendments or other changes 

to previously disclosed information to the Commission, market participants and 

218 
the public. Provision of all such information to market participants and the public 

could be by timely placement of the information on a contract market's web site. 

(b) Acceptable practices. In making information available to market participants 

and the public, on its web site, a DCM should place information on the Web site 

no later than the day a new product is listed, the day a new or amended rule is 

implemented or the day previously disclosed information is changed. For 

example, the timely provision of this information on a contract market's Web site 

could be done through press releases, newsletters or notices to members. 

Additionally, a contract market should ensure that the rulebook posted on its Web 

site is available to the public ( i.e. , can be accessed by visitors to the Web site 

without the need to register, log in, provide a user name or obtain a password) and 

is kept current. A rulebook will be considered current if: (1) Notice of any 

substantive new or amended rule is provided within one day of implementation, 

either by press release, newsletter, notice to members or actual posting of the 

change in the rulebook; and (2) all new rules, both substantive and nonsubstantive, are posted in the rulebook within five days of implementation. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

b) Are there adequate arrangements for transparency? 

Yes. The CEA and CFTC regulations require transparency and fair treatment. As 

noted above, the CFTC’s guidance concerning DCM Designation Criteria 3 of Section 

5(b) of the CEA–Fair and Equitable Trading, provides, in part, that: 

Establishing and enforcing trading rules to ensure fair and equitable trading on a 

contract market, among other things, includes providing to market participants, 

on a fair, equitable and timely basis, information regarding, prices, bids and 

offers, as applicable to the market. (emphasis added). 

In addition, a board of trade applying for contract market designation must satisfactorily 

demonstrate its capacity to operate in compliance with Section 5(d) of the CEA. See 

Appendix B to Part 38, guidance under DCM Core Principle 1—In General. 

Among other things, Core Principle 8 of Section 5(d) of the CEA provides that: 

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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 8 of 

Section 5(d): 

219 
 (a) Application Guidance. A contract market should provide to the public 

information regarding settlement prices, price range, volume, open interest and 

other related market information for all actively traded contracts, as determined 

by the Commission, on a fair, equitable and timely basis. The Commission 

believes that Section 5(d)(8) requires contract markets to publicize trading 

information for any non-dormant contract. Provision of information for any 

applicable contract could be through such means as provision of the information 

to a financial information service and by timely placement of the information on a 

contract market's web site. 

(b) Acceptable Practices. The mandatory compliance with Section 16.01, 

“Trading volume, open contracts, prices and critical dates,” required under the 

regulations, would constitute an acceptable practice under Core Principle 8. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

c) Are adequate records (i.e., audit trails) available to reconstruct trading activity 

within a reasonable time? 

Yes. A board of trade applying for contract market designation must satisfactorily 

demonstrate its capacity to operate in compliance with Section 5(d) of the CEA. See

Appendix B to Part 38, guidance under Core Principle 1. 

Among other things, Core Principle 10 of Section 5(d) requires the creation of an audit 

trail. 

Core Principle 10 of Section 5(d) of the CEA provides that: 

The board of trade shall maintain rules and procedures to provide for the 

recording and safe storage of all identifying trade information in a manner that 

enables the contract market to use the information 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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 10 of 

Section 5(d): 

(a) Application Guidance. A DCM should have arrangements and resources for 

recording of full data entry and trade details and the safe storage of audit trail 

data. A DCM should have systems sufficient to enable the contract market to use 

the information for purposes of assisting in the prevention of customer and market 

abuses through reconstruction of trading. 

(b) Acceptable Practices. 

220 
(1) The goal of an audit trail is to detect and deter customer and market 

abuse. An effective contract market audit trail should capture and retain 

sufficient trade-related information to permit contract market staff to detect 

trading abuses and to reconstruct all transactions within a reasonable period of 

time. An audit trail should include specialized electronic surveillance 

programs that would identify potentially abusive trades and trade patterns, 

including, for instance, withholding or disclosing customer orders, trading 

ahead, and preferential allocation. An acceptable audit trail must be able to 

track a customer order from time of receipt through fill allocation or other 

disposition. The contract market must create and maintain an electronic 

transaction history database that contains information with respect to 

transactions executed on the DCM. 

(2) An acceptable audit trail should include the following: original source 

documents, transaction history, electronic analysis capability, and safe storage 

capability. A contract market whose audit trail satisfies the following 

acceptable practices would satisfy Core Principle 10. 

(i) Original Source Documents. Original source documents include 

unalterable, sequentially identified records on which trade execution 

information is originally recorded, whether recorded manually or 

electronically. For each customer order (whether filled, unfilled or 

cancelled, each of which should be retained or electronically captured), 

such records reflect the terms of the order, an account identifier that 

relates back to the account(s) owner(s), and the time of order entry. (For 

floor-based contract markets, the time of report of execution of the order 

should also be captured.) 

(ii) Transaction History. A transaction history which consists of an 

electronic history of each transaction, including 

(a) all data that are input into the trade entry or matching system for 

the transaction to match and clear; 

(b) the categories of participants for which such trades are executed, 

including whether the person executing a trade was executing it for 

his/her own account or an account for which he/she has discretion, 

his/her clearing member’s house account, the account of another 

member, including market participants present on the floor, or the 

account of any other customer; 

(c) timing and sequencing data adequate to reconstruct trading; and 

(d) the identification of each account to which fills are allocated. 

(iii) Electronic Analysis Capability. An electronic analysis capability that 

permits sorting and presenting data included in the transaction history so 

221 
as to reconstruct trading and to identify possible trading violations with 

respect to both customer and market abuse. 

(iv) Safe Storage Capability. Safe storage capability provides for a 

method of storing the data included in the transaction history in a manner 

that protects the data from unauthorized alteration, as well as from 

accidental erasure or other loss. Data should be retained in accordance 

with the recordkeeping standards of Core Principle 17. 

See Appendix B to Part 38 at: 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm.

d) Is the system capable of disclosing the types of information that it is designed to 

make available, and, conversely, of providing safeguards to preserve the confidentiality 

of other information, the disclosure of which is not intended? 

Yes. Fair and equitable trading on a contract market, among other things, includes 

providing to market participants, on a fair, equitable and timely basis, information 

regarding prices, bids and offers, as applicable to the market. A board of trade applying 

for contract market designation must satisfactorily demonstrate its capacity to operate in 

compliance with DCM Designation Criterion 7 of Section 5(b) and DCM Core Principles 

7, 8, and 10 of Section 5(d) of the CEA. DCM Designation Criterion 7 requires the board 

of trade to provide the public with access to the rule, regulations, and contract 

specifications of the board of trade. DCM Core Principle 7 ensures disclosure of general 

information to market authorities, market participants, and the public information. DCM 

Core Principle 8 requires the daily publication of trade information. DCM Core Principle 

10 requires the creation of an audit trail. An acceptable audit trail will include a safe 

storage capability providing for the storing of data included in the transaction history in a 

manner that protects the data from unauthorized alteration, as well as from accidental 

erasure or other loss. 

Designation Criterion 7 of Section 5(b) of the CEA: 

The board of trade shall provide the public with access to the rules, regulations, 

and contract specifications of the board of trade. 

Appendix A to Part 38 provides the following CFTC guidance on designation criterion 

7 of Section 5(b): 

A DCM should provide information to the public by placing the information on 

its Web site. 

See Appendix A to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

222 
Core Principle 7 of Section 5(d) of the CEA: 

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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 7 of 

Section 5(d): 

(a) Application guidance. A DCM should have arrangements and resources for the 

disclosure of contract terms and conditions and trading mechanisms to the 

Commission, market participants and the public. Procedures should also include 

providing information on listing new products, rule amendments or other changes 

to previously disclosed information to the Commission, market participants and 

the public. Provision of all such information to market participants and the public 

could be by timely placement of the information on a contract market's web site. 

(b) Acceptable practices . In making information available to market participants 

and the public, on its web site, a DCM should place information on the web site 

no later than the day a new product is listed, the day a new or amended rule is 

implemented or the day previously disclosed information is changed. For 

example, the timely provision of this information on a contract market's web site 

could be done through press releases, newsletters or notices to members. 

Additionally, a contract market should ensure that the rulebook posted on its web 

site is available to the public ( i.e. , can be accessed by visitors to the web site 

without the need to register, log in, provide a user name or obtain a password) and 

is kept current. A rulebook will be considered current if: (1) Notice of any 

substantive new or amended rule is provided within one day of implementation, 

either by press release, newsletter, notice to members or actual posting of the 

change in the rulebook; and (2) all new rules, both substantive and nonsubstantive, are posted in the rulebook within five days of implementation. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 8 of Section 5(d) of the CEA provides that: 

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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 8 of 

Section 5(d): 

223 
(a) Application Guidance. A contract market should provide to the public 

information regarding settlement prices, price range, volume, open interest and 

other related market information for all actively traded contracts, as determined 

by the Commission, on a fair, equitable and timely basis. The Commission 

believes that Section 5(d)(8) requires contract markets to publicize trading 

information for any non-dormant contract. Provision of information for any 

applicable contract could be through such means as provision of the information 

to a financial information service and by timely placement of the information on a 

contract market's web site. 

(b) Acceptable Practices. The mandatory compliance with Section 16.01, 

“Trading volume, open contracts, prices and critical dates,” required under the 

regulations, would constitute an acceptable practice under Core Principle 8. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

Core Principle 10 of Section 5(d) of the CEA: 

The board of trade shall maintain rules and procedures to provide for the 

recording and safe storage of all identifying trade information in a manner that 

enables the contract market to use the information 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. 

Appendix B to Part 38 provides the following CFTC guidance on Core Principle 10 of 

Section 5(d): 

(a) Application Guidance. A DCM should have arrangements and resources for 

recording of full data entry and trade details and the safe storage of audit trail 

data. A DCM should have systems sufficient to enable the contract market to use 

the information for purposes of assisting in the prevention of customer and market 

abuses through reconstruction of trading. 

(b) Acceptable Practices. 

(1) The goal of an audit trail is to detect and deter customer and market 

abuse. An effective contract market audit trail should capture and retain 

sufficient trade-related information to permit contract market staff to detect 

trading abuses and to reconstruct all transactions within a reasonable period of 

time. An audit trail should include specialized electronic surveillance 

programs that would identify potentially abusive trades and trade patterns, 

including, for instance, withholding or disclosing customer orders, trading 

ahead, and preferential allocation. An acceptable audit trail must be able to 

track a customer order from time of receipt through fill allocation or other 

disposition. The contract market must create and maintain an electronic 

224 
transaction history database that contains information with respect to 

transactions executed on the DCM. 

(2) An acceptable audit trail should include the following: original source 

documents, transaction history, electronic analysis capability, and safe storage 

capability. A contract market whose audit trail satisfies the following 

acceptable practices would satisfy Core Principle 10. 

(i) Original Source Documents. Original source documents include 

unalterable, sequentially identified records on which trade execution 

information is originally recorded, whether recorded manually or 

electronically. For each customer order (whether filled, unfilled or 

cancelled, each of which should be retained or electronically captured), 

such records reflect the terms of the order, an account identifier that 

relates back to the account(s) owner(s), and the time of order entry. (For 

floor-based contract markets, the time of report of execution of the order 

should also be captured.) 

(ii) Transaction History. A transaction history which consists of an 

electronic history of each transaction, including 

(a) all data that are input into the trade entry or matching system for 

the transaction to match and clear; 

(b) the categories of participants for which such trades are executed, 

including whether the person executing a trade was executing it for 

his/her own account or an account for which he/she has discretion, 

his/her clearing member’s house account, the account of another 

member, including market participants present on the floor, or the 

account of any other customer; 

(c) timing and sequencing data adequate to reconstruct trading; and 

(d) the identification of each account to which fills are allocated. 

(iii) Electronic Analysis Capability. An electronic analysis capability that 

permits sorting and presenting data included in the transaction history so 

as to reconstruct trading and to identify possible trading violations with 

respect to both customer and market abuse. 

(iv) Safe Storage Capability. Safe storage capability provides for a 

method of storing the data included in the transaction history in a manner 

that protects the data from unauthorized alteration, as well as from 

accidental erasure or other loss. Data should be retained in accordance 

with the recordkeeping standards of Core Principle 17. 

225 
See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

************************************************************************** 

ADDENDUM

If any member/participant/intermediary of the Exchange will be able to enter orders 

directly into the Exchange’s trade matching algorithm from within the U.S., then the 

Exchange would require a direct access no-action letter from the Division of Market 

Oversight (Division). If the orders are entered into the Exchange’s trade matching 

algorithm from outside the U.S., then the Exchange would not require a direct access noaction letter. 

With respect to a request for no-action relief, the following is provided: 

Pursuant to the November 2, 2006 policy statement “Boards of Trade Located 

Outside of the United States and No-Action Relief From the Requirement To 

Become a Designated Contract Market or Derivatives Transaction Execution 

Facility,” foreign boards of trade that wish to permit their U.S. members and other 

participants in the U.S. to have direct access to their electronic trade matching 

system (not through an intermediary located outside the U.S.) may request noaction relief to do so from the Division. Such a request must be submitted 

pursuant to CFTC Regulation 140.99, which contains certain regulatory 

requirements with respect to requests for no-action relief generally. 

General. Requests for such no-action relief generally request that the Division confirm 

that it will not recommend enforcement action if the foreign board of trade does not seek 

designation as a contract market (DCM) or registration as a derivatives transaction 

execution facility (DTEF) pursuant to Sections 5 and 5a of the Commodity Exchange Act 

or comply with other sections of the Act or Commission regulations that relate to DCMs 

or DTEFs in connection with direct access from the U.S. 

Generally, foreign boards of trade request no-action relief to permit: 

1. Members in the U.S. to trade for their own accounts through the trading 

system; 

2. Members who are registered with the Commission as futures commission 

merchants (FCMs) or who are exempt from registration as FCMs pursuant to 

Commission Rule 30.10 (Rule 30.10 Firms) to submit orders and trade for U.S. 

customers through the trading system; and 

3. Members who are registered as FCMs or who are Rule 30.10 Firms to accept 

orders from U.S. customers through automated order routing systems for 

submission to the trading system. 

226 
Some foreign boards of trade also request relief to permit members who are registered 

with the Commission as CPOs or CTAs, or are exempt from such registration 

pursuant to CFTC regulations 4.13 or 4.14, to submit orders for execution on behalf 

of U.S. pools they operate or U.S. customer accounts for which they have 

discretionary authority, respectively, provided that an FCM or Regulation 30.10 Firm 

acts as clearing firm and guarantees without limitation all such trades of the CPO or 

CTA effected through submission of orders on the trading system; 

Scope of Review. In reviewing a request for no-action relief, Commission staff reviews, 

among other things, general information about the foreign board of trade, as well as 

detailed information about: 

1. membership criteria (including financial and fit and proper requirements); 

2. various aspects of the automated trading system (including the order-matching 

system, the audit trail, response time, reliability, security, and, of particular 

importance, adherence to the IOSCO principles for screen-based trading); 

3. settlement and clearing (including financial requirements and default 

procedures); 

4. terms and specifications of the contracts to be made available from within the 

U.S.; 

5. the regulatory regime governing the foreign board of trade in its home 

jurisdiction; 

6. the foreign board of trade’s status in its home jurisdiction and its rules and 

enforcement thereof (including market surveillance and trade practice 

surveillance); and 

7. existing information-sharing agreements among the Commission, the foreign 

board of trade, and the foreign board of trade’s regulatory authority. 

When issued, the no-action letters conclude with a standard set of terms and conditions 

for the granting of the relief which include, among other things, a quarterly volume 

reporting requirement. 

227 
Principle 26. There should be ongoing regulatory supervision of exchanges 

and trading systems, which should aim to ensure that the integrity of trading 

is maintained through fair and equitable rules that strike an appropriate 

balance between the demands of different market participants 

Assessment: Fully Implemented 

1) Does the regulatory system include: 

a) A program whereby the regulator or an SRO, subject to oversight by the regulator, 

monitors day-to-day trading activity on the exchange or trading system (through a 

market surveillance program), monitors conduct of market intermediaries (through 

examinations of business operations) and collects and analyzes the information 

gathered through these activities?

Yes. Both the CFTC and DCMs conduct market surveillance. The following discussion 

describes the CFTC’s market surveillance activities. 

The CFTC Market Surveillance Program. Futures prices are widely quoted and 

disseminated throughout the U.S. and abroad. Business, agricultural, and financial 

enterprises use futures markets for pricing information and for hedging against price risk. 

The goals of the CFTC's market surveillance program are to preserve these economic 

functions of the futures and option markets under its jurisdiction by monitoring trading 

activity to detect and prevent manipulation or abusive practices, to keep the Commission 

informed of significant market developments, to enforce Commission and exchange 

speculative position limits, and to ensure compliance with Commission reporting 

requirements. In conducting market surveillance, Staff has a close working relationship 

with the exchanges’ market surveillance staff. 

The Market Surveillance Mission. The primary mission of the market surveillance 

program is to identify situations that could pose a threat of manipulation and to initiate 

appropriate preventive actions. Each day, for all active futures and option contract 

markets, the CFTC's market surveillance staff monitors the daily activities of large 

traders, key price relationships, and relevant supply and demand factors in a continuous 

review for potential market problems. 

From the perspective of surveillance, markets can be grouped according to their 

settlement provisions despite the great diversity among the underlying commodities on 

which futures contracts are based. 

228 
Physical Delivery Commodities. Futures contracts that require the delivery of a 

physical commodity are most susceptible to manipulation when the deliverable supply on 

such contracts is small relative to the size of positions held by traders, individually or in 

related groups, as the contract approaches expiration. 

The more difficult and costly it is to augment deliverable supplies within the time 

constraints of the expiring futures contract's delivery terms, the more susceptible to 

manipulation the contract becomes. Examples of some pertinent surveillance questions 

for these markets include: 

• Are the positions held by the largest long trader(s) greater in size than deliverable 

supplies not already owned by such trader(s)? 

• Are the long traders likely to demand delivery? 

• Is taking delivery the least costly means of acquiring the commodity? 

• To what extent are the largest short traders capable of making delivery? 

• Is making futures delivery a better alternative than selling the commodity in the 

cash market? 

• Is the futures price, as the contract approaches expiration, reflecting the cash 

market value of the deliverable commodity? 

• Is the price spread between the expiring future and the next delivery month 

reflective of underlying supply and demand conditions in the cash market? 

An excellent barometer for potential liquidation problems is the basis relationship (i.e., 

the difference between cash and futures price). When the price of the liquidating future is 

abnormally higher than underlying cash prices or both the futures and underlying cash 

price are abnormally higher than comparable cash prices, there is ample reason to 

examine the causes and to assess the motives of traders holding sizable long futures 

positions. 

Financial Instruments. Futures contracts that require the delivery of a financial 

instrument generally are less likely than futures on physical commodities to be subject to 

manipulation in the form of squeezes. This assertion is based on the premise that the 

underlying cash markets for financial instruments tend to be deeper, more liquid, more 

transparent, and more readily arbitraged than physical commodity markets. Nonetheless, 

there are situations when the questions specified above still pertain to futures on financial 

instruments. For example, when a particular financial futures contract provides for a 

deliverable supply that either is of finite size or is a narrow segment of the broader cash 

market for the underlying financial instrument, then all the questions raised in the prior 

Section on physical commodities would apply. 

In addition, price aberrations in the cash market for the underlying financial instrument 

may provide an indication of (or an opportunity for) an attempted manipulation. 

Surveillance staff monitors cash prices of the financial instrument specified for delivery 

on the futures contract in relation to cash prices for non-deliverable instruments that are 

close, or identical substitutes. High deliverable prices relative to non-deliverable prices 

229 
for financial instruments may signal an attempt to remove deliverable supplies from the 

futures market as part of an attempted manipulation. 

To the extent participants in the markets take positions vastly beyond their financial 

capacity to take delivery or make settlement, this may also signal some manipulative 

activity. 

Several financial products involve U.S. Treasury or agency instruments (e.g., bonds or 

notes). CFTC surveillance staff maintains open lines of communication with the U.S. 

Treasury Department, the Federal Reserve Bank of New York, the SEC, among others. 

Cash-Settled Markets. The surveillance emphasis in cash-settled contracts is on the 

integrity of the cash price series used to settle the futures contract. The size of a trader's 

position at the expiration of a cash-settled futures contract cannot affect the price of that 

contract because the trader cannot demand or make delivery of the underlying 

commodity. 

Since manipulation of the cash market can yield a profit in the futures contract, CFTC 

staff monitors large reportable futures positions and is alert for any unusual cash market 

activity on the part of large futures traders. Examples of some pertinent surveillance 

questions for these markets are: 

• As the futures contract expiration approaches, is the cash price moving in a 

manner consistent with supply and demand factors and with other comparable cash 

prices, which are not used in the cash-settlement process? 

• Do traders with large positions in the expiring future have the capacity and ability 

to affect the cash price series used to settle the futures contract? 

• What information can be obtained from the organization that compiles the cash 

price series regarding how the price is determined? Is anyone reporting prices that 

appear to be out of line with prices reported by others? If yes, can it be determined 

that the party reporting those prices holds a futures position that would benefit by 

those prices? 

Equity Futures: Special Concerns. Generally, equities and equity futures markets are 

closely linked through intermarket arbitrage. Therefore, effective surveillance of equity 

futures markets requires coordination with the exchanges trading the underlying equities 

and equity options to address intermarket trading abuses. 

If the stock index underlying the futures and/or option contract is a broad-based index in 

terms of number of stocks and market capitalization, then intermarket price manipulation 

and insider trading concerns is greatly reduced. However, narrower indices and singlestock futures may require more vigilance with added protections with respect to misuse 

of information, especially to the extent that the market is, or acts like, a market in a single 

security. The Commission cooperates and works with the SEC on surveillance issues. 

230 
Sources of Market Information. The CFTC's market surveillance program uses many 

sources of market information to accomplish its objectives. Some of this information is 

publicly available, including data on the overall supply, demand, and marketing of the 

underlying commodity; futures, option, and cash prices; and trading volume and open 

interest data. Some of the information is highly confidential, which includes data from 

exchanges, intermediaries, and large traders. 

Exchanges report daily positions and transactions of each clearing member to the 

Commission. The data are transmitted electronically during the morning after the “as of” 

date. They show, separately for proprietary and customer accounts, the aggregate position 

and trading volume of each clearing member in each futures and option contract. The 

data is used to identify quickly the firms that clear the largest buy or sell volumes or hold 

the biggest positions in a particular market. The clearing member data, however, do not 

identify the beneficial owners of the positions. Beneficial owners are identified by our 

large trader reporting system, which is the heart of the CFTC’s market surveillance 

program. 

Regulatory Response When Problems Develop. Surveillance economists prepare 

weekly summary reports of futures and option contracts for regional surveillance 

supervisors, who immediately review these reports. Surveillance staff informs 

Commission and senior staff of potential problems and significant market developments 

at weekly surveillance meetings so that they will be prepared to take prompt action when 

necessary. 

The market surveillance process is not conducted exclusively at the CFTC. Surveillance 

issues are usually handled jointly by the CFTC and the appropriate exchange. Relevant 

surveillance information is shared and corrective actions are taken, when appropriate. 

Potential problem situations are jointly monitored and, if necessary, verbal contacts are 

made with the participants in question. These contacts may be for the purpose of 

understanding their trading, confirming reported positions, alerting the brokers or traders 

as to the regulatory concern for the situation, or warning them to trade responsibly. This 

“jawboning” activity by the Commission and the exchanges has been effective in 

resolving most potential problems at an early stage. 

The Commission customarily gives an exchange the first opportunity to resolve problems 

in its markets, either informally or through emergency action. If an exchange fails to take 

actions that the Commission deems appropriate, the Commission has broad emergency 

powers under which it can order the exchange to take actions specified by the 

Commission. Such actions could include imposing or reducing limits on positions, 

requiring the liquidation of positions, extending a delivery period, or closing a market. 

Fortunately, most issues are resolved without the need to use the CFTC's emergency 

powers. The fact that the CFTC has had to take emergency actions only four times in its 

history demonstrates the potency of the other available tools to avoid disorderly 

liquidations or default. 

231 
Enforcement of Position Limits. The CFTC surveillance staff also monitors 

compliance with Commission or exchange speculative limits. These rules help prevent 

traders from accumulating concentrated positions that could disrupt a market. To monitor 

those limits, the market surveillance staff reviews daily for potential violations. Although 

bona fide hedgers are exempt from speculative limits, Commission staff monitors 

hedgers' compliance with their exemption levels. Commercial traders that carry futures 

and option positions in excess of Commission speculative position limit levels are 

required to submit a monthly statement of cash positions. These statements show the total 

cash position of each trader, which reflects the amount of the trader's actual physical 

ownership of each commodity and the amount of the trader's fixed-price purchases and 

sales for which the trader has a legitimate cash exposure at risk. Commission staff 

compares each trader's cash position to the trader's futures and option positions. 

The CFTC has a comprehensive market surveillance program to detect and prevent 

corruption of the economic functions of the futures and option markets that it oversees. 

b) Regulatory oversight mechanisms to verify compliance by the exchange or trading 

system with its statutory or administrative responsibilities, particularly as they relate to 

the integrity of the markets, market surveillance, the monitoring of risks, and the 

ability to respond to such risks?

Yes. 

DCM core principles. Section 5(d) of the CEA sets out the “core principles” with which 

a DCM must comply in order to maintain designation. The CFTC’s guidance on these 

requirements states under Core Principle 1 that: “A board of trade applying for 

designation as a contract market must satisfactorily demonstrate its capacity to operate in 

compliance with the core principles under Section 5(d) of the [CEA] and [Regulation] 

38.3.” 

In order to maintain designation, contract markets must comply with the following core 

principles: 

Core Principle 1 - Must meet and adhere to the following core principles for 

Contract Markets on a continuing basis:108 

Core Principle 2 - Compliance with Rules: monitor and enforce compliance with 

all contract market rules,109 

Core Principle 3 - Contracts Not Readily Subject to Manipulation: list contracts 

that are not readily susceptible to manipulation, 

 

108 Section 5(d) of the CEA. 

109 Section 5(d)(2) of the CEA provides that a “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.” 

232 
Core Principle 4 - Monitoring of Trading: monitor trading to prevent 

manipulation, price distortion and disruption, 

Core Principle 5 - Position Limitations or Accountability: adopt position 

limitations or position accountability where necessary and appropriate, 

Core Principle 6 - Emergency Authority: adopt rules to provide for the exercise of 

emergency authority, 

Core Principle 7 - Availability of General Information: make certain contract and 

execution information available to market authorities, participants and the public, 

Core Principle 8 - Daily Publication of Trading Information: make public daily 

certain transaction information, 

Core Principle 9 Execution of Transactions: provide a competitive, open and 

efficient market and mechanism for executing transactions, 

Core Principle 10 - Trade Information: maintain rules and procedures to provide 

for the recording and safe storage of trade information for the purpose of 

preventing customer and market abuses and providing evidence of rule violations, 

Core Principle 11 - Financial Integrity of Contracts: establish and enforce rules 

providing for the financial integrity of any contracts traded on the exchange 

(including the clearing and settlement with a DCO), and rules to ensure the 

financial integrity of any FCMs and IBs and protection of customer funds, 

Core Principle 12 - Protection of Market Participants: establish and enforce rules 

to protect market participants from abusive practices, 

Core Principle 13 - Dispute Resolution: establish and enforce rules regarding and 

providing for alternative dispute resolution, as appropriate for market participants 

and intermediaries, 

Core Principle 14 - Governance Fitness Standards: establish and enforce 

appropriate fitness standards for directors, members of disciplinary committees, 

members of the contract market and any other person with direct access to the 

facility, 

Core Principle 15 - Conflicts of Interest: establish and enforce rules to minimize 

and resolve conflicts of interest in the contract market’s decision making process, 

Core Principle 16 - Composition of Boards of Mutually Owned Contract Markets: 

ensure that the composition of the governing board reflects market participants, 

Core Principle 17 - Record Keeping: maintain records for five years, and 

233 
Core Principle 18 - Antitrust Considerations: endeavour to avoid unreasonable 

restraints of trade or imposing any material anticompetitive burden on trading on 

the contract market. 

Rules implementing the core principles, as well as illustrative guidance and acceptable 

practices for satisfaction of the Core Principle, are set forth in Part 38 of the 

Commission’s regulations.110

Commission Oversight Procedures. The Commission’s regulatory scheme is based 

upon the assumption of self-regulatory responsibilities by the exchanges and DCOs and 

continuing oversight by the Commission of the exercise of those responsibilities. 

In addition to monitoring exchange and DCO operations on an ongoing basis through 

compliance reporting and “for cause” inquiries, the Commission’s staff periodically 

reviews the programs and procedures adopted by each DCM and DCO to ensure 

compliance with the relevant core principles and to assess the effectiveness of those rules 

and procedures. 

The operational integrity of exchanges is addressed through the CFTC’s periodic RERs 

that broadly address market surveillance, trade practice surveillance and disciplinary 

programs. DMO’s Market Compliance Section conducts regular reviews of each DCM’s 

ongoing compliance with core principles through the self-regulatory programs operated 

by the exchange in order to enforce its rules, prevent market manipulation and customer 

and market abuses, and ensure the recording and safe storage of trade information. 

Periodic RERs normally examine a DCM’s audit trail, trade practice surveillance, 

disciplinary, and dispute resolution programs for compliance with the relevant core 

principles, which include Core Principle 10, Trade Information, and Core Principle 17, 

Recordkeeping with respect to audit trail programs; Core Principle 2, Compliance With 

Rules, and Core Principle 12, Protection of Market Participants with respect to trade 

practice surveillance and disciplinary programs; and Core Principle 13, Dispute 

Resolution, with respect to dispute resolution programs. 

Other periodic RERs normally examine a DCM’s market surveillance program for 

compliance with Core Principle 4, Monitoring of Trading, and Core Principle 5, Position 

Limitations or Accountability. On some occasions, these two types of RERs may be 

combined in a single RER. Market Compliance can also conduct horizontal RERs of the 

compliance of multiple exchanges in regard to particular core principles. 

In conducting an RER, Staff examine trading and compliance activities at the exchange in 

question over an extended time period selected by DMO, typically the twelve months 

immediately preceding the start of the review. Staff conduct extensive review and 

analysis of documents and systems used by the exchange in carrying out its self-

 

110 17 C.F.R. Part 38 – Designated Contract Markets. See Appendix A to Part 38 Application Guidance and 

Appendix B Guidance on Acceptable Practices in Compliance with core principles. See also 66 FR 42256 (August 

10, 2001)(final rules) for a discussion of these rules. 

234 
regulatory responsibilities; interview compliance officials and staff of the exchange; and 

prepare a detailed written report of their findings. In nearly all cases, the RER report is 

made available to the public and posted on cftc.gov. 

c) Provides the regulator with adequate access to all pre-trade and post-trade 

information available to market participants. 

Yes. Core Principle 7 of Section 5(d) of the CEA requires the DCM to make available to 

market authorities, market participants, and the public information concerning the terms 

and conditions of the contract market and the mechanisms for executing transactions on or 

through the facilities of the contract market. 

Core Principle 8 of Section 5(d) of the CEA requires the DCM to make public daily 

information on settlement prices, volume, open interest, and opening and closing ranges 

for actively traded contracts on the contract market. 

2) Does the regulatory framework require that amendments to the rules of the exchange 

or trading system must be provided to, or approved by, the regulator?

Yes. DCMs generally may implement new rules or rule amendments by filing with the 

Commission a certification that the new rule or rule amendment complies with the 

CEA and the Commission’s regulations and/or by requesting CFTC approval of such 

rules and amendments (See CFTC Regulation 40.6(a)). 

3) When the regulator determines that the exchange or trading system is unable to comply 

with the conditions of its approval, or with securities law or regulation, is there a 

mechanism that permits the regulator to: 

a) Re-examine the exchange or trading system and impose a range of actions, such as 

restrictions or conditions on the market operator? 

b) Withdraw the exchange or trading system’s authorization? 

Yes, to all of the above. The CFTC has the power to direct DCMs to alter or supplement 

their rules and to take such action as it deems to be necessary to maintain or restore 

orderly trading. Section 8a(7) and (9) of the CEA, respectively. CEA Sections 5b, 5c(d) 

and 6(b) authorize the CFTC to suspend or revoke a contract market’s designation based 

on a failure or refusal to comply with any of the provisions of the CEA, CFTC 

regulations or CFTC orders. 

235 
Principle 27. Regulation should promote transparency of trading 

Assessment: Fully Implemented 

1) Does the regulatory framework include: 

a) Requirements or arrangements for providing pre-trade (e.g., posting of bids and 

offers) and post-trade (e.g., last sale price and volume of transaction) information to 

market participants on a timely basis? 

Yes. CEA Sections 5(b), 5(d), and 2(h)(7), as well as the Commission’s guidance and 

regulations, require pre-trade and post-trade transparency. DCM Designation Criteria 3—

Fair And Equitable Trading, requires a board of trade to establish fair and equitable 

trading rules. The CFTC’s guidance provides that this obligation includes, among other 

things, providing to market participants, on a fair, equitable and timely basis, information 

regarding, prices, bids, and offers, as applicable to the market. DCM Core Principle 8—

Daily Publication Of Trading Information—requires the daily publication of trading 

information. Additionally, DCM Core Principle 7—Availability Of General 

Information—requires the daily publication of trading information for significant price 

discovery contracts traded or executed on electronic trading facilities. The CFTC’s 

guidance provides that an acceptable practice for DCM Core Principle Section 5(d) and 

Section 2(h)(7)(C)(ii)(VI) is mandatory compliance with Regulation Section16.01. 

Regulation 16.01 provides that reporting markets shall make readily available data 

pertaining to trading volume, open contracts, and price to the news media and general 

public without charge, in a format that readily enables the consideration of such data, no 

later than the business day following the day to which the information pertains. 

The CFTC also publishes a variety of market transaction data, such as the Commitment of 

Traders (“COT”)111 reports and This Month in Futures Markets. 

CFTC Regulation 16.01 states the following: 

 

111 The COT report provides a breakdown of the open interest in futures contracts in which 20 or more traders hold 

positions that equal or exceed the reporting levels set by the CFTC. The CFTC has redesigned the COT reports for 

August 2009 to begin including more detailed information on futures markets and market participants. Traders will 

be classified in a more nuanced way than in prior years, into four categories: (1) producers and merchants; (2) swap 

dealers; (3) managed funds; and (4) other market participants. Data regarding contracts that perform a significant 

price discovery function will also be highlighted. The enhanced data will keep market participants and the public 

better informed about the positions of various types of traders. 

236 
(a) Trading volume and open contracts. Each reporting market shall record for 

each business day the following information separately for futures by commodity 

and by future, and, for options, by underlying futures contract for options on 

futures contracts or by underlying physical for options on physicals, and by put, 

by call, by expiration date and by strike price: 

(1) The option delta, where a delta system is used; 

(2) The total gross open contracts, excluding from futures those contracts 

against which notices have been stopped; 

(3) For futures, open contracts against which delivery notices have been 

stopped on that business day; 

(4) The total volume of trading, excluding transfer trades or office trades; 

(5) The total volume of futures exchanged for commodities or for derivatives 

positions which are included in the total volume of trading; 

(6) The total volume of block trades which are included in the total volume of 

trading. 

(b) Prices. Each reporting market shall record the following information 

separately for futures, by commodity and by future, and, for options, by 

underlying futures contract for options on futures contracts or by underlying 

physical for options on physicals, and by put, by call, by expiration date and by 

strike price: 

(1) For the trading session and for the opening and closing periods of trading 

as determined by each reporting market: 

(i) The lowest price of a sale or offer, whichever is lower, and the highest 

price of a sale or bid, whichever is higher, that the reporting market 

reasonably determines accurately reflect market conditions. If vacated or 

withdrawn, bids and offers shall not be used in making this determination. 

A bid is vacated if followed by a higher bid or price and an offer is 

vacated if followed by a lower offer or price. 

(ii) If there are no transactions, bids, or offers during the opening or 

closing periods, the reporting market may record as appropriate: 

(A) The first price (in lieu of opening price data) or the last price (in 

lieu of closing price data) occurring during the trading session, clearly 

indicating that such prices are the first and the last price; or 

237 
(B) Nominal opening or nominal closing prices which the reporting 

market reasonably determines accurately reflect market conditions, 

clearly indicating that such prices are nominal. 

(2) The settlement price established by each reporting market or its clearing 

organization. 

(3) Additional information. Each reporting market shall record the following 

information with respect to transactions in commodity futures and commodity 

options on that reporting market: 

(i) The method used by the reporting market in determining nominal 

prices and settlement prices; and 

(ii) If discretion is used by the reporting market in determining the 

opening and closing ranges or the settlement prices, an explanation that 

certain discretion may be employed by the reporting market and a 

description of the manner in which that discretion may be employed. 

(c) Critical dates. Each reporting market shall report to the Commission for each 

futures contract the first notice date and the last trading date and for each option 

contract the expiration date in accordance with paragraph (d) of this Section. 

(d) Form, manner and time of filing reports. Unless otherwise approved by the 

Commission or its designee, reporting markets shall submit to the Commission 

the information specified in paragraphs (a)(1) through (a)(5), (b) and (c) of this 

Section as follows: 

(1) Using the format, coding structure and electronic data transmission 

procedures approved in writing by the Commission or its designee; provided 

however , the information shall be made available to the Commission or its 

designee in hard copy upon request; and 

(2) When each such form of the data is first available but not later than 7:00 

a.m. on the business day following the day to which the information pertains 

for the delta factor and settlement price and not later than 12:00 p.m. for the 

remainder of the information. Unless otherwise specified by the Commission 

or its designee, the stated time is eastern time for information concerning 

markets located in that time zone, and central time for information concerning 

all other markets. 

(e) Publication of recorded information. 

(1) Reporting markets shall make the information in paragraph (a) of this 

Section readily available to the news media and the general public without 

charge, in a format that readily enables the consideration of such data, no later 

238 
than the business day following the day to which the information pertains. The 

information in paragraphs (a)(4) through (a)(6) of this Section shall be made 

readily available in a format that presents the information together. 

(2) Reporting markets shall make the information in paragraphs (b)(1) and 

(b)(2) of this Section readily available to the news media and the general 

public, and the information in paragraph (b)(3) of this Section readily 

available to the general public, in a format that readily enables the 

consideration of such data, no later than the business day following the day to 

which the information pertains. 

See CFTC Regulation 16.01 at 

http://ecfr.gpoaccess.gov/cgi/t/text/textidx?c=ecfr&sid=38e11e5c012f7958d7ddd4b3237420e8&rgn=div8&view=text&node=1

7:1.0.1.1.15.0.7.2&idno=17. 

COT Reports. The first COT report was published for 13 agricultural commodities as 

of June 30, 1962. At the time, this report was proclaimed as "another step forward in 

the policy of providing the public with current and basic data on futures market 

operations." Those original reports were compiled on an end-of-month basis and were 

published on the 11th or 12th calendar day of the following month. 

Over the years, in a continuous effort to better inform the public about futures markets, 

the CFTC has improved the COT report in several ways. The COT report is published 

more often—switching to mid-month and month-end in 1990, to every 2 weeks in 

1992, and to weekly in 2000. The COT report is released more quickly—moving the 

publication to the 6th business day after the "as of" date (1990) and then to the 3rd

business day after the "as of" date (1992). The report includes more information—

adding data on the numbers of traders in each category, a crop-year breakout, and 

concentration ratios (early 1970s) and data on option positions (1995). The report also 

is more widely available—moving from a subscription-based mailing list to fee-based 

electronic access (1993) to being freely available on the Commission’s Web site 

(1995). 

The COT reports provide a breakdown of each Tuesday's open interest for markets in 

which 20 or more traders hold positions equal to or above the reporting levels 

established by the CFTC. The weekly reports for Futures-Only Commitments of 

Traders and for Futures-and-Options-Combined Commitments of Traders are released 

every Friday at 3:30 p.m. Eastern time. 

Reports are available in both a short and long format. The short report shows open 

interest separately by reportable and nonreportable positions. For reportable positions, 

additional data are provided for commercial and non-commercial holdings, spreading, 

changes from the previous report, percent of open interest by category, and numbers of 

traders. The long report, in addition to the information in the short report, also groups 

the data by crop year, where appropriate, and shows the concentration of positions 

held by the largest four and eight traders. 

239 
Additionally, in a December 5, 2006 press release, the CFTC announced that, in 

addition to the existing COT reports, a supplemental report would be published 

beginning January 5, 2007. Supplemental reports show aggregate futures and option 

positions of Noncommercial, Commercial, and Index Traders in 12 selected 

agricultural commodities. To begin release in August 2009, the CFTC has redesigned 

the COT reports to include more detailed information on futures markets and market 

participants. Traders will be classified in a more nuanced way than in prior years, into 

four categories: (1) producers and merchants; (2) swap dealers; (3) managed funds; 

and (4) other market participants. The enhanced data will keep market participants 

and the public better informed about the positions of various types of traders.112

Current and historical COT data are available on the Commission’s Web site, 

http://www.cftc.gov. Also available at that Web site are historical COT data going 

back to 1986 for futures-only reports and to 1995 for option-and-futures-combined 

reports. 

See http://www.cftc.gov/cftc/cftccotreports.htm for current and archived COTs. 

CFTC Reports: This Month’s Futures Markets. This report is based on the COT 

report. For each commodity, the COT reports provide information on the size and the 

direction of the positions taken, across all maturities, by three categories of futures 

traders. These three trader categories are called “commercial”, “non-commercial”, and 

“non-reportable”. 

See http://www.cftc.gov/OCE/WEB/index.htm for This Month’s Futures Markets. 

b) Requirements or arrangements that information on completed transactions be 

provided on an equitable basis to all participants? 

Yes. DCM Core Principle 8—Daily Publication of Trading Information—requires the 

daily publication of trading information. Additionally, DCM Core Principle 7—

Availability Of General Information—requires the daily publication of trading 

information for significant price discovery contracts traded or executed on electronic 

trading facilities. The CFTC’s guidance provides that an acceptable practice for Section 

5(d) and Section 2(h)(7)(C)(ii)(VI) is mandatory compliance with CFTC Regulation 

16.01. Regulation 16.01 provides that reporting markets shall make readily available data 

pertaining to trading volume, open contracts, and price to the news media and general 

public without charge, in a format that readily enables the consideration of such data, no 

later than the business day following the day to which the information pertains. 

CFTC Regulation 16 requires each contract market to submit to the CFTC for each 

business day a report showing for each clearing member, by proprietary and customer 

account, and by future or underlying futures contract for options on futures or by 

underlying physicals for options on physicals, information such as the total long and short 

 

112 See supra, note 112. 

240 
open contracts carried at the end of the day; and the quantity of contracts bought and sold 

during the day. 

CFTC Regulation 16.01 requires a contract market to publish each business day for 

futures and options the total volume, quantity of futures for cash transactions, total gross 

open contracts, for futures open contracts against which delivery notices have been 

stopped and the option delta, and to make this information readily available to the public. 

See infra, response to Principle 29, Question 1, concerning the CFTC’s Large Trader 

Reporting system.

2) Where an authorized exchange or trading system’s operator permits derogation from 

the objective of real-time transparency, are: 

a) The conditions clearly defined? 

Yes. DCM Designation Criterion 3 of Section 5(b) of the CEA—Fair And Equitable 

Trading—requires DCMs to 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. But Designation Criterion 3 

also allows DCM rules to authorize—(A) transfer trades or office trades; (B) an exchange 

of—(i) futures in connection with a cash commodity transaction; (ii) futures for cash 

commodities; or (iii) futures for swaps; or (C) an FCM, acting as principal or agent, to 

enter into or confirm the execution of a contract for the purchase or sale of a commodity 

for future delivery if the contract is reported, recorded, or cleared in accordance with the 

rules of the contract market or a DCO. 

Moreover, DCM Core Principle 9—Execution of transactions, states ‘‘The board of trade 

shall provide a competitive, open, and efficient market and mechanism for executing 

transactions.” CFTC Regulation 1.38 sets forth a requirement that all purchases and sales 

of a commodity for future delivery or a commodity option on or subject to the rules of a 

DCM should be executed by open and competitive methods. This ‘‘open and 

competitive’’ requirement is modified by a proviso that allows transactions to be 

executed in a ‘‘non-competitive’’ manner if the transaction is in compliance with DCM 

rules specifically providing for the noncompetitive execution of such transactions, and 

such rules have been submitted to, and approved by, the Commission. Specifically, the 

CEA permits DCMs to establish trading rules that: (1) authorize the exchange of futures 

for swaps; or (2) allow a FCM, acting as principal or agent, to enter into or confirm the 

execution of a contract for the purchase or sale of a commodity for future delivery if the 

contract is reported, recorded, or cleared in accordance with the rules of a contract market 

or DCO. 

Core Principle 9 of Section 5(d) of the CEA provides that: 

The board of trade shall provide a competitive, open, and efficient market and 

mechanism for executing transactions. 

241 
The Commission’s proposed guidance in Appendix B to Part 38 provides that: 

(1) Transactions on the centralized market. 

(i) Purchases and sales of any commodity for future delivery, and of any 

commodity option, on or subject to the rules of a contract market shall be 

executed openly and competitively by open outcry, by posting of bids and offers, 

or by other equally open and competitive methods, in a place or through an 

electronic system provided by the contract market, during the hours prescribed by 

the contract market for trading in such commodity or commodity option. 

(ii) A competitive and open market's mechanism for executing transactions 

includes a contract market's methodology for entering orders and executing 

transactions. 

(iii) Appropriate objective testing and review of a contract market's automated 

systems should occur initially and periodically to ensure proper system 

functioning, adequate capacity and security. A DCM's analysis of its automated 

system shall address compliance with appropriate principles for the oversight of 

automated systems, ensuring proper system functionality, adequate capacity and 

security. 

(2) Transactions off the centralized market. 

(i) In order to facilitate the execution of transactions, transactions may be 

executed off the centralized market, including by transfer trades, office trades, 

block trades, inter-exchange spread transactions, or trades involving the exchange 

of futures for a commodity or for a derivatives position, if transacted in 

accordance with written rules of a contract market that specifically provide for 

execution of such transactions away from the centralized market and that have 

been certified to or approved by the Commission. 

(ii) Every person handling, executing, clearing, or carrying trades off the 

centralized market shall comply with the rules of the applicable DCM and DCO, 

including to identify and mark by appropriate symbol or designation all such 

transactions or contracts and all orders, records, and memoranda pertaining 

thereto. 

(iii) A DCM that determines to allow trades off the centralized market shall 

ensure that such trading does not operate in a manner that compromises the 

integrity of price discovery on the centralized market or facilitate illegal or nonbona fide transactions. 

(3) Block trades-minimum size. 

242 
(i) When determining the number of contracts that constitutes the appropriate 

minimum size for block trades, a contract market should ensure that block trades 

are limited to large transactions and that the minimum size is appropriate for that 

specific contract, by applying the principles set forth in this Section. For any 

contract that has been trading for one calendar quarter or longer, the acceptable 

minimum block trade size should be a number larger than the size at which a 

single buy or sell order is customarily able to be filled in its entirety at a single 

price in that contract's centralized market. Factors to consider in determining what 

constitutes a large transaction could include an analysis of the market's volume, 

liquidity and depth; a review of typical trade sizes and/or order sizes; and input 

from floor brokers, floor traders and/or market users. For any contract that has 

been listed for trading for less than one calendar quarter, an acceptable minimum 

block trade size in such contract should be the size of trade the exchange 

reasonably anticipates will not be able to be filled in its entirety at a single price in 

that contract's centralized market. An appropriate minimum size could be 

estimated based on centralized market data in a related futures contract, the same 

contract traded on another exchange, or trading activity in the underlying cash 

market. The exchange could also consider the anticipated volume, liquidity and 

depth of the contract; input from potential market users; or consider that 

exchange's experience with offering similar new contracts. The minimum size 

thresholds for block trades should be reviewed periodically to ensure that the 

minimum size remains appropriate for each contract. Such review should take into 

account the sizes of trades in the centralized market and the market's volume and 

liquidity. 

See Proposed DCM Core Principle 9 guidance at 

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/file/e8-

21865a.pdf.

b) Does the operator and/or the regulator have access to the complete information to 

be able to assess the need for derogation and if necessary, to prescribe alternatives? 

Yes. As discussed in detail in Principle 27, Question 1 above, DCMs must comply with 

DCM Core Principle 8—Daily Publication of Trading Information and Commission 

Regulation 16.01. Additionally, most current DCM rules require reporting of block 

trades within 5 minutes of execution with a small number of DCM rules allowing as 

many as 15 minutes to report. On September 11, 2009, the Commission re-proposed in 

73 FR 5407 that block trades should be reported to the contract market within a 

reasonable period of time. The Commission also re-proposed that DCMs would 

publicize details about transactions off the centralized market immediately upon the 

receipt of the transaction report. The proposed acceptable practices would also require 

the DCM to identify block trades on its trade register. 

Relevant parts of the Commission’s proposed acceptable practices in Appendix B to 

Part 38 provide that: 

(b) Acceptable practices. 

243 
(2) Transactions off the centralized market. 

(i) General provisions. 

(A) Allowable trades. Acceptable transactions off the centralized 

market include: transfer trades, office trades, block trades, interexchange spread transactions or trades involving the exchange of 

futures for commodities or for derivatives positions, if transacted in 

accordance with written rules of a contract market that specifically 

provide for execution away from the centralized market and that have 

been certified to or approved by the Commission. 

(B) Reporting. Transactions executed off the centralized market should 

be reported to the contract market within a reasonable period of time. 

(C) Publication. The contract market should publicize details about 

block trade transactions immediately upon the receipt of the 

transaction report and publicize daily the total quantity of the exchange 

of futures for commodities or for derivatives positions and the total 

quantity of the block trades that are included in the total volume of 

trading, as required by Reg. 16.01. 

(D) Recordkeeping. Parties to, and members facilitating, transactions 

off the centralized market should keep appropriate records. 

Appropriate recordkeeping for transactions off the centralized market 

would comply with Core Principle 10 and Core Principle 17. 

(E) Identification of trades. Reg. 1.38(b) establishes the requirements 

regarding the identification of trades off the centralized market. It 

requires contract market rules to require every person handling, 

executing, clearing, or carrying trades, transactions or positions that 

are executed off the centralized market, including transfer trades, 

office trades, block trades or trades involving the exchange of futures 

for a commodity or for a derivatives position, to identify and mark by 

appropriate symbol or designation all such transactions or contracts 

and all orders, records, and memoranda pertaining thereto. 

(F) Identification in the trade register. The contract market should 

identify transactions executed off the centralized market in its trade 

register, using separate indicators for each such type of transaction. 

See Proposed Core Principle 9 guidance at 

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/file/e8-

21865a.pdf. 

244 
 

245 
Principle 28. Regulation should be designed to detect and deter manipulation 

and other unfair trading practices 

Assessment: Fully Implemented 

1) Does the regulatory system prohibit the following with respect to securities admitted to 

trading on authorized exchanges and regulated trading systems: 

a) Market or price manipulation? 

b) Misleading information? 

c) Insider trading? 

d) Front running? 

e) Other fraudulent or deceptive conduct and market abuses? 

Yes, to all of the above. In general, CEA Section 4b(a) makes it unlawful for any 

registered entity, defined in CEA Section 1a(29) to include DCMs and DTEFs, any agent 

or employee of any member, or any other person, in or in connection with such order, to 

make any contract of sale of any commodity in interstate commerce on or subject to the 

rules of a registered entity, for or on behalf of any other person – 

• To cheat or defraud or attempt to cheat or defraud such other person; 

• Willfully to make or cause to be made to such other person any false report or 

statement thereof; 

• Willfully to deceive or attempt to deceive such other person; or 

• Bucket such order, fill such order by offset against the order of any other person, 

or willfully or knowingly and without prior consent of the other person to become the 

buyer in respect of selling orders or become the seller in respect of any buying order 

of such person. 

CEA Section 4c prohibits fictitious trading or trading which would cause the market to 

reflect a price that is not “true and bona fide.” Sections 6c and 9(a)(2) of the CEA 

authorize CFTC action against manipulation. Section 9(a) also authorizes criminal 

penalties for manipulation and all other willful violations of the CEA and CFTC 

regulations, including fraud. 

CFTC Regulation 33.10 (which applies to DCMs pursuant to CFTC Regulation 38.2) 

makes it unlawful for any person to cheat or defraud or attempt to defraud any other 

246 
person; to make or cause to be made to any other person any false report or statement or 

record; or deceive or attempt to deceive any other person by any means whatsoever in 

connection with commodity option transactions. 

Finally, Section 9(e) of the CEA provides an explicit prohibition against insider trading 

for certain persons, making it a felony: (1) for any person who is an employee, member 

of the governing board, or member of any committee of a board of trade, registered 

entity, or registered futures association, in violation of a regulation issued by the 

Commission, 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, or willfully and knowingly disclose for any purpose inconsistent with the 

performance of such person’s official duties as an employee or member, any material 

nonpublic information obtained through special access related to the performance of such 

duties, and (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 material, nonpublic information that such person knows was obtained in 

violation of paragraph (1) employee, member of the governing board, or member of any 

committee of a board of trade, registered entity, or registered futures association 

2) Does the regulatory approach to detect and deter such conduct include an effective and 

appropriate combination of: 

a) Direct surveillance, inspection, reporting, such as, for example, securities listing 

or product design requirements (where applicable), position limits, audit trail 

requirements, quotation display rules, order handling rules, settlement price rules 

or market halts complemented by enforcement of the law and trading rules? 

b) Effective, proportionate and dissuasive sanctions for violations? 

Yes, to all of the above. The DCMs have the primary obligation to detect and deter 

unlawful conduct and use a combination of direct surveillance, inspection, reporting, 

product design requirements, position limits, settlement price rules or market halts 

complemented by vigorous enforcement of the law and trading rules. The CFTC 

conducts oversight of the exchanges’ program to ensure effectiveness. See supra, 

response to Principle 26, Question 1(b) regarding the CFTC’s rule enforcement program. 

In addition to the exchange surveillance program, the CFTC independently conducts an 

extensive market surveillance program, utilizing large trader reports. See supra, response 

to Principle 26, Question 1(a) regarding the CFTC’s market surveillance program. 

The CFTC has robust sanctioning powers, including trading prohibitions and civil 

penalties. DOE also actively investigates illegal exchange activity, working 

independently and in conjunction with exchange staff. 

3) Are there arrangements in place for: 

a) The continuous collection and analysis of information concerning trading activities? 

247 
b) Providing the results of such analysis to market and regulatory officials in a 

position to take remedial action if necessary? 

c) Monitoring the conduct of market intermediaries participating in the market? 

d) Triggering further inquiry as to suspicious transactions or patterns of trading?

Yes, to all of the above. Both the CFTC and DCMs conduct market surveillance. See

supra, response to Principle 26, Question 1(a), regarding the CFTC’s market surveillance 

program. 

4) If there is potential for domestic cross-market trading, are there inspection, assistance 

and information-sharing requirements or arrangements in place to monitor and/or address 

domestic cross-market trading abuses? 

Yes, there are information sharing arrangements and MOUs for enforcement and 

investigative assistance in place to monitor and address domestic cross-market trading 

abuses. Both individual markets and the CFTC have these arrangements and some 

involve foreign markets and regulators. 

The CFTC’s market surveillance program, previously described in the response to 

Principle 26, Question 1(a), enables the CFTC to monitor and address domestic crossmarket trading abuses. 

MOUs. The CFTC cooperates with foreign regulatory and enforcement authorities 

through formal MOUs and other arrangements to combat cross-border fraud and other 

illegal practices that could harm customers or threaten market integrity. 

Cross-border information sharing among market authorities plays an integral role in the 

effective surveillance of global markets that are linked by products, participants, and 

technology. Information sharing arrangements can be critical in combating cross-border 

fraud and manipulation, addressing the financial risks of market participants, and sharing 

regulatory expertise on market oversight and supervision. The CFTC makes and receives 

a significant number of requests for assistance and information to and from foreign 

authorities in connection with various surveillance and enforcement issues. 

The CFTC has entered into MOUs and cooperative arrangements with many 

jurisdictions, including cooperative enforcement arrangements, arrangements relating to 

sharing financial and other types of fitness information, and arrangements for sharing 

information on matters related to the implementation of the CFTC's Part 30 Regulations, 

which grant foreign firms an exemption from certain CFTC requirements. 

Intermarket Surveillance Group. The purpose of the Intermarket Surveillance Group 

(ISG) is to provide a framework for the sharing of information and the coordination of 

regulatory efforts among exchanges trading securities and related products to address 

potential intermarket manipulations and trading abuses. The ISG plays a crucial role in 

information sharing among markets that trade securities, options on securities, security 

248 
futures products, and futures and options on broad-based security indexes. The ISG also 

provides a forum for discussing common regulatory concerns, thus enhancing members’ 

ability to fulfill efficiently their regulatory responsibilities. In effect, the ISG is an 

information-sharing cooperative governed by a written agreement. The ISG is not subject 

to regulatory oversight, nor does it file rule changes with the CFTC or the SEC or seek 

approval when it considers requests from securities or futures exchanges to become a 

member. 

Membership in the ISG carries with it a commitment to share information required for 

regulatory purposes with other members. ISG agreements provide that information that is 

shared must be kept strictly confidential and used only for regulatory purposes. Such 

information is shared on an as-needed basis and only upon request. In addition, U.S. 

securities participants, via the facilities of the Securities Industry Automation 

Corporation (SIAC), routinely share trading information electronically. 

In connection with the routine sharing of information, the ISG has defined certain types 

of violations which can occur across markets, and has allocated responsibility for 

surveillance for such activity to the appropriate member. This enables participants to 

avoid duplicative efforts while continuing to ensure effective intermarket surveillance. 

Generally, the full ISG meets two times per year. Meetings are open only to 

representatives of members, prospective members, SIAC representatives, and appropriate 

governmental authorities such as the CFTC, SEC, the UK Financial Services Authority, 

and, on occasion, international organizations such as IOSCO. Senior market surveillance 

or market regulation personnel represent member organizations. 

From time to time, and at the discretion of the Chairman, subgroups may be formed to 

address specific issues of importance to the group. Such subgroups may be permanent or 

have a limited time depending on the subject. Subgroups are headed by a representative 

of a member or affiliate and are appointed by the Chairman. Meetings of subgroup 

members are generally independent of regular ISG meetings and may take place either at 

a location directed by the subgroup chairperson or telephonically during the interval 

between ISG meetings. Ordinarily, standing subgroups meet on the day preceding a full 

ISG meeting. Affiliate membership in the ISG is open to all recognized market centers 

that trade products that have rules and regulations designed to detect and deter possible 

abuses in their marketplaces. Participants in the ISG must have the ability to share 

regulatory information and otherwise cooperate with other ISG participants in connection 

with regulatory matters affecting their markets. 

Intermarket Financial Surveillance Group. The Intermarket Financial Surveillance 

Group was formed in 1988 to provide a coordinating body to address financial 

surveillance issues relevant to both futures and securities markets. The IFSG includes 

most of the principal commodity and securities exchanges as well as the NFA and 

Financial Industry Regulatory Authority (FINRA). The members of the IFSG have 

agreed to share financial information with respect to “high risk” member firms as 

commonly defined by the group. The agreement also provides for the exchange of 

249 
information upon request regarding capital, segregation of customer funds, margins, 

liquidity problems, omnibus accounts carried and/or carrying brokers, and pay/collect 

data with respect to such high risk firms. 

Joint Audit Committee. The JAC, which consists of representatives of the financial 

compliance departments of each of the futures industry SROs, was established in 1979 to 

coordinate the SROs’ audit and financial surveillance programs, including informationsharing, disciplinary actions, audit procedures, assignment of audit responsibility for 

dual-membership firms, and to review current financial reporting issues and 

interpretations. CFTC staff frequently attends JAC meetings to discuss financial 

compliance issues. 

Joint Compliance Committee. To foster improvements and uniformity in their systems 

and procedures used for trade practice compliance, the futures exchanges, at the CFTC’s 

urging, formed the Joint Compliance Committee (“JCC”). The JCC has developed 

uniform definitions of trade practice offenses and routinely meets to share information on 

automated compliance systems and other surveillance matters with a view to improving 

exchange compliance programs. 

Unified Clearing Group. The CFTC endorsed the formation of the Unified Clearing 

Group (“UCG”) in 1995. The UCG was formed to coordinate the flow of information 

concerning common clearing members of the nation’s principal securities and futures 

exchanges. The related clearing entities established mechanisms to share information on 

cash flow streams, such as daily pay outs, collections and settlements. 

International Exchange MOU. As noted above, in 1995 numerous derivatives 

exchanges developed an Exchange MOU that was created to address the problem of 

accessing information about large exposures where exchange member firms and market 

participants typically trade on multiple exchanges and no one regulator or market 

authority will have all of the information necessary to evaluate the risks in its markets. 

Like the Declaration, under the Exchange MOU the occurrence of agreed triggering 

events affecting an exchange member’s financial resources, positions, price movements 

or price relationships will prompt the sharing of information. 

5) If there are foreign linkages, substantial foreign participation, or cross listings, are 

there cooperation arrangements with relevant foreign regulators and/or markets that 

address manipulation or other abusive trading practices? 

Yes. The Commission has attached additional conditions to staff direct access no-action 

letters issued to foreign boards of trade that elect to list for direct access from the U.S. 

contracts which settle against any price, including the daily or final settlement price, of 

(1) a contract listed for trading on a DCM or DTEF, or (2) a contract listed for trading on 

an ECM that has been determined to be a significant price discovery contract (SPDC) 

(collectively, linked contracts). These conditions apply to ICE Futures Europe, which 

has made available from the U.S. by direct access four contracts which settle on prices 

established at the New York Mercantile Exchange (NYMEX). In addition to a special 

CFTC-FSA MOU that enhances information sharing among the regulatory authorities 

250 
and scheduled monthly telephone conversations between the two, and enhanced 

cooperation with ICE Futures Europe, the additional conditions require that (1) ICE 

Futures Europe’s linked contracts must have position limits or position accountability 

levels (including related hedge exemption provisions) that are comparable to those for the 

target contract at NYMEX; (2) ICE Futures Europe must inform the CFTC of any trader 

that exceeds the linked contract’s position limit and what, if any, responsive action was 

taken; (3) ICE Futures Europe must publish daily trading information (e.g., settlement 

prices, volume, open interest, and opening and closing ranges) that is comparable to the 

information published for the target contract; and (4) ICE Futures Europe must provide to 

the CFTC, either directly or through the FSA, a daily report of large trader positions in 

each linked contract for all contract months in a form and manner that can be integrated 

into the CFTC’s market surveillance systems and COT report. 

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Principle 29. Regulation should aim to ensure the proper management of 

large exposures, default risk and market disruption 

Assessment: Fully Implemented 

1) Does the market authority have a mechanism in place that is intended to monitor and 

evaluate continuously the risk of open positions or credit exposures that are sufficiently 

large to expose a risk to the market or to a clearing firm that includes: 

a) Qualitative or quantitative trigger levels appropriate to the market for the purpose 

of identifying large exposures, continuous monitoring and an evaluative process? 

Yes. The CFTC established the RSG in 2005 to fulfill its obligation, under Section 3(b) 

of the CEA, “to ensure the financial integrity of all transactions subject to [the CEA] and 

the avoidance of systemic risk.” As mentioned above, the RSG attempts on a daily basis: 

(i) to identify any significant financial risks posed by positions in products that (A) an 

FCM clears through a DCO, and (B) fall within the jurisdiction of the CFTC; and (ii) to 

confirm that such financial risks are being appropriately managed. In essence, the RSG 

identifies (i) traders that pose risks to FCMs, and (ii) FCMs that pose risks to DCOs. It 

also reviews financial resources and risk management practices at traders, FCMs, and 

DCOs. 

The RSG has developed or obtained access to a number of automated systems and 

applications that it uses in its work. On an ongoing basis, the RSG strives to upgrade 

these systems and to develop more effective links among them. The following are the 

primary systems used. 

ISS (Integrated Surveillance System). ISS is a large-trader reporting system (LTRS). 

The RSG uses the LTRS to identify traders with positions that warrant further analysis, 

and to gather information about such traders. The CFTC market surveillance program 

also uses the LTRS, in the manner described below. 

Under the Commission’s LTRS, clearing members, FCMs, and foreign brokers 

(collectively called “reporting firms”) file daily reports with the Commission.113 Those 

reports show the futures and option positions of traders that hold positions at or above 

specific reporting levels set by the Commission.114 If, at the daily market close, a 

reporting firm has a trader with a position at or above the Commission’s reporting level 

in any single futures month or option expiration, the firm reports that trader’s entire 

 

113 17 C.F.R. Part 17. 114 Reporting levels are specified in 17 C.F.R. Part 15. 

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position in all futures and options expiration months in that commodity, regardless of 

size. 

The aggregate of all large-traders’ positions reported to the Commission usually 

represents 70 to 90 percent of the total open interest in any given market. The minimum 

reporting level for large-trader reports is currently 25 contracts. A greater level may be 

specified as the Commission gains experience with a commodity. The level for any given 

market is based on the total open positions in that market, the size of positions held by 

traders in the market, the surveillance history of the market, and, for the physical-delivery 

markets, the size of deliverable supplies. From time to time, the Commission will raise or 

lower the reporting levels in specific markets to strike a balance between collecting 

sufficient information to oversee the markets and minimizing the reporting burden on the 

futures industry and the public. (The Commission publishes aggregate data concerning 

reported positions in its weekly COT reports, which are available at the Commission’s 

Web site and are the subject of a separate Backgrounder.) 

Exchanges also provide the daily positions that each clearing member is carrying in each 

futures and options contract on each underlying commodity.115 Each day as of the 

previous day’s close, exchanges report each clearing member’s open long and short 

positions, purchases and sales, exchanges of futures for cash, and futures delivery notices. 

These data are reported separately by proprietary and customer accounts by futures 

month and, for options, by puts and calls by expiration date and strike price. The 

Commission staff use these data to identify large cleared positions, in single markets or 

across many markets and exchanges, to audit large-trader reports, and to identify account 

aggregation issues. 

The Commission employs surveillance staff economists and futures trading specialists to 

continually monitor large-trader data and the financial integrity of clearing members. 

The market surveillance process is not conducted exclusively at the CFTC. Contract 

markets conduct and maintain their own market surveillance programs as part of their 

self-regulatory responsibilities. 

Through various software tools, the raw large-trader data are transformed into analytical 

reports. A Commission economist may view the largest traders in a specific market, a 

single trader across several markets, or a trader’s pattern of trading over a specific time 

period. 

The Commission uses various means to ensure the accuracy of its large-trader data. For 

example, the large-trader positions reported by clearing members are compared to 

clearing-member data reported by the exchanges. An inquiry is made if: a) the sum of a 

clearing member’s large-trader positions exceeds the member’s open cleared position; or 

b) a clearing member has a cleared position many times the reporting level for a given 

market, but reports little or no large-trader positions. This same procedure is used to 

compare large-trader data reported by non-clearing FCMs and foreign brokers to the total 

 

115 17 C.F.R. Part 16. 

253 
positions they are carrying at other brokers or clearing members. Reporting firms are also 

subject to on-site audits by exchange and Commission staff. 

In the several markets with Federal speculative position limits (grains, the soy complex, 

and cotton), hedgers that hold positions in excess of those limits must file periodic reports 

with the Commission.116 Those reports show the trader’s positions in the cash market and 

are used to determine whether the trader has sufficient cash positions to justify futures 

and option positions above the speculative limits. The Commission also publishes a 

weekly Cotton On Call report, as a service to the cotton industry, showing how many 

unfixed-price cash cotton purchases and sales are outstanding against each cotton futures 

month. 

Traders that hold reportable positions in designated futures and option markets must keep 

records showing all details concerning their positions and transactions in the futures and 

options and in the underlying commodity.117 This includes inventories, purchases, and 

sales of the cash commodity represented by the futures market, as well as its products and 

by-products. Upon request by the Commission, a trader must furnish the Commission 

with any pertinent information about those positions or transactions. 

In summary, the Commission operates an extensive reporting system that includes timely 

data on clearing members and large traders. These data are the core of a comprehensive 

market surveillance program that monitors futures markets on a daily basis in order to 

preserve these markets’ economic functions of hedging and price discovery. 

SPARK (Stressing Positions at Risk). SPARK is a system that was developed by 

DCIO staff. It is used to sort and to analyze data at the trader level, the FCM level, and 

the DCO level based on a variety of criteria. As discussed in greater detail below, RSG 

uses SPARK, in conjunction with LTRS, to identify large traders and FCMs with 

positions that warrant closer monitoring during periods of market volatility. 

SRM (SPAN Risk Manager). SRM is the system used by the futures industry in the 

United States and many other countries to calculate performance bond requirements. The 

RSG uses it to determine the current performance bond requirements for positions of 

interest and to conduct stress tests of such positions. 

SHAMIS (Shared Market Information System). SHAMIS is a system developed by 

the DCOs through which they share data about daily settlements. For any given FCM, 

information is shared among those DCOs at which it is a clearing member. The RSG 

receives data about all members at all participating DCOs. 

DCO Performance Bond Reports. On a monthly basis, each DCO reports to the RSG 

the amount of performance bond required and on deposit for each clearing FCM. This 

data is used by the RSG in assessing the financial resources available to meet risks at 

each clearing FCM and DCO. 

 

116 Reports include Form 204 for grains and the soy complex and Form 304 for cotton. 17 C.F.R. Part 19. 117 17 C.F.R. Part 18. 

254 
RSR (Regulatory System Review) Express. RSR is the system used by CFTC staff to 

review the monthly financial statements filed by FCMs. The RSG uses RSR in 

evaluating the capital resources of FCMs relative to the risks posed to them by their 

proprietary and customer positions. 

DCO Financial Statements. The RSG periodically obtains and reviews financial 

statements prepared by DCOs in contexts such as SEC public company filings. The RSG 

uses this information in evaluating the financial resources of DCOs relative to the risks 

posed by their clearing FCMs. 

News/Price Sources. The RSG monitors several online news and price sources 

throughout the day. For example, price data from a service called Futures Source is used 

each day in determining the extent to which price changes have eroded performance bond 

coverage. 

Risk surveillance essentially contains four components: (1) identifying traders, FCMs, 

and DCOs at risk; (2) estimating the magnitude of the risk; (3) comparing the risk to the 

available financial resources; and (4) assessing the risk management practices of traders, 

FCMs, and DCOs. The RSG uses the tools and resources noted above in a variety of 

ways to accomplish these tasks. 

Identify Traders/FCMs/DCOs at Risk

Based on current market conditions. Each member of the RSG is assigned to monitor 

a particular set of products. Currently, the categories are: (1) agricultural; (2) currencies; 

(3) energy; (4) equities; (5) interest rates; and (6) metals. When a particular market 

becomes volatile, the assigned analyst uses LTRS and SPARK to identify large traders 

and their clearing FCMs, SRM to determine performance bond requirements for these 

traders and clearing FCMs, the DCO Performance Bond Report to gauge the amount of 

performance bond on deposit, and RSR to review capital information for the FCMs. 

Within the SPARK system, the RSG has also developed other features that are used to 

identify market participants of interest. For example, the Daily Price Report shows for 

each contract the percentage of the performance bond requirement that would be used by 

that day’s price change. The Top Day analysis enables the RSG to calculate the actual 

loss incurred by a trader or FCM in a given contract based on that day’s price change and 

its positions as of the beginning of the day. The RSG can perform Top Day analysis for 

any contract and does so routinely for all markets where the price change is greater than 

or equal to 100% of the performance bond requirement (70% for Eurodollars, energies, 

and S&Ps). 

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Based on account characteristics. The RSG attempts to be proactive rather than 

reactive. Accordingly, RSG staff attempts to identify traders and FCMs who might pose 

risk before a market becomes volatile, not just after the volatility appears. A number of 

different characteristics may trigger further scrutiny. 

Absolute size. Simple size can be an indicator of risk. Assigning responsibility to RSG 

staff on a market-by-market basis permits analysts to develop familiarity over time with 

the identity of the largest participants in their respective markets. 

Short option size. Unlike futures, the risk of options is non-linear. That is, a price 

change that would cause a $1,000 change in the value of a futures position might cause a 

$20,000 change in the value of an option on that futures position. Accordingly, the RSG 

pays particular attention to large net short option positions. 

Size relative to the market. A position that is not large in absolute terms but is large 

relative to the market may pose additional risk. Such a concentrated position may be 

difficult to liquidate quickly and without moving the market. 

Size relative to the FCM’s capital. Similarly, a position that is not large in absolute 

terms but is large relative to the FCM or DCO may pose additional risk. As discussed 

further below, the resources of the FCM and DCO are always a factor in assessing 

financial risk. 

Size relative to the performance bond on deposit. Performance bond is the first layer 

of financial protection. A trader or FCM that is currently subject to a performance bond 

call poses greater risk than a trader or FCM with an identical position that has excess 

performance bond on deposit. 

Size relative to the trader’s assets. A large position held by a trader who is known to 

be well-capitalized would be of less concern than the same position held by a trader who 

did not have such “deep pockets.” The RSG will contact the trader directly or obtain 

additional information about the trader from the DCO and/or FCM. 

 

Size relative to a DCO’s resources. In evaluating a DCO’s financial resources, the RSG 

measures a DCO’s ability to cover a default by the clearing FCM carrying the largest 

position. Greater concern would arise if positions on one side of a market were 

concentrated among a few clearing FCMs than if they were dispersed over many clearing 

FCMs. 

Cumulative size across multiple markets. Although DCOs receive settlement 

information about common members through SHAMIS, they do not receive position 

information. The RSG attempts to identify traders and FCMs that pose significant risk at 

multiple DCOs. 

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News about a particular trader or FCM. The RSG may decide to perform additional 

analysis of a particular trader or FCM based on information that RSG staff learns from 

the newswires or CFTC or industry sources. 

Estimate the Magnitude of the Risk

After identifying traders or FCMs at risk, the RSG estimates the magnitude of the risk. 

The SRM system enables RSG staff to calculate the current performance bond 

requirement for any trader or FCM. This amount is generally designed to cover 

approximately 99% of potential one-day moves. 

SRM also enables RSG staff to conduct stress tests. RSG staff can determine how much 

a position would lose in a variety of circumstances such as extreme market moves. This 

is a particularly important tool with respect to option positions. As noted, the non-linear 

nature of options means that the loss resulting from a given price change may be many 

multiples greater for an option position than for a futures position in the same market. 

Moreover, the complexity of option positions can result in situations where the greatest 

loss does not correspond to the most extreme price move. 

Data from SHAMIS also provides context in estimating potential risk. RSG staff is able 

to see what a typical daily settlement amount would be for each FCM at each DCO, as 

well as what the record amounts have been for each FCM at each DCO. 

Compare Risks to Available Assets

After identifying accounts at risk and estimating the size of the risk, the third step is to 

compare that risk to assets available to cover it. Relevant assets include those of the 

trader, the FCM, and the DCO. 

The first layer of protection is performance bond. As noted, the amount DCOs collect 

from FCMs is designed to cover approximately 99% of one-day moves. FCMs, in turn, 

are required to collect from their customers an amount that is set by exchange rules. This 

level is generally about 30% higher than at the DCO. Furthermore, FCMs may charge 

any customer an amount above the exchange minimum based on an assessment of that 

customer’s risk profile. Therefore, in the great majority of cases, the amount of 

performance bond on deposit will cover any price change. 

To confirm that this remains the case, the RSG monitors the actual level of coverage 

being achieved by DCO performance bond levels. Using the information collected in 

SPARK, the RSG prepares two monthly reports analyzing the adequacy of performance 

bond levels. One report focuses on twenty-four (24) benchmark contracts and compares 

each contract’s performance bond level to the largest market moves over the last six (6) 

and twelve (12) months. The other reviews all contracts for breaches of performance 

bond levels during the last thirty (30) days and notes whether performance bond changes 

were made. 

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Of course, even 99% coverage means that on 2 or 3 days a year a price change may 

exceed the performance bond amount. In such instances, the issue then becomes whether 

the trader can meet its obligations. A well-capitalized corporation holding a particular 

position might be deemed a lesser risk than a smaller company holding the same position. 

The second layer of protection is the FCM’s capital. As noted, RSR provides the RSG 

with access to detailed information about an FCM’s financial resources. These resources 

can be compared to the risks posed by particular traders with large positions or the 

cumulative risk to the FCM across all customers and markets. Concentration of positions 

is a key factor. For example, one customer with a 1,000-lot position is riskier to an FCM 

than 1,000 customers with one lot each. 

The third layer of protection is the DCO. The RSG compares the risk posed by the 

largest clearing member to a DCO’s financial resource package. The RSG analyzes not 

only the size of the DCO package but also its composition. In the event of a default, a 

DCO must have access to sufficient liquidity to meet its obligations as a central 

counterparty on very short notice. 

In conclusion, the RSG has implemented a comprehensive regime for monitoring and 

continuously evaluating the risk that open positions or credit exposures pose to the 

market or to an FCM. 

b) Access to information, if needed, on the size and beneficial ownership of positions 

held by direct customers of market intermediaries? 

Yes. The CFTC’s large trader reporting system (LTRS) daily collects information on 

beneficial ownership of reportable positions. Since traders frequently carry futures 

positions through more than one reporting firm and since individuals sometimes control, 

or have a financial interest in more than one account, the Commission routinely collects 

information that enables its surveillance staff to aggregate related accounts. Reporting 

firms must file a form which identifies each new account with reportable positions for 

each futures contract. In addition, if a trader’s position reaches a reportable level, the 

trader may be required to file a more detailed identification report to identify accounts 

and reveal any relationships that may exist with other accounts or traders.118

An additional monitoring mechanism allows surveillance economists to investigate 

further the positions of large traders by instituting a “special call,” which requires a trader 

to report their futures and option positions with all firms, or their cash market or OTC 

positions.119 The trader is required to give information on their trading and delivery 

activity. This mechanism may be used when a trader is using too many firms to be easily 

monitored through required reports. Special calls also may be used to examine cash 

market positions and commitments in relation to futures market positions to access the 

 

118 The FCM, clearing member or foreign broker identifies special accounts on CFTC Form 102. 17 C.F.R. 17.01. 

The trader furnishes required information on CFTC Form 40. 17 C.F.R. 18.04. CFTC daily enters these forms into 

its Integrated Surveillance System. Blank copies of the Form 102 and Form 40 are available for viewing and 

downloading at the CFTC’s Web site. 

119 See, generally, 17 C.F.R. Parts 18 and 21. 

258 
economic rationale of the trader’s overall position. The Commission thus has the 

authority and techniques to investigate and discover the identities of the true account 

owners and controllers of large positions, whether domestic or foreign. 

c) The power to take appropriate action against a market participant that does not 

provide relevant information needed to evaluate an exposure (e.g., require liquidation 

of positions, increase margin requirements and/or revoke trading privileges)? 

Yes. Both the CFTC and DCMs have the power to suspend and halt trading, set margin, 

position limits, price limits, “circuit breakers” or otherwise intervene in the market.

CFTC Authority. CEA Section 5(d) requires a board of trade to adopt rules to provide 

for the exercise of emergency power and Section 8a(7) of the CEA authorizes the CFTC 

to alter or supplement the rules of a registered entity, and Section 8a(9) of the CEA 

authorizes the CFTC to direct a registered entity to take such action as in the CFTC’s 

judgment is necessary to maintain or restore orderly trading in or liquidation of any 

futures contract, including but not limited to the setting of temporary emergency margin 

levels on any futures contract and the fixing of limits that may apply to a market position. 

CFTC enforcement powers are comprehensive and authorize civil injunctive actions for 

failing to comply with requests for required information and subpoena enforcement 

actions for failure to comply with subpoena demand for documents or testimony. Failure 

to comply with a court order is punishable by contempt of court. 

Contract market Requirements.

Core Principle 6 of Section 5(d) of the CEA provides that: 

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. 

Appendix B to Part 38 of the CEA provides the following CFTC Guidance on Core 

Principle 6 of Section 5(d): 

(a) Application Guidance. A DCM should have clear procedures and guidelines 

for contract market decision-making regarding emergency intervention in the 

market, including procedures and guidelines to avoid conflicts of interest while 

carrying out such decision-making. A contract market should also have the 

authority to intervene as necessary to maintain markets with fair and orderly 

trading as well as procedures for carrying out the intervention. Procedures and 

guidelines should also include notifying the Commission of the exercise of a 

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contract market's regulatory emergency authority, minimizing conflicts of 

interest, and documenting the contract market's decision-making process and the 

reasons for using its emergency action authority. 

(b) Acceptable Practices. As is necessary to address perceived market threats, 

the contract market, among other things, should be able to impose position limits 

in particular in the delivery month, impose or modify price limits, modify circuit 

breakers, call for additional margin either from customers or clearing members, 

order the liquidation or transfer of open positions, order the fixing of a settlement 

price, order a reduction in positions, extend or shorten the expiration date or the 

trading hours, suspend or curtail trading on the market, order the transfer of 

customer contracts and the margin for such contracts from one member (including 

non-intermediated market participants) of the contract market to another, or alter 

the delivery terms or conditions, or, if applicable, should provide for such actions 

through its agreements with its third-party provider of clearing services. 

See Appendix B to Part 38 at 

http://www.cftc.gov/industryoversight/tradingorganizations/designatedcontractmarkets/in

dex.htm. 

d) The general power to take appropriate action, such as to compel market 

participants carrying or controlling large positions to reduce their exposures or to post 

increased margin?

Yes. Both the CFTC and exchanges have the power to compel market participants to 

reduce their exposures or to post increased margin. 

The market surveillance process is not conducted exclusively at the CFTC. Surveillance 

issues are usually handled jointly by the CFTC and the affected exchange. Relevant 

surveillance information is shared and, when appropriate, corrective actions are 

coordinated. Potential problem situations are jointly monitored and, if necessary, verbal 

contacts are made with the brokers or traders who are significant participants in the 

market in question. These contacts may be for the purpose of asking questions, 

confirming reported positions, alerting the brokers or traders as to the regulatory concern 

for the situation, or warning them to conduct their trading responsibly. This “jawboning” 

activity by the Commission and the exchanges has been quite effective in resolving most 

potential problems at an early stage. 

The Commission customarily gives the exchange the first opportunity to resolve 

problems in its markets, either informally or through emergency action. If an exchange 

fails to take actions that the Commission deems appropriate, the Commission has broad 

emergency powers under which it can order the exchange to take actions specified by the 

Commission. Such actions could include limiting trading to liquidating transactions, 

imposing or reducing limits on positions, requiring the liquidation of positions, extending 

a delivery period, or closing a market. Fortunately, most issues are resolved without the 

need to use the CFTC's emergency powers. The fact that the CFTC has had to take 

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emergency actions only four times in its history demonstrates the potency of the other 

available tools to avoid disorderly liquidations or default. 

See CFTC Emergency Authority Background at 

http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/cftcemergencyaut

horitybackgrou.pdf. 

2) Do arrangements, whether formal or informal, exist to enable markets and regulators 

to share information on large exposures of common market participants or on related 

products with regulators and markets: 

a) In the domestic jurisdiction? 

Yes. 

With DCMs. The CFTC and futures exchanges have executed agreements to share 

information that is prompted by, among other things, large exposures. The Commission 

essentially has the same information that DCMs have with respect to large exposure 

information. Wherever the exchanges manage position limits, they inform the 

Commission of any exemptions granted. The Exchanges are able to monitor the exposure 

size within each contract on an intraday basis. Frequent conversations occur between 

exchange and Commission staff when liquidation or acquisitions of large exposures 

create a heightened concern. This has become more relevant with the increased open 

interest held by large passive long-only traders (index traders). 

In some specific contracts, when traders hold positions above a certain threshold they are 

required to disclose their full portfolio of related products. This rule was implemented in 

the wake of the disruptive activity by Amaranth Advisors in the Natural Gas futures 

contract traded on the NYMEX. These “exposure forms” are filed before the last day of 

trading of a specific contract month and are forwarded to CFTC surveillance staff. The 

need for this special disclosure derives from the existence of a large OTC market that is 

directly linked to the futures contract, and for positions which are not observable by the 

Exchange. This model could be replicated in other contracts as the need arises. 

With Exempt Commercial Markets. The increasing volume traded on ECMs that settle 

off a futures contract has prompted the Commission to increase oversight of certain 

“linked contracts”. The Commission has issued rules regarding a category of contract 

deemed to be Significant Price Discovery Contracts (SPDCs) which encompasses linked 

contracts. Under these rules, ECMs and Clearinghouses will have the same reporting 

obligations with respect to SPDCs as DCMs have for futures contracts. In the meantime, 

a hybrid situation exists in which the ECM is reporting a form of large trader positions 

but not yet meeting the quality standards the CFTC requires. 

With cash market regulators. Surveillance staff briefs Commissioners every Friday on 

current issues with various contracts and will regularly invite staff from the 

corresponding cash market regulatory agency. In two instances the need to formalize 

communications has led to the establishment of MOUs. 

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FERC - Though the MOU is focused in the sharing of retrospective information, the 

relation supports ongoing communications between surveillance staffs. The majority of 

communications relates to market fundamentals but it may cover position or market 

power related information when it is relevant and available. For example, the control over 

strategic assets (pipelines, storage) and trading conditions in cash markets. 

USDA - An MOU is currently under development to facilitate the exchange information 

in cash and futures markets and will include information relevant to position and market 

power. 

FTC - As the FTC develops its anti-manipulation rule in petroleum markets, CFTC staff 

anticipate an MOU will be entered into in similar terms to those with USDA and FERC. 

EPA - The EPA posts in its Web site the current holdings of SO2 and NOx permits by 

party. Since this information is public, CFTC staff does not regularly engage with the 

EPA in the monitoring of exposures. 

On the environmental markets, the CFTC is engaged in talks with two regional regulators 

of greenhouse gases (the Regional Greenhouse Gases Initiative and the Western Climate 

Initiative) to find ways of exchanging information to prevent market manipulation or 

distortions arising from large exposures or any other means. 

For information on the coordinating mechanisms with other domestic financial regulators 

(e.g., SEC), see infra, response to Principle 28, Question 4. 

b) In other relevant jurisdictions? 

The Declaration on Cooperation and Supervision of International Futures Markets and 

Clearing Organizations ("Declaration"), and its companion Exchange Memorandum of 

Understanding (Exchange MOU),120 was at the core of improvements in international 

cooperation contemplated at the 1995 Windsor meeting (which was convened following 

the collapse of Barings Plc.) That meeting, and the resulting Windsor Declaration, set in 

motion a series of international initiatives at both the regulatory and market level 

intended to enhance the resilience of the financial marketplace against the shocks or 

stress caused by such defaults. The Declaration (and companion Exchange MOU) were 

created to address the problem of accessing information about large exposures where 

exchange member firms and market participants typically trade on multiple exchanges 

and no one regulator or market authority will have all of the information necessary to 

evaluate the risks in its markets. 

Under the Declaration, the occurrence of agreed triggering events affecting an exchange 

member’s financial resources, positions, price movements or price relationships, or 

events suggesting manipulation or other abusive conduct, will prompt the sharing of 

 

120 Report on Cooperation Between Market Authorities and Default Procedures, supra, at page 4 ¶ 8 regarding the 

promotion of formal/informal mechanisms. See also Report on Trading Halts and Market Closures. (October 

2002). pp. 23-24. 

262 
information. See Declaration paragraphs 2.2 and 2.3. Although the Declaration is a 

multilateral arrangement containing appropriate confidentiality and use restrictions (and 

can serve as an independent arrangement for structuring the sharing of information), the 

specific implementation of any request pursuant to the Declaration will be on a bilateral 

basis and remain subject to any existing bilateral arrangements. Similarly, under the 

Declaration, the occurrence of agreed triggering events affecting an exchange member’s 

financial resources, positions, price movements or price relationships will prompt the 

sharing of information. 

A special situation has arisen in WTI Crude Oil with the trading of a financially settled 

futures contract on ICE Europe which settlement price is directly linked to a contract 

trading on the NYMEX. Given that these two contracts are in effect a single market, on 

November 17, 2006 the CFTC and the United Kingdom Financial Services Authority 

(FSA) entered into Memorandum of Understanding concerning consultation, cooperation 

and the exchange of information related to market oversight. Under this MOU, the FSA 

and CFTC share information on a daily basis regarding large exposures. 

3) Does a market authority make its default procedures available to market participants, 

including specifically information concerning:

a) The general circumstances in which action may be taken? 

b) Who may take it? 

c) The scope of actions which may be taken? 

As mentioned above, if an FCM is executing transactions on a DCM, then such FCM 

must clear such transactions through a DCO. A DCO is essential to managing systemic 

and counterparty risks in the event that a member FCM fails. Because of the importance 

of the DCO in the management of such risks, Section 5b(c)(2)(L) of the CEA requires 

that a DCO provide “information concerning the rules and operating procedures 

governing the clearing and settlement systems (including default procedures) available to 

market participants.” In general, most DCOs make their default procedures, including 

information concerning (a), (b), and (c) above, accessible to the public via their Web site. 

Also as mentioned above, if an FCM becomes the subject of bankruptcy proceedings, 

then Subchapter IV and Part 190 set forth a clear structure for the liquidation of such 

FCM. Both Subchapter IV and Part 190 are publicly available. 

4) Do default procedures and/or national law permit markets and/or the clearing and 

settlement system(s) promptly to isolate the problem of a failing firm by addressing its open 

proprietary positions and positions it holds on behalf of customers or otherwise protect 

customer funds and assets from an intermediary’s default under national law. 

Yes. See response to Principle 24, Question 1. 

5) Is there a mechanism by which market authorities for related products can consult with 

each other in order to minimize the adverse effects of market disruptions?

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Yes. See response to Principle 24, Question 1. 

****************************************************************************** 

ADDENDUM

CFTC Regulation of DCOs

Introduction. A DCO is a central counterparty that “interposes itself between 

counterparties” to commodity contracts, thereby “becoming the buyer to every seller and 

the seller to every buyer.”121 A DCO guarantees that a member with net gains on its 

positions will receive related amounts, even if the DCO cannot collect such amounts from 

a member with net losses on its positions. Thus, a DCO is essential to managing 

systemic and counterparty risks, especially in the event that a member defaults. 

Currently, if an FCM is executing transactions in commodity futures on a DCM, then 

such FCM is required to clear such transactions through a DCO. In order to clear such 

transactions, the FCM generally must be a member of the DCO,122 and must therefore 

comply with the rules of the DCO, especially those pertaining to payments and 

settlements. The DCO monitors the FCM for compliance with such rules. 

In general, if a DCO cannot collect payments from a member, or if a DCO believes that it 

will shortly be unable to collect such payments,123 the DCO will declare the member to 

be in default. The rules of the DCO would govern the management of such default. 

Usually, such rules would permit: (i) the DCO to liquidate or transfer positions carried 

by the defaulting member; (ii) the DCO to access all property held in the proprietary 

accounts of the defaulting member; (iii) the DCO to access all property held in the 

omnibus customer account of the defaulting member, if such member defaulted to the 

DCO as a result of a customer default; and (iv) the DCO to access any amounts that the 

defaulting member had contributed to the guarantee fund. If the proceeds from (i) 

through (iv) do not cover all DCO losses, then the rules of the DCO may permit: (A) the 

DCO to access the amounts that non-defaulting members had contributed to the guarantee 

 

121 See Section 1.1 of CPSS-IOSCO Recommendations for Central Counterparties, dated as of November 2004. 

122 Most large FCMs are members of a DCO. If an FCM is not a member of a DCO (“Non-Clearing FCM”), it may 

become a customer of, and thereby clear transactions through, an FCM that is a member of a DCO (“Clearing 

FCM”). The Clearing FCM monitors the compliance of the Non-Clearing FCM with payment obligations. Pursuant 

to Regulation (as such term is defined below) 1.12(f)(2), the Clearing FCM has an affirmative responsibility to 

notify the CFTC whenever it determines that it must immediately liquidate or transfer the positions of a NonClearing FCM, or limit the Non-Clearing FCM to trading for liquidation only, because the Non-Clearing FCM has 

failed to meet its payment obligations to the Clearing FCM. 

123 In general, if a DCO suspects that a member would shortly be unable to make scheduled payments, a DCO would 

request that such member deposit additional performance bond. If the member is unable to make such deposit, then 

the DCO would declare such member to be in default. 

264 
fund; (B) the DCO to look to its own capital; and (C) the DCO to levy an assessment on 

all members. 

The CFTC supervises DCOs in three main ways. First, the CFTC evaluates applications 

from entities seeking to become DCOs. Second, the CFTC conducts periodic reviews of 

already registered DCOs. Third, the CFTC surveys, on a daily basis, DCO exposures and 

compares such exposures to DCO financial resources. Additionally, the CFTC may 

review and approve DCO rules. 

Procedures for Registration of DCOs. Under Section 5b of the CEA (7 U.S.C. 7a1(a)), an entity that wants to register as a DCO must submit an application to the CFTC 

which demonstrates that it complies with the core principles applicable to DCOs under 

Section 5b(c)(2)(A) through (N) of the CEA (7 U.S.C. 7a-1(c)(2)(A) –(N)). Part 39 of 

the Regulations sets forth the application procedures, with Appendix A thereto providing 

guidance to applicants on how to demonstrate compliance with the core principles. 

The core principles require DCOs to have (i) adequate financial, operational, and 

managerial resources, (ii) appropriate standards for participant and product eligibility, 

(iii) adequate and appropriate risk management capabilities, (iv) the ability to complete 

settlements on a timely basis under varying circumstances, (v) standards and procedures 

to protect member and participant funds, (vi) efficient and fair default rules and 

procedures, (vii) adequate rule enforcement and dispute resolution procedures, and (viii) 

adequate and appropriate systems safeguards, emergency procedures, and plans for 

disaster recovery. 

Additionally, the core principles require DCOs to (A) provide necessary reports to 

facilitate CFTC oversight, (B) maintain all business records for five years in a form 

acceptable to the CFTC, (C) make available to the public its rules and operating 

procedures, (D) participate in appropriate domestic and international information-sharing 

agreements, and (E) avoid actions that are unreasonable restraints of trade or that impose 

anti-competitive burdens on trading. 

Under Regulation 39.3(a)(2), a DCO application must include a copy of the applicant’s 

rules and an explanation of how the applicant is able to satisfy each of the core principles. 

The DCO application also must provide a copy of relevant agreements with participants 

or others, as well as descriptions of relevant system test procedures, tests conducted, or 

test results. The CFTC publishes non-confidential portions of the DCO application on its 

website for public comment, although such publication is not required by statute or 

regulation. 124 

Staff members from DCIO evaluate DCO applications and make a recommendation to 

the CFTC. Based on such recommendation, the CFTC will approve the application, 

register the applicant as a DCO subject to conditions, or deny the application. If an 

 

124 For an example of the types of information that may be included in a DCO application, please refer to the DCO 

application submitted by ICE Clear Europe Limited, which could be accessed at: 

http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5687-09.html. 

265 
application is denied, the applicant will be afforded the opportunity for a hearing on the 

record before the CFTC, with the right to appeal an adverse decision to the court of 

appeals. 

Core Principle Reviews of DCOs. As mentioned above, Section 5b(c)(2)(A) through 

(N) of the CEA sets forth core principles that a DCO must comply with to be registered 

with the CFTC. DCOs are given reasonable discretion in establishing the manner in 

which they comply, consistent with guidance provided by the CFTC in Part 39 of the 

Regulations. 

The CFTC evaluates compliance with the core principles when reviewing DCO 

applications, and for DCOs that are already registered, the CFTC conducts periodic 

reviews to assess their compliance with the core principles on an ongoing basis. The 

objectives of the Core Principle reviews are: (i) to gain a thorough understanding of the 

DCO’s methods for meeting Core Principle standards; (ii) to identify any deficiencies in 

compliance; and (iii) to initiate corrective action if necessary. 

A Core Principle review may focus on one or two core principles and assess the 

compliance of multiple DCOs with those particular core principles (horizontal review), or 

it may focus on a particular DCO and the compliance of that DCO with multiple core 

principles (vertical review). The CFTC plans its Core Principle reviews based on an 

assessment of risk. 

Once DCIO staff members are selected to participate in the review, the CFTC sends an 

engagement letter to the DCO, which usually includes a request that the DCO provide 

relevant documents and information to the CFTC. DCIO staff members review these 

materials and use them to formulate a list of questions to ask in a site visit. 

After the site visit, DCIO staff members compile their notes from the site visit, conduct 

independent analysis and testing, and prepare any follow-up questions for the DCO. 

Once DCIO staff members are satisfied that the review is complete, a detailed written 

report for the CFTC is prepared. The report includes DCIO analysis, conclusions, and 

recommendations, if any, for corrective action. 

Once the CFTC has considered the report and decided on the appropriate response, the 

DCO is notified of the review’s significant findings and any recommendations for 

corrective action. After a reasonable amount of time has passed, the CFTC will follow 

up with the DCO to find out what steps the DCO has taken to implement the CFTC’s 

recommendations. 

Risk Surveillance Program. On a daily basis, the Risk Surveillance Group within DCIO 

endeavors: (i) to identify significant financial risks from positions in products that (A) an 

FCM clears through a DCO, and (B) fall within the jurisdiction of the CFTC; and (ii) to 

confirm that such financial risks are being appropriately managed. The Risk Surveillance 

Group undertakes these tasks at the trader level, the firm level, and the clearing level. It 

266 
identifies both traders that pose risks to FCMs and FCMs that pose risks to DCOs. It also 

reviews financial resources and risk management practices at traders, FCMs, and DCOs. 

As described in greater detail in CFTC responses to IOSCO Principle 29, the Risk 

Surveillance Group reviews the following data: (i) large trader position information; 

(ii) performance bond information; (iii) FCM financial information; and (iv) DCO 

financial information. The Risk Surveillance Group gathers such information using the 

following tools: (i) SPARK, an internally-developed CFTC system, and (ii) SPAN Risk 

Manager, a DCO-developed margining and stress testing system. Upon identifying 

positions that have significant risk, the Risk Surveillance Group conducts stress tests to 

estimate the size of the risk and compares potential losses to available resources. Stress 

testing is conducted both for individual traders and for FCMs. The Risk Surveillance 

Group then compares results from stress testing to performance bond on deposit, FCM 

capital, and DCO resources. 

After such comparison, the Risk Surveillance Group follows up, as appropriate, with 

traders, FCMs, and/or DCOs. The discussions may address trading strategies, financial 

resources, operational procedures, and/or risk management procedures. Follow-up may 

include on-site visits. 

The Risk Surveillance Group prepares and maintains a number of reports that are used in 

its risk evaluation and follow-up process. For example, the Risk Surveillance Group 

monitors the actual level of coverage being achieved by performance bond requirements 

and prepares two monthly reports analyzing the adequacy of performance bond levels. 

One report focuses on 24 benchmark contracts and compares each contract’s performance 

bond level to the largest market moves over the last 6 and 12 months. The other reviews 

all contracts for performance bond level breaches during the last 30 days and notes 

whether changes were made. The Risk Surveillance Group also maintains records 

showing the daily settlement amount and record amounts for each FCM at each DCO. 

DCO Rule Approvals. Under Section 5c(c)(2) of the CEA (7 U.S.C. 7a-2(c)(2)) and as 

provided in Regulation 40.5, a DCO may request that the CFTC approve a new or 

amended rule prior to implementation. 

The submission must include the text of the rule, the proposed effective date, any action 

taken or anticipated to be taken to adopt the proposed rule, and the rules of the DCO that 

authorize the adoption of the proposed rule. The request must explain the operation, 

purpose, and effect of the proposed new or amended rule, including, as applicable, a 

description of the anticipated benefits to market participants or others, any potential 

anticompetitive effects on market participants or others, how the rule fits into the DCO’s 

framework of self-regulation, and any other information that may be beneficial to CFTC 

staff in analyzing the proposed rule. If a proposed rule affects the application of any 

other rule of the DCO, the request must set forth the relevant text of any such rule and 

describe the anticipated effect. The request must describe any substantive opposing 

views expressed to the DCO by its governing board, board committee members, members 

of the DCO, or its market participants if such views are not incorporated into the 

267 
proposed rule. In addition, the request must identify and discuss any Regulation that may 

need to be amended, or CEA section or Regulation that may need to be interpreted, in 

order to approve the proposed rule. 

The CFTC usually publishes requests for approval on its website and typically allows a 

public comment period, although public notice and comment are not required by the CEA 

or the Regulations. 

Section 5c(c)(3) of the CEA (7 U.S.C. 7a-2(c)(3)) provides that the CFTC shall approve 

any new rule or rule amendment unless it finds that it would violate the CEA. If the 

CFTC finds a rule would violate the CEA it will notify the DCO and explain the issues 

raised. 

268 
ANNEX: MEMORANDA OF 

UNDERSTANDING

269 
Cooperative Enforcement

• Argentina – Comision Nacional de Valores (CNV), MOU on Consultation, Technical 

Assistance, and Mutual Assistance for the Exchange of Information, May 30, 1995 

• Australia – Australian Securities Commission (now Australian Securities and Investments 

Commission) ASIC, MOU concerning Consultation and Cooperation in the Administration 

and Enforcement of Futures Laws, October 19, 1994 

• Brazil – Comissão de Valores Mobiliários (CVM), MOU on Mutual Assistance and 

Exchange of Information, April 12, 1991 

• Canada – Ontario Securities Commission (OSC), MOU, July 7, 1992 

• Canada – Commission des valeurs mobilières du Québec (CVMQ), MOU, July 7, 1992 

• Dubai – Dubai Financial Services Authority (DFSA), Protocol Concerning Mutual 

Assistance, Information Sharing and Cooperation Agreements, December 1, 2005 

• France – Commission des Opérations de Bourse (COB), Administrative Agreement, June 6, 

1990. The CFTC and the COB also signed a Mutual Recognition MOU (MRMOU) that 

provides for information sharing to facilitate monitoring and compliance matters related to 

the mutual recognition of intermediaries and products. 55 Fed. Reg. 23902 (June 13, 1990) 

• Germany – Bundesaufsichtsamt für den Wertpapierhandel (BAWe), MOU concerning 

Consultation and Cooperation in the Administration and Enforcement of Futures Laws, 

October 17, 1997 

• Hong Kong – Securities and Futures Commission (SFC), MOU concerning Consultation and 

Cooperation in the Administration and Enforcement of Futures Laws, October 5, 1995 

• Ireland – Irish Financial Services Regulatory Authority (IFSRA), The CFTC-IFSRA 

Statement of Intent concerns consultation and cooperation in the administration and 

enforcement of futures laws, March 17, 2004. The Statement of Intent (SOI) provides a 

framework for information sharing, thereby facilitating cooperation in cross-border 

investigations of potential violations of commodity futures and options laws. 

• Isle of Man – Financial Supervision Commission (FSC), Statement of Intent Concerning 

Mutual Assistance and Cooperation Arrangements, April 12, 2005 

• Italy – Commissione Nazionale per le Società e la Borsa (CONSOB), MOU on Consultation 

and Mutual Assistance for the Exchange of Information, June 22, 1995 

270 
• Japan – The Japanese Financial Services Agency (FSA) and the U.S. Securities and 

Exchange Commission (SEC), Statement of Intent Concerning Cooperation, Consultation 

and the Exchange of Information, May 17, 2002 

• Jersey – The Jersey Financial Services Commission (FSC) and the U.S. Securities and 

Exchange Commission (SEC), MOU Concerning Cooperation, Consultation and the 

Exchange of Information, May 30, 2002 

• Mexico – Comisión Nacional Bancaria y de Valores (CNBV), MOU on Consultation, 

Technical Assistance, and Mutual Assistance for the Exchange of Information, May 11, 1995 

• The Netherlands – Government of the Kingdom of the Netherlands, Agreement (through the 

Government of the United States of America) on Mutual Administrative Assistance in the 

Exchange of Information in Futures Matters, April 29, 1993. The Ministry of Finance 

designated the Securities Board of the Netherlands (the Dutch futures, options, and securities 

regulator) and the Dutch Central Bank (the regulator for collective investment schemes) to 

implement the Agreement, which entered into force on February 1, 1994, after approval by 

the Dutch Parliament. 

• New Zealand – New Zealand Securities Commission (NZSC), MOU on Consultation and 

Mutual Assistance for the Exchange of Information, September 16, 1996 

• Portugal – Commissão do Mercado de Valores Mobiliários (CMVM), MOU concerning 

Consultation and Cooperation in the Administration and Enforcement of Futures Laws, 

February 4, 1999 

• Singapore – Monetary Authority of Singapore, MOU concerning Consultation, Cooperation 

and the Exchange of Information (concluded jointly with the U.S. Securities and Exchange 

Commission), May 16, 2000 

• South Africa – Financial Services Board of the Republic of South Africa (FSB), Joint 

Communiqué on Exchange of Information for Cooperation and Consultation, May 27, 1997 

• Spain – Comisión Nacional del Mercado de Valores (CNMV), MOU on Mutual Assistance 

and Exchange of Information, October 26, 1992 

• Switzerland – Swiss Confederation, Diplomatic Notes (through the U.S. government) 

amending Article 1, Paragraph 3 of the Treaty on Mutual Assistance in Criminal Matters 

(MLAT), November 3, 1993 

• Taiwan – Securities and Futures Commission, MOU between the CFTC and the Taiwan 

Securities & Exchange Commission (now the Securities & Futures Commission) through, 

respectively, the American Institute in Taiwan and the Coordination Council for North 

American Affairs (now the Taipei Economic and Cultural Representative Office in the 

United States), January 11, 1993 

271 
• Turkey – Capital Markets Board Of Turkey, MOU between the CFTC and the Capital 

Markets Board of Turkey concerning Consultation, Cooperation, and the Exchange of 

Information, June 25, 2001 

• United Kingdom – Department of Trade and Industry, MOU on Exchange of Information in 

matters relating to Securities and Futures concluded jointly with the U.S. Securities and 

Exchange Commission, September 23, 1986 

• United Kingdom – Department of Trade and Industry (DTI), Securities and Investments 

Board (SIB) (now Financial Services Authority (FSA)), MOU on Mutual Assistance and 

Exchange of Information, concluded jointly with the U.S. Securities and Exchange 

Commission, September 25, 1991; HM Treasury (HMT) (added on May 9, 1994) 

272 
Information Sharing for Supervisory, Prudential, and Risk Assessment 

Purposes and Regulation of Cross-border Futures Activity

• France – Conseil des Marches Financiers, MOU regarding information sharing on remote 

members of regulated markets, March 21, 2002 

• Hong Kong – Securities and Futures Commission (SFC), Declaration on Cooperation and 

Supervision of Cross-Border Managed Futures Activity, October 5, 1995 

• Italy – Commissione Nazionale per le Società e la Borsa (CONSOB), Exchange of letters 

relating to the listing of equity-based futures contracts, April 5, 2000 

• Italy – Commissione Nazionale per le Società e la Borsa (CONSOB), Supplemental MOU to 

facilitate the recognition of regulated markets, September 11, 2000 

• Multilateral Arrangement – Declaration on Cooperation and Supervision of International 

Futures Exchanges and Clearing Organizations, March 15, 1996 (as amended) (“Boca 

Declaration”).125

 

125 The Boca Declaration and a companion exchange MOU constitute multilateral mechanisms for sharing 

information on a bilateral basis between the requesting and requested market authority consistent with their legal 

and contractual obligations. The documents establish mechanisms whereby the occurrence of certain agreed 

triggering events affecting an exchange member's financial resources or positions will prompt the sharing of 

information under the Boca Declaration and/or MOU. The trigger levels are designed to facilitate the identification 

of large exposures by firms that could have a potentially adverse effect on markets. 

The Boca Declaration signed in March 1996 was amended in October 1997 to delete language that had prevented 

certain regulators from signing the Declaration. In March 1998, the Declaration was amended again to permit 

regulators to make requests for information based upon possible manipulative or other disruptive conduct. 

Signatories as of April 2002: Comisión Nacional de Valores (Argentina); Australian Securities and Investments 

Commission (Australia); Ministry of Finance (Austria); Commission bancaire et financière (Belgium); Comissão de 

Valores Mobiliários (Brazil); Commission des valeurs mobilières du Québec (Canada, Québec); Ontario Securities 

Commission (Canada, Ontario); Danish Financial Supervisory Authority/Finanstilsynet (Denmark); Commission des 

Opérations de Bourse (France); Bundesaufsichtsamt für den Wertpapierhandel (Germany); Securities and Futures 

Commission (Hong Kong); Hungarian Banking and Capital Market Supervision (Hungary); Central Bank of Ireland 

(Ireland); Commissione Nazionale per le Società e la Borsa (Italy); Ministry of International Trade and Industry 

(Japan); Ministry of Agriculture, Forestry and Fisheries (Japan); Securities Commission (Malaysia); Securities 

Board of the Netherlands (Netherlands); New Zealand Securities Commission (New Zealand); Comissão do 

Mercado de Valores Mobiliários (Portugal); Monetary Authority of Singapore (Singapore); Financial Services 

Board (South Africa); Comisión Nacional del Mercado de Valores (Spain); Financial Supervisory 

Authority/Finansinspektionen (Sweden); Securities and Futures Commission (Taiwan); Capital Markets Board 

(Turkey); Financial Services Authority (United Kingdom); Commodity Futures Trading Commission (United 

States). 

273 
• United Kingdom – Financial Services Authority (FSA), MOU concluded jointly with the US 

SEC, October 28, 1997 

• United Kingdom – Financial Services Authority (FSA), Arrangement on Warehouse 

Information to facilitate exchanges of information for surveillance and enforcement purposes 

regarding deliverable commodities, May 17, 2000 

• United Kingdom – Financial Services Authority (FSA), MOU concerning consultation, 

cooperation and the exchange of information related to market oversight, November 17, 2006 

274 
Financial Information Sharing 

• Canada – Ontario Securities Commission, Commission des valeurs mobilieres de Quebec 

(and Canadian SROs), Financial Information-Sharing MOU, September 23, 1991 

• United Kingdom – Securities and Investments Board (now Financial Services Authority) 

(and UK SROs), Financial Information-Sharing MOU, September 1, 1988; Addendum to 

Financial Information-Sharing MOU, May 15, 1989 

275 
Information Sharing related to Technical Assistance 

• Chile – Superintendencia de Valores y Seguros de Chile, MOU regarding futures regulatory 

cooperation and the provision of technical assistance, September 13, 2002 

• China – China Securities Regulatory Commission, MOU regarding regulatory cooperation 

and the provision of technical assistance, January 18, 2002 

• India – Forward Markets Commission, Arrangement regarding regulatory cooperation and 

technical assistance, October 18, 2006 

• India – Securities and Exchange Board of India (SEBI), MOU regarding regulatory 

cooperation, consultation, and the provision of technical assistance, April 28, 2004 

• Russia – Commodities’ Exchanges Commission of the Ministry of the Russian Federation 

Anti-Monopoly Policy and Support of Entrepreneurship, Joint Statement regarding 

cooperation, consultation, and the provision of technical assistance, December 11, 2000 

• Thailand – Office of the Agricultural Futures Trading Commission, Arrangement regarding 

regulatory cooperation and technical assistance, March 26, 2006 

276 
Multilateral Arrangements and Information Sharing with US Government 

Agencies 

• United States – CFTC and SEC, MOU Regarding the Oversight of Security Futures Product 

Trading and the Sharing of Security Futures Product Information, March 17, 2004126

• IOSCO – IOSCO MMOU Concerning Consultation and Cooperation and the Exchange of 

Information, May 2002127

 

126 The CFTC-SEC MOU covers the oversight of security futures product (SFP) trading and the sharing of security 

futures product information. Pursuant to the Commodity Futures Modernization Act of 2000 the CFTC and the SEC 

have joint authority for the oversight and regulation of security futures products. With respect to security futures 

products, the MOU provides that the CFTC and the SEC will notify each other of any planned examinations, advise 

the other of reasons for an intended examination, provide each other with examination-related information, and 

conduct examinations jointly, if feasible. The CFTC and the SEC will also notify each other of significant issues 

arising from these markets and share trading data and related information for SFP activity. Implementation of this 

MOU should serve to increase the effectiveness and efficiency of the joint CFTC/SEC oversight of SFPs. In 

November 2002, OneChicago and NQLX began trading these products under the joint supervision of the agencies. 

The sharing of information and coordination recognized under this memorandum is an important element in 

providing oversight that is effective but avoids unnecessary regulatory burdens. 

127 The IOSCO MMOU is the first worldwide multilateral enforcement cooperation arrangement among securities 

and derivatives regulators. The IOSCO MMOU provides for the exchange of essential information to investigate 

cross-border securities and derivatives violations, including the most serious offenses, such as manipulation, insider 

trading and customer fraud. The MOU enables regulators to share critical information, including bank, brokerage, 

and client identification records and to use that information in civil and criminal prosecutions. 

Signatories: Alberta: Alberta Securities Commission; Australia: Australian Securities and Investments Commission; 

British Columbia: British Columbia Securities Commission; France: Commission des opérations de bourse; 

Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Greece: Capital Market Commission; Hong 

Kong: Securities and Futures Commission; Hungary: Hungarian Financial Supervisory Authority; India: Securities 

and Exchange Board of India (SEBI); Italy: Commissione Nazionale per le Società e la Borsa; Jersey: Jersey 

Financial Services Commission; Lithuania: Lithuanian Securities Commission; Mexico: Comisión Nacional 

Bancaria y de Valores; New Zealand:New Zealand Securities Commission; Ontario: Ontario Securities 

Commission; Poland: Polish Securities and Exchange Commission; Portugal: Comissão do Mercado de Valores 

Mobiliários; Quebec: Commission des valeurs mobilières du Québec; Spain: Comisión Nacional del Mercado de 

Valores; South Africa: Financial Services Board; Turkey: Capital Markets Board; United Kingdom: Financial 

Services Authority; United States of America: CFTC and SEC. 

277