II

104TH CONGRESS

2D SESSION S. 2077

To amend the Commodity Exchange Act to improve the Act, and for other

purposes.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 16, 1996

Mr. LUGAR (for himself and Mr. LEAHY) introduced the following bill; which

was read twice and referred to the Committee on Agriculture, Nutrition,

and Forestry

A BILL

To amend the Commodity Exchange Act to improve the

Act, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Commodity Exchange

5 Amendments Act of 1996’’.

6 SEC. 2. HEDGING.

7 The fourth sentence of section 3 of the Commodity

8 Exchange Act (7 U.S.C. 5) is amended by striking

9 ‘‘through fluctuations in price’’.
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1 SEC. 3. DELIVERY POINTS FOR FOREIGN FUTURES CON2 TRACTS.

3 Section 4(b) of the Commodity Exchange Act (7

4 U.S.C. 6(b)) is amended—

5 (1) in the third sentence—

6 (A) by striking ‘‘(1)’’ and ‘‘(2)’’ and in7 serting ‘‘(A)’’ and ‘‘(B)’’, respectively; and

8 (B) by striking ‘‘No rule’’ and inserting

9 ‘‘Except as provided in paragraph (2), no rule’’;

10 (2) by inserting ‘‘(1)’’ after ‘‘(b)’’; and

11 (3) by adding at the end the following:

12 ‘‘(2)(A) The Commission shall consult with a foreign

13 government, foreign futures authority, or department,

14 agency, governmental body, or regulatory organization em15 powered by a foreign government to regulate a board of

16 trade, exchange, or market located outside the United

17 States, or a territory or possession of the United States,

18 that has 1 or more established delivery points in the Unit19 ed States, or a territory or possession of the United

20 States, for a contract of sale of a commodity for future

21 delivery that is made or will be made on or subject to the

22 rules of the board of trade, exchange, or market.

23 ‘‘(B) In the consultations, the Commission shall en24 deavor to secure adequate assurances, through memo25 randa of understanding or any other means the Commis26 sion considers appropriate, that the presence of the deliv-
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1 ery points will not create the potential for manipulation

2 of the price, or any other disruption in trading, of a con3 tract of sale of a commodity for future delivery traded on

4 or subject to the rules of a contract market, or a commod5 ity, in interstate commerce.

6 ‘‘(C) Any warehouse or other facility housing an es7 tablished delivery point in the United States, or a territory

8 or possession of the United States, described in subpara9 graph (A) shall—

10 ‘‘(i) keep books, records, and other information

11 specified by the Commission pertaining to all trans12 actions and positions in all contracts made or car13 ried on the foreign board of trade, exchange, or mar14 ket in such form and manner and for such period as

15 may be required by the Commission;

16 ‘‘(ii) file such reports regarding the transactions

17 and positions with the Commission as the Commis18 sion may specify; and

19 ‘‘(iii) keep the books and records open to in20 spection by a representative of the Commission or

21 the United States Department of Justice.’’.

22 SEC. 4. EXEMPTION AUTHORITY AND SWAP EXEMPTION.

23 (a) IN GENERAL.—Section 4(c) of the Commodity

24 Exchange Act (7 U.S.C. 6(c)) is amended by adding at

25 the end the following:
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1 ‘‘(6)(A) An agreement, contract, or transaction (or

2 class thereof) that is otherwise subject to this Act shall

3 be exempt from all provisions of this Act and any person

4 or class of persons offering, entering into, rendering ad5 vice, or rendering other services with respect to the agree6 ment, contract, or transaction (or class thereof) shall be

7 exempt for the activity from all provisions of this Act (ex8 cept in each case the provisions of sections 2(a)(1)(B), 4b,

9 and 4o, any antifraud provision adopted by the Commis10 sion pursuant to section 4c(b), and the provisions of sec11 tion 6(c) and 9(a)(2) to the extent the provisions prohibit

12 manipulation of the market price of any commodity in

13 interstate commerce or for future delivery on or subject

14 to the rules of any contract market): Provided, That prior

15 to, on, or after the date of enactment of this paragraph,

16 the agreement, contract, or transaction (or class thereof)

17 satisfies the eligibility conditions for an exemption under

18 the regulations of the Commission published in the Fed19 eral Register on January 22, 1993, and codified in sec20 tions 35.1(b)(2) and 35.2 of part 35 of title 17, Code of

21 Federal Regulations.

22 ‘‘(B) This paragraph shall not restrict the authority

23 of the Commission to grant exemptions under this sub24 section that are in addition to or independent of the ex25 emption provided in this paragraph. No such exemption
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1 shall be applied in a manner that restricts an exemption

2 provided under this paragraph.

3 ‘‘(7)(A) The Commission may exempt an agreement,

4 contract, or transaction (or class thereof) under this sub5 section to the extent that the agreement, contract, or

6 transaction (or class thereof) may be subject to this Act.

7 ‘‘(B) An exemption under this subsection shall not

8 create a presumption that the exempted agreement, con9 tract, or transaction (or class thereof) is subject to this

10 Act.’’.

11 (b) REVIEW.—Not later than 1 year after the date

12 of enactment of this Act, the Commodity Futures Trading

13 Commission shall complete a reconsideration of the regula14 tions contained in part 36 of title 17, Code of Federal

15 Regulations, with the goal of establishing exemptive provi16 sions that are consistent with subsection (c).

17 (c) SENSE OF CONGRESS.—It is the sense of Con18 gress that—

19 (1) the exemption provided under section 4(c)

20 of the Commodity Exchange Act (7 U.S.C. 6(c)),

21 and codified in part 36 of title 17, Code of Federal

22 Regulations, does not yet sufficiently promote fair

23 competition by affording exchange-traded instru24 ments fair and even-handed treatment with similar
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1 products traded over-the-counter among institutions

2 and professionals; and

3 (2) the Commodity Futures Trading Commis4 sion should provide for such fair competition by

5 granting instruments traded on or subject to the fa6 cilities of exchanges, exemptive flexibility that is eq7 uitable in comparison to the exemptive flexibility the

8 Commission has granted to over-the-counter trans9 actions, while ensuring the protection of market par10 ticipants and financial and market integrity.

11 (d) REPORT.—On completion of the review required

12 by subsection (b), the Commodity Futures Trading Com13 mission shall report on the results of the review to the

14 Committee on Agriculture of the House of Representatives

15 and the Committee on Agriculture, Nutrition, and For16 estry of the Senate.

17 SEC. 5. CONTRACT DESIGNATION.

18 (a) IN GENERAL.—Section 5 of the Commodity Ex19 change Act (7 U.S.C. 7) is amended—

20 (1) by striking the matter preceding paragraph

21 (1) and inserting the following:

22 ‘‘SEC. 5. DESIGNATION OF A BOARD OF TRADE AS A CON23 TRACT MARKET.

24 ‘‘(a) IN GENERAL.—The Commission shall designate

25 a board of trade as a contract market if the board of trade
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1 complies with and carries out the following conditions and

2 requirements:’’;

3 (2) by striking paragraph (7);

4 (3) by redesignating paragraph (8) as para5 graph (7); and

6 (4) by adding at the end the following:

7 ‘‘(b) EXISTING AND FUTURE DESIGNATIONS.—

8 ‘‘(1) IN GENERAL.—If a board of trade is des9 ignated as a contract market by the Commission

10 under subsection (a) and section 6, the board of

11 trade shall retain the designation for all existing or

12 future contracts, unless the Commission suspends or

13 revokes the designation or the board of trade relin14 quishes the designation.

15 ‘‘(2) EXISTING DESIGNATIONS.—A board of

16 trade that has been designated as a contract market

17 as of the date of enactment of this subsection shall

18 retain the designation unless the Commission finds

19 that a violation of this Act or a rule, regulation, or

20 order of the Commission by the contract market jus21 tifies suspension or revocation of the designation

22 under section 6(b), or the board of trade relin23 quishes the designation.

24 ‘‘(c) NEW CONTRACT SUBMISSIONS.—Except as pro25 vided in subsection (e), a board of trade that has been
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1 designated as a contract market under subsection (a) shall

2 submit to the Commission all rules that establish the

3 terms and conditions of a new contract of sale in accord4 ance with subsection (d) (referred to in this section as a

5 ‘new contract’), other than a rule relating to the setting

6 of levels of margin and other rules that the Commission

7 may specify by regulation.

8 ‘‘(d) PROCEDURES FOR NEW CONTRACTS.—

9 ‘‘(1) REQUIRED SUBMISSION TO COMMISSION.—

10 Except as provided in subsection (e), a contract

11 market shall submit new contracts to the Commis12 sion in accordance with subsection (c).

13 ‘‘(2) EFFECTIVENESS OF NEW CONTRACTS.—A

14 contract market may make effective a new contract

15 and may implement trading in the new contract—

16 ‘‘(A) not earlier than 10 business days

17 after the receipt of the new contract by the

18 Commission; or

19 ‘‘(B) earlier if authorized by the Commis20 sion by rule, regulation, order, or written no21 tice.

22 ‘‘(3) NOTICE TO CONTRACT MARKET.—The new

23 contract shall become effective and may be traded on

24 the contract market, unless, within the 10-business25 day period beginning on the date of the receipt of
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1 the new contract by the Commission, the Commis2 sion notifies the contract market in writing—

3 ‘‘(A) of the determination of the Commis4 sion that the proposed new contract appears

5 to—

6 ‘‘(i) violate a specific provision of this

7 Act (including paragraphs (1) through (7)

8 of section 5(a)) or a rule, regulation, or

9 order of the Commission; or

10 ‘‘(ii) be contrary to the public interest;

11 and

12 ‘‘(B) that the Commission intends to re13 view the new contract.

14 ‘‘(4) NOTICE IN THE FEDERAL REGISTER.—

15 Notwithstanding the determination of the Commis16 sion to review a new contract under paragraph (3)

17 and except as provided in subsection (e), the con18 tract market may make the new contract effective,

19 and may implement trading in the new contract, on

20 a date that is not earlier than 15 business days after

21 the determination of the Commission to review the

22 new contract unless within the period of 15 business

23 days the Commission institutes proceedings to dis24 approve the new contract by providing notice in the
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1 Federal Register of the information required under

2 paragraph (5)(A).

3 ‘‘(5) DISAPPROVAL PROCEEDINGS.—

4 ‘‘(A) NOTICE OF PROPOSED VIOLATIONS.—

5 If the Commission institutes proceedings to de6 termine whether to disapprove a new contract

7 under this subsection, the Commission shall

8 provide the contract market with written notice,

9 including an explanation and analysis of the

10 substantive basis for the proposed grounds for

11 disapproval, of what the Commission has reason

12 to believe are the grounds for disapproval, in13 cluding, as applicable—

14 ‘‘(i) the 1 or more specific provisions

15 of this Act or a rule, regulation, or order

16 of the Commission that the Commission

17 has reason to believe the new contract vio18 lates or, if the new contract became effec19 tive, would violate; or

20 ‘‘(ii) the 1 or more specific public in21 terests to which the Commission has rea22 son to believe the new contract is contrary,

23 or if the new contract became effective

24 would be contrary.
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1 ‘‘(B) DISAPPROVAL PROCEEDINGS AND DE2 TERMINATION.—

3 ‘‘(i) OPPORTUNITY TO PARTICIPATE;

4 HEARING.—Before deciding to disapprove

5 a new contract, the Commission shall give

6 interested persons (including the board of

7 trade) an opportunity to participate in the

8 disapproval proceedings through the sub9 mission of written data, views, or argu10 ments following appropriate notice and an

11 opportunity for a hearing on the record be12 fore the Commission.

13 ‘‘(ii) DETERMINATION OF DIS14 APPROVAL.—At the conclusion of the dis15 approval proceeding, the Commission shall

16 determine whether to disapprove the new

17 contract.

18 ‘‘(iii) GROUNDS FOR DISAPPROVAL.—

19 The Commission shall disapprove the new

20 contract if the Commission determines that

21 the new contract—

22 ‘‘(I) violates this Act or a rule,

23 regulation, or order of the Commis24 sion; or
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1 ‘‘(II) is contrary to public inter2 est.

3 ‘‘(iv) SPECIFICATIONS FOR DIS4 APPROVAL.—Each disapproval determina5 tion shall specify, as applicable—

6 ‘‘(I) the 1 or more specific provi7 sions of this Act or a rule, regulation,

8 or order of the Commission, that the

9 Commission determines the new con10 tract violates or, if the new contract

11 became effective, would violate; or

12 ‘‘(II) the 1 or more specific pub13 lic interests to which the Commission

14 determines the new contract is con15 trary, or if the new contract became

16 effective would be contrary.

17 ‘‘(C) FAILURE TO TIMELY COMPLETE DIS18 APPROVAL DETERMINATION.—If the Commis19 sion does not conclude a disapproval proceeding

20 as provided in subparagraph (B) for a new con21 tract by the date that is 120 calendar days

22 after the Commission institutes the proceeding,

23 the new contract may be made effective, and

24 trading in the new contract may be imple25 mented, by the contract market until such time
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1 as the Commission disapproves the new con2 tract in accordance with this paragraph.

3 ‘‘(D) APPEALS.—A board of trade that has

4 been subject to disapproval of a new contract by

5 the Commission under this subsection shall

6 have the right to an appeal of the disapproval

7 to the court of appeals as provided in section

8 6(b).

9 ‘‘(6) CONTRACT MARKET DEEMED DES10 IGNATED.—A board of trade shall be deemed to be

11 designated a contract market for a new contract of

12 sale for future delivery when the new contract be13 comes effective and trading in the new contract be14 gins.

15 ‘‘(e) REQUIRED INTERAGENCY REVIEW.—Notwith16 standing subsection (d), no board of trade may make ef17 fective a new contract (or option on the contract) that is

18 subject to the requirements and procedures of clauses (ii)

19 through (v) of paragraph (1)(B), and paragraph

20 (8)(B)(ii), of section 2(a) until the requirements and pro21 cedures are satisfied and carried out.’’.

22 (b) CONFORMING AMENDMENT.—The first sentence

23 of section 6(a) of the Commodity Exchange Act (7 U.S.C.

24 8(a)) is amended by striking ‘‘Any board of trade desir25 ing’’ and inserting ‘‘A board of trade that has not obtained
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1 any designation as a contract market for a contract of sale

2 for a commodity under section 5 that desires’’.

3 SEC. 6. DELIVERY BY FEDERALLY LICENSED WAREHOUSES.

4 Section 5a(a) of the Commodity Exchange Act (7

5 U.S.C. 7a(a)) is amended by striking paragraph (7) and

6 inserting the following:

7 ‘‘(7) Repealed;’’.

8 SEC. 7. SUBMISSION OF RULES TO COMMISSION.

9 Section 5a(a) of the Commodity Exchange Act (7

10 U.S.C. 7a(a)(12)) is amended by striking paragraph (12)

11 and inserting the following:

12 ‘‘(12)(A)(i) except as otherwise provided in this

13 paragraph, submit to the Commission all bylaws,

14 rules, regulations, and resolutions (collectively re15 ferred to in this subparagraph as ‘rules’) made or is16 sued by the contract market, or by the governing

17 board or committee of the contract market (except

18 those relating to the setting of levels of margin,

19 those submitted pursuant to section 5 or 6(a), and

20 those the Commission may specify by regulation)

21 and may make a rule effective not earlier than 10

22 business days after the receipt of the submission by

23 the Commission or earlier, if approved by the Com24 mission by rule, regulation, order, or written notice,

25 unless, within the 10-business-day period, the Com-
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1 mission notifies the contract market in writing of its

2 determination to review such rules for disapproval

3 and of the specific sections of this Act or the regula4 tions of the Commission that the Commission deter5 mines the rule would violate. The determination to

6 review such rules for disapproval shall not be dele7 gable to any employee of the Commission. Not later

8 than 45 calendar days before disapproving a rule of

9 major economic significance (as determined by the

10 Commission), the Commission shall publish a notice

11 of the rule in the Federal Register. The Commission

12 shall give interested persons an opportunity to par13 ticipate in the disapproval process through the sub14 mission of written data, views, or arguments. The

15 determination by the Commission whether a rule is

16 of major economic significance shall be final and not

17 subject to judicial review. The Commission shall dis18 approve, after appropriate notice and opportunity

19 for hearing (including an opportunity for the con20 tract market to have a hearing on the record before

21 the Commission), a rule only if the Commission de22 termines the rule at any time to be in violation of

23 this Act or a regulation of the Commission. If the

24 Commission institutes proceedings to determine

25 whether a rule should be disapproved pursuant to
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1 this paragraph, the Commission shall provide the

2 contract market with written notice of the proposed

3 grounds for disapproval, including the specific sec4 tions of this Act or the regulations of the Commis5 sion that would be violated. At the conclusion of the

6 proceedings, the Commission shall determine wheth7 er to disapprove the rule. Any disapproval shall

8 specify the sections of this Act or the regulations of

9 the Commission that the Commission determines the

10 rule has violated or, if effective, would violate. If the

11 Commission does not institute disapproval proceed12 ings with respect to a rule within 45 calendar days

13 after receipt of the rule by the Commission, or if the

14 Commission does not conclude a disapproval pro15 ceeding with respect to a rule within 120 calendar

16 days after receipt of the rule by the Commission, the

17 rule may be made effective by the contract market

18 until such time as the Commission disapproves the

19 rule in accordance with this paragraph.

20 ‘‘(B)(i) The Commission shall issue regulations

21 to specify the terms and conditions under which, in

22 an emergency as defined by the Commission, a con23 tract market may, by a two-thirds vote of the gov24 erning board of the contract market, make a rule

25 (referred to in this subparagraph as an ‘emergency
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1 rule’) immediately effective without compliance with

2 the 10-day notice requirement under subparagraph

3 (A), if the contract market makes every effort prac4 ticable to notify the Commission of the emergency

5 rule, and provide a complete explanation of the

6 emergency involved, prior to making the emergency

7 rule effective.

8 ‘‘(ii) If the contract market does not provide

9 the Commission with the requisite notification and

10 explanation before making the emergency rule effec11 tive, the contract market shall provide the Commis12 sion with the notification and explanation at the ear13 liest practicable date.

14 ‘‘(iii) The Commission may delegate the power

15 to receive the notification and explanation to such

16 individuals as the Commission determines necessary

17 and appropriate.

18 ‘‘(iv) Not later than 10 days after the receipt

19 from a contract market of notification of such an

20 emergency rule and an explanation of the emergency

21 involved, or as soon as practicable, the Commission

22 shall determine whether to suspend the effect of the

23 rule pending review by the Commission under the

24 procedures of subparagraph (A).
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1 ‘‘(v)(I) The Commission shall submit a report

2 on the determination of the Commission on the

3 emergency rule under clause (iv), and the basis for

4 the determination, to the affected contract market,

5 the Committee on Agriculture of the House of Rep6 resentatives, and the Committee on Agriculture, Nu7 trition, and Forestry of the Senate.

8 ‘‘(II) If the report is submitted more than 10

9 days after the Commission’s receipt of notification of

10 the emergency rule from a contract market, the re11 port shall explain why submission within the 10-day

12 period was not practicable.

13 ‘‘(III) A determination by the Commission to

14 suspend the effect of a rule under this subparagraph

15 shall be subject to judicial review on the same basis

16 as an emergency determination under section 8a(9).

17 ‘‘(IV) Nothing in this paragraph limits the au18 thority of the Commission under section 8a(9);’’.

19 SEC. 8. AUDIT TRAIL.

20 Section 5a(b) of the Commodity Exchange Act (7

21 U.S.C. 7a(b)) is amended—

22 (1) in paragraph (3), by inserting ‘‘selected by

23 the contract market’’ after ‘‘means’’ each place it

24 appears; and

25 (2) by adding at the end the following:
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1 ‘‘(7) The requirements of this subsection establish

2 performance standards and do not mandate the use of a

3 specific technology to satisfy the requirements.’’.

4 SEC. 9. MISCELLANEOUS TECHNICAL AMENDMENTS.

5 Section 8a of the Commodity Exchange Act (7 U.S.C.

6 12a) is amended—

7 (1) in paragraph (2)—

8 (A) in subparagraph (B), by inserting

9 ‘‘this paragraph or’’ after ‘‘the provisions of’’;

10 and

11 (B) in subparagraph (D), by inserting

12 ‘‘pleaded guilty to or’’ after ‘‘such person has’’;

13 and

14 (2) in paragraph (3)(H), by striking ‘‘or has

15 been convicted in a State court,’’ and inserting ‘‘or

16 has pleaded guilty to, or has been convicted, in a

17 State court,’’.

18 SEC. 10. CONSIDERATION OF EFFICIENCY, COMPETITION,

19 RISK MANAGEMENT, AND ANTITRUST LAWS.

20 Section 15 of the Commodity Exchange Act (7 U.S.C.

21 19) is amended—

22 (1) by striking ‘‘SEC. 15. The Commission’’ and

23 inserting the following:

24 ‘‘SEC. 15. (a)(1) Prior to adopting a rule or regula25 tion authorized by this Act or adopting an order (except
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1 as provided in subsection (b)), the Commission shall con2 sider the costs and benefits of the action of the Commis3 sion.

4 ‘‘(2) The costs and benefits of the proposed Commis5 sion action shall be evaluated in light of considerations of

6 protection of market participants, the efficiency, competi7 tiveness, and financial integrity of futures markets, price

8 discovery, sound risk management practices, and other ap9 propriate factors, as determined by the Commission.

10 ‘‘(b) Subsection (a) shall not apply to the following

11 actions of the Commission:

12 ‘‘(1) An order that initiates, is part of, or is the

13 result of an adjudicatory or investigative process of

14 the Commission.

15 ‘‘(2) An emergency action.

16 ‘‘(3) A finding of fact regarding compliance

17 with a requirement of the Commission.

18 ‘‘(c) The Commission’’; and

19 (2) by striking ‘‘requiring or approving’’ and in20 serting ‘‘requiring, reviewing, or disapproving’’.

21 SEC. 11. DISCIPLINARY AND ENFORCEMENT ACTIVITIES.

22 (a) IN GENERAL.—It is the sense of Congress that

23 the Commodity Futures Trading Commission should—

24 (1) to the extent practicable, avoid unnecessary

25 duplication of effort in pursuing disciplinary and en-
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1 forcement actions if adequate self-regulatory actions

2 have been taken by contract markets and registered

3 futures associations; and

4 (2) retain an oversight and disciplinary role

5 over the self-regulatory activities by contract mar6 kets and registered futures associations in a manner

7 that is sufficient to safeguard financial and market

8 integrity and the public interest.

9 (b) REPORT.—Not later than 1 year after the date

10 of enactment of this Act, the Commission shall submit a

11 report to the Committee on Agriculture of the House of

12 Representatives and the Committee on Agriculture, Nutri13 tion, and Forestry of the Senate that evaluates the effec14 tiveness of the enforcement activities of the Commission,

15 including an evaluation of the experience of the Commis16 sion in preventing, deterring, and disciplining violations

17 of the Commodity Exchange Act (7 U.S.C. 1 et seq.) and

18 Commission regulations involving fraud against the public

19 through the bucketing of orders and similar abuses.

20 SEC. 12. DELEGATION OF FUNCTIONS BY THE COMMISSION.

21 (a) IN GENERAL.—It is the sense of Congress that

22 the Commodity Futures Trading Commission should—

23 (1) review its rules and regulations that dele24 gate any of its duties or authorities under the Com-
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1 modity Exchange Act (7 U.S.C. 1 et seq.) to con2 tract markets or registered futures associations;

3 (2) consistent with the public interest and law,

4 determine which additional functions, if any, per5 formed by the Commission should be delegated to

6 contract markets or registered futures associations;

7 and

8 (3) establish procedures (such as spot checks,

9 random audits, reporting requirements, pilot

10 projects, or other means) to ensure adequate per11 formance of the additional functions that are dele12 gated to contract markets or registered futures asso13 ciations.

14 (b) REPORT.—Not later than 1 year after the date

15 of enactment of this Act, the Commission shall report the

16 results of its review and actions under subsection (a) to

17 the Committee on Agriculture of the House of Representa18 tives and the Committee on Agriculture, Nutrition, and

19 Forestry of the Senate.

Æ