[Federal Register Volume 65, Number 240 (Wednesday, December 13, 2000)]
[Rules and Regulations]
[Pages 77962-77993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30267]



[[Page 77961]]

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Part II





Commodity Futures Trading Commission





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17 CFR Part 1 et al.



A New Regulatory Framework for Multilateral Transaction Execution 
Facilities, Intermediaries and Clearing Organizations; Rules Relating 
to Intermediaries of Commodity Interest Transactions; A New Regulatory 
Framework for Clearing Organizations; Exemption for Bilateral 
Transactions; Final Rules

Federal Register / Vol. 65, No. 240 / Wednesday, December 13, 2000 / 
Rules and Regulations

[[Page 77962]]


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COMMODITY FUTURES TRADING COMMISSION

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

RIN 3038-AB55


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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

EFFECTIVE DATE: February 12, 2001.

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, or Alan L. Seifert, Deputy Director or 
Riva Spear Adriance, Special Counsel, Division of Trading and Markets, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, N.W., Washington, D.C. 20581. Telephone: (202) 418-5260. E-
mail: (<a href="/cdn-cgi/l/email-protection#3b6b7a495853524f415e577b585d4f58155c544d"><span class="__cf_email__" data-cfemail="32627340515a5b4648575e72515446511c555d44">[email protected]</span></a>), (<a href="/cdn-cgi/l/email-protection#d09183b5b9b6b5a2a490b3b6a4b3feb7bfa6"><span class="__cf_email__" data-cfemail="adecfec8c4cbc8dfd9edcecbd9ce83cac2db">[email protected]</span></a>) or 
(<a href="/cdn-cgi/l/email-protection#17455673657e76797472577471637439707861"><span class="__cf_email__" data-cfemail="8ddfcce9ffe4ece3eee8cdeeebf9eea3eae2fb">[email protected]</span></a>).

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

    The Commission, on June 22, 2000, proposed a new regulatory 
framework to apply to multilateral transaction execution facilities 
that trade contracts of sale of a commodity for future delivery or 
commodity options. 65 FR 38986. The Commission proposed this new 
framework to ``promote innovation, maintain U.S. competitiveness, and 
at the same time reduce systemic risk and protect customers.'' Id. The 
framework provides U.S. futures exchanges greater flexibility with 
which to respond to the competitive challenges brought about by new 
technologies.
    Specifically, the framework proposed to replace the current ``one-
size-fits-all'' regulation for futures markets with broad, flexible 
``core principles,'' and to establish three regulatory tiers for 
markets: recognized futures exchanges (RFEs), derivatives transaction 
facilities (DTFs) and exempt multilateral transaction execution 
facilities (exempt MTEFs). The proposed core principles were tailored 
to match the degree and manner of regulation to the varying nature of 
the products and the participants permitted to trade on a facility.
    In general, the framework proposed a lower level of regulatory 
oversight where access to an exchange or facility is restricted to 
eligible participants or commercial participants or where the nature of 
the underlying commodity poses a relatively low susceptibility to 
manipulation. This reflects the reduced need to monitor closely such 
markets. The Commission also proposed, however, that markets serving a 
price discovery function, irrespective of the product traded or market 
participants, provide a degree of price transparency. The proposed 
framework therefore balanced the public interests of market and price 
integrity, protection against manipulation and customer protection with 
the need to permit exchanges and other trading facilities to operate 
more flexibly in today's competitive environment. As noted in the 
Notice of Proposed Rulemaking, the President's Working Group on 
Financial Markets and the chairmen of the Commission's Congressional 
oversight committees encouraged the Commission to consider proposing 
such major revisions to the regulatory framework.\1\ 65 FR at 38987.
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    \1\ Recognizing the importance of the OTC derivatives markets, 
the Chairmen of the Senate and House Agriculture Committees asked 
the President's Working Group on Financial Markets (PWG) to conduct 
a study of OTC derivatives markets. After studying the existing 
regulatory framework for OTC derivatives, recent innovations, and 
the potential for future developments, the PWG on November 9, 1999, 
reported to Congress its recommendations. See, Over-the-Counter 
Derivatives Markets and the Commodity Exchange Act, Report of the 
President's Working Group. The PWG report focused on promoting 
innovation, competition, efficiency, and transparency in OTC 
derivatives markets and in reducing systemic risk. Although specific 
recommendations about the regulatory structure applicable to 
exchange-traded futures were beyond the scope of its report, the PWG 
suggested that the Commission review existing regulatory structures 
(particularly those applicable to markets for financial futures) to 
determine whether they were appropriately tailored to serve valid 
regulatory goals.
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B. The Proposed Rules

    Under the proposed framework, current U.S. futures exchanges would 
be included automatically in the RFE category.\2\ These exchanges would 
be permitted greater business flexibility through compliance with core 
principles rather than the prescriptive regulations now in place. In 
addition to achieving greater flexibility in their current operations, 
the exchanges, as a business choice, also could operate as a DTF or as 
an exempt MTEF, as appropriate.
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    \2\ Products subject to the special procedural provisions of 
section 2(a)(1)(B)(ii) of the Act, however, must continue to be 
designated and regulated by the Commission as contract markets.
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    The proposed DTF market would be subject to an intermediate level 
of regulation. DTFs, like RFEs, would be Commission-recognized markets. 
As proposed, DTFs would be geared either to mainly institutional 
traders or to only commercial traders. Specific requirements proposed 
for DTFs differ somewhat depending upon whether a DTF is an 
institutional or a commercial market.
    The Commission proposed that institutional-participant DTFs may 
provide a trading platform for transactions involving those commodities 
listed in the rules that are eligible for such an intermediate level of 
regulation.\3\ Additional commodities,

[[Page 77963]]

including agricultural commodities, would be eligible to trade on an 
institutional-participant DTF on a case-by-case determination. The 
Commission would make that determination based upon the depth and 
liquidity of the cash market and on the surveillance history of the 
commodity based on its actual trading history.
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    \3\ The eligible commodities are those that are listed as 
eligible for trading on an exempt MTEF. The rules relating to exempt 
MTEFs are discussed below. A market that otherwise might be eligible 
to be exempt from regulation as an exempt MTEF may voluntarily 
become a DTF in order to be become a ``recognized'' market.
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    Although institutional-participant DTFs would be intended primarily 
for institutional traders, the proposed rules provide individual DTFs 
with the flexibility to decide whether or not to permit access by non-
institutional traders. The Commission proposed, therefore, to permit 
access to a DTF by non-institutional traders only through a registered 
futures commission merchant (FCM) that is a member of a recognized 
clearing organization and that has $20 million of adjusted net capital. 
Those FCMs would be required to provide their non-institutional 
customers trading on a DTF with additional disclosures and other 
protections.
    In addition, the rules proposed an intermediate level of oversight 
for commercial-participant DTFs. Only commercial participants trading 
for their own accounts would have access to these facilities. 
Commercial-participant DTFs may trade any commodity other than the 
agricultural commodities enumerated in section 1a(3) of the Act, 
government securities and commodities subject to the provisions of 
section 2(a)(1)(B)(ii) of the Act. Such commercial traders generally 
would have both the financial ability and the physical means to deliver 
tangible commodities or otherwise be involved in trading that commodity 
in connection with their line of commerce. Accordingly, certain 
requirements that were proposed to apply to institutional-participant 
DTFs would not be applicable to commercial-participant DTFs.
    The Commission also proposed a market tier exempt from all 
Commission regulation, subject only to the Act's anti-fraud and anti-
manipulation provisions and a requirement that, if performing a price 
discovery function, the market provide pricing information to the 
public. This exemption was proposed for facilities on which 
transactions would be entered into among institutional traders in 
contracts based upon a specified list of commodities.\4\ The Commission 
proposed to exempt counterparties to such transactions from a claim in 
a private right of action that a violation of the terms of the 
exemption renders the transactions void. These exempt markets could not 
hold themselves out as being regulated by the Commission. As noted 
above, existing futures markets, where appropriate, would have the 
opportunity to operate under the terms of this exemption, if they so 
choose.
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    \4\ The proposed list of commodities included: a debt 
obligation, a foreign currency, an interest rate, an exempt 
security, a measure of credit risk or quality, or cash-settled based 
upon an economic or commercial index or based upon an occurrence or 
contingency.
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C. Overview of Comments

    The Commission received a total of 71 comments from a wide range of 
commenters on the proposed new regulatory framework for multilateral 
transaction execution facilities.\5\ The commenters included 24 trade 
associations, six commodity exchanges, two government agencies, four 
financial institutions, three attorneys, two institutional study 
organizations, one agri-business firm, a self-regulatory organization, 
and several energy and communication firms or markets.
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    \5\ A significant number of letters commenting on aspects of the 
regulatory framework raised in companion notices were also submitted 
to the Commission. In this and three companion Notices of Final 
Rulemaking which are being published in this edition of the Federal 
Register, comment letters (CL) are referenced by file number, letter 
number and page. Comments filed in response to the notice of 
proposed rulemaking on MTEFs, parts 36-38, are contained in file No. 
21, on the notice of proposed rulemaking on intermediaries in file 
No. 22, on the notice of proposed rulemaking on clearing in file No. 
23 and on the notice of proposed rulemaking on the part 35 exemption 
in file No. 24. These letters are available through the Commission 
internet web site, www.cftc.gov.
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    In addition to comment letters, the Commission received oral and 
written statements during a public meeting held at the Commission's 
headquarters on June 27 and 28, 2000. At that meeting, members of the 
public had an opportunity to address the Commission and to respond to 
questions.\6\ During the meeting, several panels of industry experts, 
representing the U.S. futures exchanges, the over-the-counter 
derivatives markets, emerging information and technology providers, 
market intermediaries and clearing organizations discussed the 
proposals in the context of current market structures and future 
trends. The proposed rules were also discussed and public comments 
received at a July 19, 2000, meeting of the Commission's Agricultural 
Advisory Committee (AAC).\7\
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    \6\ A transcript of the proceedings was included in the 
Commission's comment file and is available through the Commission's 
internet web site.
    \7\ A transcript of the AAC meeting is also included in the 
Commission's comment file and is available on the Commission's 
website.
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    The overwhelming majority of the comments expressed general support 
for the Commission's proposed framework, and provided specific 
suggestions for its improvement. Many commenters described the 
Commission's initiative as a bold or important departure from the 
status quo which recognizes the beginnings of a new financial market 
landscape. In general, the commenters supported the framework's 
innovative concepts of providing greater regulatory flexibility by 
substituting core principles for prescriptive, one-size-fits-all 
regulations, and of tiered regulations tailored to the particular 
nature of the market. They also generally supported the Commission's 
initiative as providing greater legal certainty to various types of 
instruments.
    Four commenters, however, strongly disagreed with the Commission's 
approach, albeit for opposing reasons. One institutional study 
organization argued that the proposal would take regulatory reform too 
far. In contrast, a second institutional study organization, an 
investment banking firm and an attorney expressed serious reservations, 
contending that the framework provided neither significant regulatory 
relief nor greater legal certainty. The substance of individual 
comments is discussed in greater detail below.

II. Final Rules

A. Exempt Multilateral Transaction Execution Facilities (Exempt MTEFs)

    As discussed above, the Commission, in revised part 36, proposed a 
new, self-effectuating exemption for those multilateral transaction 
facilities (MTEFs) to which only eligible participants have access, 
either trading for their own account or through another eligible 
participant, and only for contracts based upon: (1) A debt obligation; 
(2) a foreign currency; (3) an interest rate; (4) an exempt security or 
index thereof, as provided in section 2(a)(1)(B)(v) of the Act; (5) a 
measure of credit risk or quality, including instruments known as 
``total return swaps,'' ``credit swaps'' or ``spread swaps''; (6) an 
occurrence or contingency beyond the control of the counterparties to 
the transaction; or (7) cash-settled, based upon an economic or 
commercial index or measure beyond the control of the counterparties to 
the transaction and not based upon prices derived from trading in a 
directly

[[Page 77964]]

corresponding underlying cash market.\8\ The Commission proposal was 
based upon the ``view that these commodities, when traded between or 
among eligible participants need not be subject to the regulatory 
scheme of the Act. Accord PWG Report at 17.'' 65 FR at 38988.
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    \8\ It should be noted that the instruments eligible for 
exemption are limited by operation of section 2(a)(1)(B) of the Act, 
which is reserved in proposed Sec. 36.3(a). As the Commission 
observed, ``[t]he reservation, and application, of this provision is 
consistent with the language of section 4(c) of the act which limits 
the Commission's authority to exempt transactions from the 
application of section 2(a)(1)(B) of the Act.'' 65 FR at 38988.
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    Many commenters strongly supported this new exemption. For example, 
the International Swaps and Derivatives Association, Inc. (ISDA) 
observed that the ``clarifications contained in the Exempt MTEF 
proposal are of critical importance to ISDA and its members.'' CL 21-37 
at 4. Reuters Group PLC (Reuters), a provider and developer of 
``electronic business-to-business transaction communities,'' stated 
that in its view, ``[t]his new category of Exempt MTEF provides 
significant legal certainty to new electronic marketplaces in the 
enumerated derivatives.'' CL 21-62 at 3. A group of commercial and 
investment banks (Coalition) \9\ commented that it ``strongly supports 
the Commission's proposal, and believes that the proposal represents a 
very important initiative both to promote legal certainty and to 
facilitate the development by U.S. market participants of electronic 
trading systems and technologies and the expanded use of clearing 
facilities. In addition, proposed part 36 would * * * limit[] the 
ability of an eligible participant to repudiate unprofitable contracts 
based on the CEA. The Coalition strongly supports these provisions. * * 
*'' CL 21-65 at 9. An attorney with the firm of Covington & Burling 
commented that:
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    \9\ They are: Chase Manhattan Bank; Citigroup, Inc.; Credit 
Suisse First Boston, Inc.; Goldman Sachs & Co.; Merrill Lynch & Co., 
Inc.; and Morgan Stanley Dean Witter & Co.

    Derivative transactions satisfying these three conditions would 
be exempt from virtually all CEA regulation * * * and either (1) 
were traded on a multilateral transaction execution facility (MTEF), 
under newly-proposed part 36 of the Commission's regulations; or (2) 
were not traded on an MTEF, under newly-revised part 35 of the 
Commission's regulations. Thus, participants * * * would obtain 
legal certainty about the limited scope of CEA regulation regardless 
of whether the means for executing transactions did or did not 
satisfy the technical definition of an MTEF.
    It is our understanding that several comments have been filed 
with the Commission that seek changes to the proposed regulations in 
ways that conceivably could affect the legal certainty described 
above, including the Commission's statement supporting such legal 
certainty. We urge the Commission not to make any changes that would 
affect the interrelationship between the MTEF exemption and the 
bilateral transactions exemption in a manner that would diminish the 
legal certainty provided to eligible participants trading exempt 
commodities.

CL 21-63 at 2-3.
    A number of the comments that generally supported proposed part 36 
also suggested specific modifications, relating mainly to the 
commodities which were proposed to be eligible for the part 36 
exemption and the proposed definition of MTEF. These issues, along with 
three comments opposing the proposed part 36 exemption on mainly 
jurisdictional grounds, are discussed below.
1. Jurisdictional Issues
    Three commenters objected to the part 36 exemption on 
jurisdictional grounds. See, CLs 21-28, 55 and 57. One of the three, JP 
Morgan Securities, Inc. (JP Morgan), objected generally to proposed 
part 36, and particularly to the inclusion of instruments eligible for 
the exemption that are ``a measure of credit risk or quality, including 
instruments known as `total return swaps,' `credit swaps,' or `credit 
spread swaps,''' reasoning that:

    An Exempt MTEF is to be subject to the anti-fraud and anti-
manipulation provisions of the Act, as well as to whatever future 
rule the Commission may enact governing information dissemination. 
Therefore, a proposed ``exemption'' from the CEA has the effect of 
extending the Commission's authority to facilities that may trade 
products, such as swaps, which are not the Commission's to regulate 
under the terms of the Act itself. A self-effectuating ``exemption'' 
in this instance unintentionally becomes the reverse, an assertion 
of CFTC jurisdiction over non-futures products.

CL 21-55 at 4.

    However, JP Morgan's conclusion is erroneous. As explained in its 
Notice of Proposed Rulemaking (65 FR at 38989), and reiterated herein, 
the Commission, by providing an exemption under part 36, is not thereby 
making an initial determination that any particular instrument which 
may be trading in reliance on the exemption is or is not within the 
Commission's jurisdiction. The use of the Commission's section 4(c) 
exemptive authority in this context to provide legal certainty to novel 
instruments without a preliminary determination by the Commission of 
complex jurisdictional issues is precisely as intended by the Congress. 
When Congress adopted section 4(c) in 1992, the Conferees stated:

    The conferees do not intend that the exercise of exemptive 
authority by the Commission [under Section 4(c)] would require any 
determination beforehand that the agreement, instrument, or 
transaction for which an exemption is sought is subject to the Act. 
Rather, this provision provides flexibility for the Commission to 
provide legal certainty to novel instruments where the determination 
as to jurisdiction is not straightforward.\10\
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    \10\ H.R. Rep. No. 978, 102d Cong., 2d Sess. 82-83 (1992).

    Moreover, the assertion that the Commission through this exemption 
would extend provisions of the Act to instruments or persons not 
subject to the Act misconstrues the nature and the scope of the 
exemption. As proposed, rule 36.3(a) provides that the anti-fraud and 
anti-manipulation sections of the Act ``continue to apply to 
transactions and persons otherwise subject to those provisions.'' \11\ 
65 FR at 38999. Thus, it is clear that the proposed rules do not 
attempt to extend application of the Act to any transactions not 
already subject to the Act.\12\
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    \11\ See also, CL 21-57 at 4, which makes the same fundamental 
error.
    \12\ In this regard, it must be noted that sections 6(c) and 
9(a)(2) of the Act prohibit manipulation of ``the market price of 
any commodity, in interstate commerce,'' and is not limited in 
application to ``contracts of sale of a commodity for future 
delivery.''
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    Proposed rule 36.2(g) requires that an exempt MTEF disseminate 
trading volume, price ranges and other trading data, but only pursuant 
to a Commission determination, after notice and an opportunity for a 
hearing, that the facility serves as a significant source for the 
discovery of prices. That procedure provides the facility with an 
opportunity to challenge the validity of the Commission's authority to 
issue and enforce such an order on the grounds that the instruments 
being traded are not subject to the Act.\13\ Nevertheless, the 
Regulatory Studies Program of the Mercatus Center (Mercatus) opined 
that, even though ``a party could contest the CFTC's assertion of 
jurisdiction * * * it is the mere assertion of regulatory jurisdiction 
by the CFTC that in the past has created the legal uncertainties that 
these Proposals attempt to address.'' CL 21-57 at 4.
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    \13\ For example, were the Chicago Mercantile Exchange (CME) to 
offer trading of its Eurodollar contract through an exempt MTEF, the 
rule provides for public notice and an opportunity for public 
comment in determining that the market ``serves as a significant 
source for the discovery of prices for an underlying commodity'' and 
to require that, as a consequence, it disseminate certain 
information to the public. See, PWG Report at 19.
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    However, proposed rule 36.3(b), the contract non-repudiation 
provision,

[[Page 77965]]

further removes any such potential negative, collateral effects on 
other markets. To the extent that part 36 applies to transactions 
traded on a facility, the contract non-repudiation provision also 
applies, reinforcing the legal certainty and validity of the 
transactions. On the other hand, to the extent that transactions and a 
market are outside of the Commission's jurisdiction, the Act and 
Commission rules (including the part 36 exemption) are inapplicable, 
and hence there can be no legal uncertainty about the validity of the 
contracts arising from the Act or Commission rules thereunder. As the 
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Commission explained in the Notice of Proposed Rulemaking,

the Commission is not making a determination that any market that is 
eligible to be an exempt MTEF under the proposed exemption is or is 
not subject to the Commission's jurisdiction under the CEA. 
Moreover, the fact that one market may operate as an exempt MTEF in 
reliance upon the proposed exemption * * * does not imply that the 
Commission has made a determination that any firm or entity that 
operates in a similar manner is subject to the Commission's 
jurisdiction under the CEA.

65 FR at 38989 (footnote omitted). Thus, the existence and application 
to any particular market of the part 36 exemption carries no negative 
legal inference or uncertainty for any other market.
    Nevertheless, Mercatus further argues that the proposed exemption 
``raises a whole new area for legal uncertainty in that the broad 
definition of MTEF in Proposed Rule 36.1(b) would appear to cover 
auction markets such as eBay and all other forms of B2B trading 
facilities, whether electronic or not.'' CL 21-57 at 5. Similarly, an 
attorney with the firm of Vinson & Elkins argues that, ``multilateral 
transaction execution facilities--regardless of the nature of their 
participants or the nature of the economic activity being undertaken on 
those facilities--must agree to become regulated by the CFTC.'' CL 21-
28 at 1. This misconstrues the operation and structure of the part 36 
exemption. As noted above, the exemption in part 36 is from application 
of the Act. To the extent that the Act does not apply to a facility's 
transactions, the regulatory framework is simply inapplicable. Thus, so 
long as a facility auctions instruments outside of the Commission's 
regulatory jurisdiction under the Act, these exemptions therefrom and 
this framework would have no application to its business.
2. Eligible Commodities
    Some commenters have suggested that the commodities eligible for 
this exemption should differ somewhat from those proposed by the 
Commission. Specifically, the United States Department of the Treasury 
(Treasury) recommended that government securities should be ineligible 
for trading on exempt MTEFs. Treasury noted that contracts eligible to 
trade on an exempt MTEF would have included both single government 
securities and baskets of government securities. It further noted that 
``[s]ince the introduction of futures contracts on government 
securities in the late 1970s, the trading of these instruments on 
futures exchanges has always been subject to Commission regulation, and 
all dealers and brokers in the cash market for government securities 
have been subject to regulation since the enactment of the Government 
Securities Act.'' CL 21-50 at 2.
    As the Commission explained in its Notice of Proposed Rulemaking, 
65 FR at 38988, its determination of which commodities to include as 
eligible for exempt MTEF status was informed by the recommendations of 
the PWG, including its recommendation to exclude from the Act 
transactions by eligible participants on electronic trading systems in 
commodities other than non-financial commodities with finite supplies. 
Treasury, however, has concluded that, for futures and options on 
government securities, a higher level of regulation than trading as an 
exempt MTEF is necessary and appropriate in order not to ``undermine 
the integrity of the government securities markets.'' Id. As Treasury 
noted in its comment letter,

    [p]rior to 1986, * * * problems with these entities [government 
securities brokers and dealers] led to the passage of the Government 
Securities Act of 1986, which was amended in 1993 to address issues 
related to auction irregularities, short squeezes, and unfair sales 
practices * * *. Allowing government securities futures to trade on 
exempt MTEFs, where they would not be subject to the Government 
Securities Act or any other regulatory framework designed to address 
potential problems, could undermine the integrity of the government 
securities markets.
    [T]here have been a number of attempts to manipulate individual 
securities within the broader market. Additionally, fraud and 
mistreatment of customers has in the past also been a concern in the 
government securities market.

Id.

    In deference to Treasury's expressed concern that a higher level of 
regulation is necessary than provided at the exempt MTEF level, the 
final rules adopted by the Commission do not include government 
securities as eligible for trading on exempt MTEFs. Specifically, the 
Commission has removed the reference to exempt securities and indexes 
thereof previously included in proposed rule 36.2(b)(4) and has amended 
final rule 36.2(b)(1) to make clear that eligible debt instruments do 
not include such exempt securities.
    In contrast to Treasury's recommendation to delete government 
securities from the list of eligible commodities, several commenters 
with energy-related businesses suggested that energy-related products 
be added to the list of commodities eligible to trade on exempt MTEFs. 
See CLs 21-34, 37, 38, 43. Merrill Lynch Co., Inc. (Merrill Lynch), for 
example, opined that ``over-the-counter bilateral trading in energy 
products between commercial entities has been exempted * * * since 1993 
* * * and that no pattern of abuses or irregularities has been 
identified.'' CL 21-38 at 9. It further reasoned that, ``electricity 
trading remains subject to oversight by the FERC and the states, 
including licensing standards for market participants, reporting 
requirements, and enforcement authority to remedy any problems that may 
arise.'' Id. at 12. Merrill Lynch also noted that action has been taken 
by the FERC,

to promote open access to transmission grids for natural gas. * * * 
Similarly, many state legislatures and public utility commissions * 
* * have adopt[ed] rules to facilitate or require the unbundling of 
gas distribution from production and supply. [A] standardized form 
of contract is in widespread use in the natural gas market. Given 
this statutory background, it would be inconsistent with the intent 
of Congress and actions taken by the FERC for the Commission to 
impose additional regulation on natural gas trading.

Id. at 13.

    However, the Commission does not require that cash markets, such as 
those described above, come within the regulatory framework.\14\ 
Centralized markets to trade spot and forward agricultural commodities 
have long existed outside of the regulatory scheme that applies to 
futures and option markets. The Act, and the regulatory framework 
thereunder, apply to markets that trade futures or option contracts on 
such underlying commodities. Accordingly, there is no inconsistency 
between the Commission's regulation of futures markets and regulation 
of the underlying cash markets by other regulators, such as the FERC or 
the states. To the contrary, the Commission in its oversight of the 
futures and option

[[Page 77966]]

markets coordinates and cooperates with the regulators of related 
underlying cash markets.
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    \14\ See, CFTC Staff Letter No. 99-67, [Current Transfer Binder] 
Comm. Fut. L. Rep. (CCH) para. 27,970 (Dec. 16, 1999), relating to a 
market established by the legislature of California for the trading 
of electricity.
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    Moreover, although some commenters expressed the view that energy 
products under the regulatory framework should be eligible to trade on 
exempt MTEFs based on the sophistication of traders in the market,\15\ 
eligibility for exempt MTEF treatment must also be premised upon a 
finding that the likelihood of manipulation is sufficiently low that 
regulation is not required. That case has not yet been made. Existing 
derivative contracts involving energy commodities typically are based 
on physical delivery within a relatively narrow geographic area. 
Delivery under these contracts can be subject to physical constraints, 
e.g., pipeline congestion, transmission congestion in the case of 
electricity, weather or natural disaster related events, concentration 
of ownership of transmission, pipeline or storage and production 
capacity. Although the total supplies of a broadly defined energy 
commodity may be large if viewed on a global basis, only a small subset 
of that total supply typically would be available for delivery on a 
derivatives contract. As the New York Mercantile Exchange (NYMEX) 
pointed out in its comment,

[t]he President's Working Group drew a distinction in its report 
that limited exclusion from CFTC regulatory authority to financial 
derivatives. The Working Group's reasoning, in part, was that 
financial derivatives had ``virtually inexhaustible supplies'' and 
that dealers in the swaps markets, * * * were subject to other forms 
of regulatory oversight. That is not the case with many participants 
in the OTC energy derivative marketplace. Because the President's 
Working Group focused primarily upon financial derivatives in its 
report, one may reasonably conclude at this time that the case has 
yet to be made that such wholesale exemption from CFTC regulation 
for energy derivatives would serve the public interest.

CL 21-47 at 3. In agreement, Williams Energy Marketing and Trading 
Company, a company engaged in energy marketing and trading and risk 
management activities, noted that it ``supports the Commission's 
proposal to exempt from regulation those * * * MTEFs meeting the 
conditions specified in the proposed rule,'' and it urged the 
``Commission to stay the course of establishing the basic parameters 
for its new regulatory framework.'' CL 21-25 at 3, 4.
---------------------------------------------------------------------------

    \15\ See, comment letter from the California Power Exchange, an 
exchange offering physical delivery cash forward markets for the 
purchase and sale of electricity between commercial parties. CL 21-
34 at 3.
---------------------------------------------------------------------------

    As proposed, the final rules do not make energy-related commodities 
eligible for trading on exempt MTEF markets at this time.\16\ The 
Commission is making this determination based upon its surveillance 
experience of designated contract markets on energy-related products 
and upon careful consideration of the comments. In making this 
determination, the Commission is not foreclosing generally any 
subsequent reconsideration of the issue. Moreover, the Commission 
proposed to permit individual markets, including those offering energy-
related products, to petition the Commission for exemption under the 
provisions of part 36. As proposed, rule 36.2(h) specifically provides 
that ``any person or entity may apply to the Commission for exemption 
for other arrangements or facilities, on such terms and conditions as 
the Commission deems appropriate, including but not limited to, the 
applicability of other regulatory regimes.'' 65 FR at 38999. The New 
York Independent System Operator (NYISO) in its comment supported 
inclusion of this provision, stating that,

[i]rrespective of whether the automatic exemption criteria are 
modified, NYISO supports the inclusion of a provision permitting the 
Commission authority to grant individual petitions for Exempt MTEF 
status * * *. This type of flexibility is, we believe, necessary to 
accommodate markets with which the Commission may not as yet be 
familiar as well as changing markets.

CL 21-61 at 7.
---------------------------------------------------------------------------

    \16\ Of course, the framework does not preclude the trading of 
such contracts altogether. Under the framework, contracts for these 
commodities may trade on an institutional-participant DTF based on a 
case-by-case determination by the Commission, on a commercial-
participant DTF or on an RFE.

    The Commission agrees that flexibility to address new and changing 
markets is both necessary and appropriate and is adopting proposed rule 
36.2(h) as final.\17\ As with other such general exemptive provisions, 
the rule does not limit the grounds on which such an exemption may be 
granted. Compare, 17 CFR 32.4(b) and 35.2(d). However, those 
petitioning for exemption should be guided by the overall principles 
---------------------------------------------------------------------------
underlying the framework, that

the level of oversight applied to exchanges or trading facilities * 
* * be based on the nature of participants allowed to trade on the 
facility and certain characteristics of the commodities being 
traded. In general, where access to an exchange or facility is 
restricted to more sophisticated traders or commercial participants, 
or where the nature of the commodity being traded poses a relatively 
low susceptibility to manipulation, regulatory oversight would be 
set at a lower level, reflecting the reduced need to monitor closely 
such markets.

65 FR at 38988. The commodities that are eligible for exempt MTEF 
status enjoy nearly inexhaustible deliverable supplies or are otherwise 
not subject to limitation. Petitions for inclusion of additional 
commodities should be for commodities of a similar nature. In addition, 
petitioners should consider addressing the sufficiency and 
applicability of other regulatory schemes.
---------------------------------------------------------------------------

    \17\ ISDA suggests including a ``category of eligible 
commodities * * * that over time become traded in sufficient volume 
so as to be highly unlikely to be susceptible to manipulation.'' CL 
21-37 at 4. The Commission is of the view that the petition 
procedure provided in part 36 would in fact provide it with the type 
of flexibility to respond to market developments that ISDA 
advocates. The Coalition recommended that this authority be 
delegated by the Commission to the Director of the Division of 
Economic Analysis. CL 21-65 at 10. The Commission is of the view 
that these determinations should not be delegated at this time.

    Proposed rule 36.2(b)(5) would make eligible for exemption 
contracts, agreements or transactions which are ``a measure of credit 
risk or quality, including instruments known as `total return swaps,' 
`credit swaps,' or `spread swaps.' '' JP Morgan objected to their 
---------------------------------------------------------------------------
proposed eligibility on the grounds that:

    [t]he named swaps are commonly based upon the price of corporate 
equities or, in the case of credit swaps, corporate debt, which is 
represented by a non-exempt security. The Commission is given 
authority under 4(c) to exempt futures contracts. But if these 
particular swaps are futures, they cannot be exempted because they 
would run afoul of the Shad-Johnson Accord, which bans futures on 
non-exempt securities prices (except for indexes which have cleared 
a lengthy regulatory approval process). The part 36 exemption will 
be of no use because it specifically does not exempt such 
transactions from the Shad-Johnson Accord. So if the Commission has 
authority to exempt these transactions (which would only be the case 
if they are futures), it cannot do so (because the Shad-Johnson 
Accord prohibits such futures).

CL 21-55 at 4.

    However, ``total return swaps,'' include a greater variety of 
instruments than just swaps on corporate equities or debt, which as JP 
Morgan correctly recognizes, are not exempt under part 36. Proposed 
rule 36.2(b) also includes instruments that are not the subject of the 
prohibitions of the Shad-Johnson Accord.\18\ Specifically, for example,

[[Page 77967]]

``total return swap'' also describes an agreement whereby one party 
agrees to pay the total return on a loan portfolio to its counterparty 
in exchange for semi-annual payments based on a floating interest rate. 
It is this type of contract, transaction or agreement, traded among 
eligible participants, that is exempt under rule 36.2(b)(5), which the 
Commission is adopting as proposed.\19\
---------------------------------------------------------------------------

    \18\ Moreover, the specific named types of instruments such as 
``total return swaps'' in the clause beginning with the word 
``including'' modify the more general description ``a measure of 
credit risk or quality.'' Thus ``total return swaps,'' a term which 
may include many different types of instruments, are included under 
this prong of the exemption only insofar as they are also ``a 
measure of credit risk or quality.'' Of course, as noted in the 
Notice of proposed Rulemaking and reiterated above, nothing in these 
rules would affect the continued applicability of any existing 
Commission exemptions, policy statements or interpretations to such 
``total return swaps,'' or to any other instrument. Moreover, the 
non-repudiation provision of rule 35.3(c) that the Commission is 
adopting in a companion release would also apply to such 
instruments.
    \19\ The rule, as proposed, referenced ``spread swaps'' rather 
than ``credit spread swaps,'' which were referenced correctly in the 
preamble at page 38988. The final rule corrects this typographic 
error.
---------------------------------------------------------------------------

    Proposed rule 36.2(b)(7) provides that cash-settled contracts on 
any economic or commercial index or measure beyond the control of the 
counterparties and not based upon prices derived from trading in a 
directly corresponding underlying cash market are eligible to trade on 
an exempt MTEF. The Board of Trade of the City of Chicago (CBT) 
suggested that proposed rule 36.2(b)(7) be modified so that it is not 
limited to economic or commercial indexes not based upon prices derived 
from trading in a directly corresponding cash market. It argued that 
the requirement that the index or measure be beyond the control of the 
counterparties is alone sufficient to protect against manipulation. CL 
21-36 at 3. However, the Commission believes that both requirements 
must be met to qualify for the exemption. Basing the cash settlement 
price of a futures contract on prices derived from trading on an 
underlying cash market necessarily raises issues regarding the 
potential ability and incentives of traders in one market to affect 
pricing in the other market.\20\ The Commission, by adopting the rule 
as proposed, intends to make eligible for this broad exemption only 
those MTEFs on which the contract's settlement price is objectively 
determined based upon prices that are ``an objective measurement of an 
economic or commercial index.'' 65 FR at 38989. As the Commission made 
clear, the exemption,

is not intended to include contracts based upon a cash-settlement 
price determined through cash-market trading of any physical 
commodity or financial instrument. * * * Finally, included in this 
category are contracts based on an objectively determined index 
value or measure of an economic or commercial index reflecting broad 
characteristics of the economy as a whole, or portions thereof, or 
material segments of commercial activity.

Id. The Notice of Proposed Rulemaking noted that the consumer price 
index or the gross domestic product, insurance data, bankruptcy rates, 
real estate rental indexes, measures of physical production or sales 
amounts such as housing starts or auto sales or crop yields are 
examples of contracts falling within this category.\21\
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    \20\ This is in contrast to proposed 36.2(b)(6) which applies to 
``an occurrence, extent of an occurrence or contingency beyond the 
control of the counterparties to the transaction.'' As the 
Commission explained, this category is intended to include 
contracts:
    based upon the outcome of a contingency, such as a recurring or 
nonrecurring event, a specific incident, a natural phenomenon or the 
unambiguous results of some other condition that gives rise to a 
hedgeable risk.
    65 FR at 38989. The Commission does not anticipate that the 
settlement price of such contracts could be derived from trading in 
a directly related cash market and has therefore not included that 
as a criterion.
    \21\ The Commission provided specific examples for each category 
of commodities eligible to trade on an exempt MTEF under proposed 
rule 36.2(b). 65 FR at 38988-89. Except for exempt securities, which 
are being deleted from eligibility in the final rules, each of those 
examples is incorporated herein by reference.
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3. Definition of MTEF
    Several comments raised issues relating to the proposed definition 
of MTEF. The Commission proposed in rule 36.1(b) to define ``MTEF'' as 
``an electronic or non-electronic market or similar facility through 
which persons, for their own accounts or for the accounts of others, 
enter into, agree to enter into or execute binding transactions by 
accepting bids or offers made by one person that are open to multiple 
persons conducting business through such market or similar facility.'' 
65 FR at 38999. As explained in the Notice of Proposed Rulemaking,

[t]he definition as proposed does not, and is not intended to, 
``preclude participants from engaging in privately negotiated 
bilateral transactions, even where these participants use computer 
or other electronic facilities, such as ``broker screens,'' to 
communicate simultaneously with other participants so long as they 
do not use such systems to enter orders to execute transactions.'' 
Accordingly, the definition makes clear that it does not include 
facilities merely used as a means of communicating bids or offers 
nor does it include markets in which a single market maker offers to 
enter into bilateral transactions with multiple counterparties who 
may not transact with each other.

Id. at 38989 (citation omitted).
    Several commenters recommended that the definition of MTEF exclude 
trading systems that include a credit screen. CL 21-21 at 6; CL 21-37 
at 4. One commenter, DNI Holdings, reasoned that ``this credit emphasis 
has always been a characteristic of swaps transactions, but has never 
been a characteristic of the futures exchanges.'' CL 21-21 at 5-6. 
However, in a companion notice of final rulemaking published in this 
edition of the Federal Register, the Commission, consistent with the 
amendment of part 35 to permit bilateral contracts, transactions or 
agreements to be cleared, is deleting individualized creditworthiness 
determinations as a condition for meeting its part 35 exemption for 
bilateral transactions.
    Moreover, as technology increases the availability of electronic 
credit screens or filters, their use has become common in both 
multilateral and bilateral environments. As NYMEX notes in commenting 
on a different provision, which applies to multilateral trading 
facilities,

this provision would appear to be premised upon the notion that the 
credit checking and position limit functionality would reside only 
within the FCM's internal systems * * *. However, * * * certain 
trading systems, such as NYMEX's NYMEX ACCESS'' electronic trading 
system maintains the credit checking functionality as a component of 
the host computer. Clearing Members may enter inputs into the system 
to set specific limits per customer.

CL 21-47 at 8.
    Finally, the exemptions in part 35 and part 36, when taken 
together, exempt derivative instruments from regulation under the Act 
whether or not they are traded on an MTEF if: (1) They are traded among 
or between eligible counterparties; (2) they are based on the 
underlying commodities, instruments or measures listed in part 36; and 
(3) they are, if cleared, cleared by an authorized clearing 
organization. As correctly observed in a comment referenced above, 
``participants in transactions that satisfy these three conditions 
would obtain legal certainty about the limited scope of CEA regulation 
regardless of whether the means for executing transactions did or did 
not satisfy the technical definition of an MTEF.'' CL 21-63 at 2. In 
light of the availability of the same degree of exemptive relief under 
either part 35 or part 36 for the specified commodities, the deletion 
of creditworthiness as a condition for exemption under part 35, and the 
use of credit screens and filters in both bilateral and multilateral 
environments, the final rule does not include such an exclusion.
    The CBT suggested that the exclusion from the proposed MTEF 
definition in rule 36.1(b)(3) for ``any facility on which only a single 
firm may participate as market maker and participants other than the 
market maker may not accept

[[Page 77968]]

bids or offers of other non-market maker participants'' should be 
deleted. It reasons that ``the Commission's approach could be read to 
allow a futures exchange * * * to decide to use a single market-maker 
or specialist system, like many securities exchanges, and avoid being 
considered to be an MTEF.'' CL 21-36 at 4. However, under the proposed 
exclusion there can be but one counterparty to all market participants. 
That is quite different from using one or more specialists in a 
multilateral trading setting. In that structure, the bids and offers of 
non-specialists are permitted to interact with each other. The 
Commission believes that this is a valid and logical distinction 
between bilateral and multilateral trading structures and is adopting 
the proposed language as final.
    The CBT also questioned whether the definition of MTEF in proposed 
rule 36.1(b) would affect the Commission's view of the scope of the 
Treasury Amendment exclusion in section 2(a)(1)(A)(ii) of the Act. CL 
21-36-4. As the Commission stated in the Notice of Proposed Rulemaking,

the definition of MTEF in proposed Sec. 36.1(b) applies only to 
those rules in which it is cited. It is not intended to modify, 
alter, amend or interpret any other provision of the Act or the 
Commission's rules. For example, the proposed Sec. 36.1(b) 
definition of MTEF does not affect the meaning or application of the 
statutory term, ``board of trade.'' 7 U.S.C. 1a(1). Thus, the scope 
and application of the statutory exclusion in section 2(a)(1)(A)(ii) 
of the Act, popularly known as the ``Treasury Amendment,'' which 
depends in part on the meaning of ``board of trade,'' is in no way 
affected by the Commission's proposed adoption of a definition of 
MTEF under Sec. 36.1(b) for purposes of the exemptions in part 35 
and part 36 of its rules.

65 FR at 38989.\22\
---------------------------------------------------------------------------

    \22\ The CBT raises the concern whether the Act's Treasury 
Amendment exclusion would continue to apply to an exempt MTEF 
without an explicit reservation in the rules of that provision of 
the statute. CL 21-36 at 4. As the Commission explained in the 
Notice of Proposed Rulemaking and reiterated herein, ``the scope and 
application of the statutory exclusion in section 2(a)(1)(A)(ii) of 
the Act * * * is in no way affected'' by this regulatory exemption. 
Thus, the determination of whether or not a person or facility is a 
``board of trade'' for purposes of the Act, generally, and the 
Treasury Amendment, specifically, should be made without reference 
to the definition of ``multilateral transaction execution facility'' 
under rule 36.1(b), which operates in the context of exemptions for 
markets to which access is limited to eligible participants.
---------------------------------------------------------------------------

    Finally, commenters suggested a number of technical modifications 
to the rules. The CBT suggested that the Commission modify the final 
rules to clarify that it is the participant to whom notice is provided 
under proposed rule 36.2(f)(1) and that the separate trading location 
(or pit) required for trading on exempt MTEFs under proposed rule 
36.2(f)(2) may nevertheless adjoin the location wherein Commission-
recognized markets are traded. CL 21-36 at 5. The Commission agrees 
with these suggestions and is modifying the final rules accordingly. In 
addition, the Minneapolis Grain Exchange (MGE), CL 21-24 at 4, 
suggested that the Commission modify proposed rule 36.2(e)'s 
requirement that an exempt MTEF be legally separate from Commission-
recognized markets. Upon further consideration of the issue, and based 
upon the fact that many of the exchanges historically overseen by the 
Commission have housed both designated contract markets and markets for 
trading spot or forward contracts without adverse consequence, the 
Commission is deleting that requirement from the final rules.

B. Derivatives Transaction Facilities.

    The Commission also proposed a new exemptive category, 
``Derivatives Transaction Facilities,'' which provides for an 
intermediate level of regulation. This intermediate level of regulation 
was proposed to be available for two separate types of markets. 
Although many of the proposed rules are common to both types of 
markets, some of the proposed rules were tailored to apply to one or 
the other market.
    The first type of DTF proposed by the Commission was for 
(primarily) ``eligible-participants.''\23\ Under the provisions of 
proposed part 37, these markets or similar facilities, including the 
current boards of trades, would be eligible to become a DTF regardless 
of the method of transmitting bids and offers or matching system used, 
either on a case-by-case determination or if the contracts traded were 
on the list of commodities eligible to trade as an exempt MTEF.\24\ The 
Commission proposed that such ``eligible participant DTFs'' would have 
the choice of whether or not to permit access to the market by non-
eligible traders. If they did permit access to non-eligible traders, a 
number of additional requirements were proposed to apply, including 
enhanced disclosure and higher net capital requirements for the 
carrying FCM.\25\
---------------------------------------------------------------------------

    \23\ In a companion notice of final rulemaking published in this 
edition of the Federal Register entitled ``Rules Relating to 
Intermediaries of Commodity Interest Transactions,'' the term 
``institutional customer'' is used rather than ``eligible 
participant.'' These terms can be used interchangeably.
    \24\ The Commission also expects, however, on a case-by-case 
basis, that the surveillance history and the self-regulatory 
undertakings of a particular exchange or facility could make it 
possible to include a specific contract traded on that facility 
within the DTF category even if the underlying commodity does not 
meet the general eligibility criteria. An exchange or facility 
seeking a case-by-case determination would be recognized as a DTF 
for that contract or contracts only upon CFTC approval.
    \25\ Amendments to the Commission's rules governing 
intermediaries are published today in a separate release in this 
edition of the Federal Register. Although those amendments apply to 
all categories of intermediaries irrespective of where they choose 
to transact business, certain proposals differentiate between 
intermediation on various types of markets and for different types 
of customers.
---------------------------------------------------------------------------

    The Commission proposed a second type of DTF under proposed part 37 
for facilities that restricted participation to ``eligible commercial 
participants.'' This type of ``commercial-participant DTF'' would be 
eligible to trade contracts on all commodities other than those 
domestic agricultural commodities enumerated in section 1a(3) of the 
Act,\26\ any securities or indices thereof subject to section 
2(a)(1)(B)(ii) of the Act or any exempt securities or indices thereof 
included in section 2(a)(1)(B)(v) of the Act. This type of eligible 
commercials-only market structure lessens many of the regulatory 
concerns regarding manipulation ordinarily present with contracts for 
tangible commodities and the regulations that are applicable to them 
have been tailored to this specific type of market.\27\
---------------------------------------------------------------------------

    \26\ They are wheat, cotton, rice, corn, oats, barley, rye, 
flaxseed, grain sorghums, mill feeds, butter, eggs, potatoes, wool, 
wool tops, fats and oils, cottonseed meal, cottonseed, peanuts, 
soybeans, soybean meal, livestock, livestock products, and frozen 
concentrated orange juice.
    \27\ Many of these trading facilities are expected to replicate 
electronically various aspects of today's commercial markets, 
including trading exclusively between principals, and direct 
negotiation and documentation of trades. In addition, these 
facilities often do not provide clearing arrangements for contracts.
---------------------------------------------------------------------------

    Although a few commenters objected to the DTF rules on 
jurisdictional grounds, many more commenters supported the concept of 
providing for an intermediate level of regulation. These commenters 
included both those interested in the eligible-participant DTF as well 
as those interested in the commercial-participant DTF. For example, 
Cargill stated that the ``three-tier system seems to provide adequate 
regulation for a wide range of financial products and market 
participants depending on the relative sophistication of the 
participants.'' CL 21-49 at 2. The Coalition stated that it supports 
the Commission's efforts to create an intermediate category of 
regulated trading facility subject to less regulation than an RFE and 
more regulation than an exempt MTEF. The Coalition went on to say that 
the tiered approach recognizes that there is a wide range of

[[Page 77969]]

types of markets, trading systems and market participants, and that it 
will facilitate market innovation. CL 21-65 at 16. The Association for 
Investment Management and Research (AIMR) opined that the tiered 
approach to regulation recognizes different operational profiles and 
risks inherent to individual participants. CL 21-64 at 3.
    Commenters also suggested that the Commission reconsider various 
specific aspects of the rules as proposed. These suggestions clustered 
around how various commodities, including in particular, domestic 
agricultural commodities, should fit within the framework, how eligible 
participants should be defined, under what conditions non-eligible 
participants should have access, how the core principles should be 
enforced and what further tailoring might be appropriate for regulating 
commercial-participant DTFs. Each of these issues is discussed in 
greater detail below.
1. Jurisdictional Issues.
    Although contracts, agreements or transactions traded on a DTF 
would be exempt from many of the Act's provisions and Commission 
regulations,\28\ the exemption is contingent upon compliance with the 
conditions set forth in part 37. A market that applies to the 
Commission for recognition, and is so recognized by the Commission, is 
bound to comply with applicable provisions of the Act and Commission 
rules as a condition of this exemption.
---------------------------------------------------------------------------

    \28\ Certain sections of the Act, including the fraud and 
manipulation provisions of the Act and the Commission's regulations 
are reserved in rule 37.8 and would continue to apply.
---------------------------------------------------------------------------

    Notwithstanding the requirement that a market or facility must 
apply to the Commission for recognition in order for the part 37 
exemption to pertain, Mercatus questioned how commercial markets for 
physical commodities would be treated in this regime, and suggested 
that the Commission provide further guidance on the reach of the 
proposed part 37 in this area. CL 21-57 at 6. As the Commission noted 
in proposing part 37 (65 FR at 38989), and reiterates here, in 
exercising its section 4(c) exemptive authority to date, the Commission 
has not made a determination that the transactions being exempted were, 
or were not, subject to the Commission's jurisdiction under the 
CEA.\29\ Rather, the Commission has exercised its section 4(c) 
authority to provide legal certainty for instruments that may be within 
its jurisdiction. However, the Commission will not entertain 
applications for recognition from markets or facilities offering 
transactions that clearly are outside of its jurisdiction.
---------------------------------------------------------------------------

    \29\ As noted above, the legislative history states that the 
Commission in exercising its section 4(c) exemptive authority is not 
required to make an initial determination that the agreement, 
instrument, or transaction for which an exemption is sought is 
subject to the Act. Accordingly, in carrying out this mandate, when 
the Commission exempted certain swap agreements in 1993, pursuant to 
section 4(c) of the Act, it stated:
    The issuance of this rule (Rule 35.2) should not be construed as 
reflecting any determination that the swap agreements covered by the 
terms hereof are subject to the Act, as the Commission has not made 
and is not obligated to make any such determination.
    58 FR 5587, 5588 (Jan. 22, 1993). See also Order Granting the 
London Clearing House's Petition for an Exemption Pursuant to 
Section 4(c) of the Commodity Exchange Act, 64 FR 53346 (Oct. 1, 
1999); Exemption for Certain Contracts Involving Energy Products, 58 
FR 21286, 21288 (Apr. 20, 1993); Regulation of Hybrid Instruments, 
58 FR 5580, 55821 n. 2 (Jan. 22, 1993). The Commission is following 
this same mandate with respect to this exemption for DTFs.
---------------------------------------------------------------------------

    The Coalition directly addressed this issue and supports the 
Commission's view. It reasoned that

the Commission would not be authorized to exercise jurisdiction over 
activities that are clearly outside its jurisdiction under the CEA. 
Examples of this would include trading in equity options and spot 
transactions.
    At the same time, the conferees to the Futures Trading Practices 
Act of 1992 (the ``FTPA'') expressly authorized the Commission to 
exercise its exemptive authority under Section 4(c)(1) of the CEA 
without determining whether the exempted transactions are subject to 
the CEA. And they authorized the Commission to do so on such terms 
and conditions as the Commission deems appropriate. The conferees 
specifically so provided to enable the Commission to act without 
making consequential jurisdictional determinations that might create 
legal uncertainty for, or imply the illegality of, other 
transactions.
    For precisely the reasons motivating the FTPA conferees, the 
Coalition believes that the Commission is authorized to and should 
accept requests by trading facilities who wish to be registered as 
DTFs and who request that the Commission not make any determination 
that the underlying transactions are futures contracts or commodity 
options. The Coalition agrees with the Commission's implicit 
judgment that this approach will minimize the adverse jurisdictional 
implications, and therefore the legal uncertainty, that might 
otherwise arise if one trading facility elects to pursue DTF 
registration in circumstances where other, possibly analogous 
trading facilities do not. However, as suggested by the immediately 
preceding discussion, the Commission should only so proceed in cases 
where a bona fide issue as to its jurisdiction exists and should not 
so proceed in any case where it is clear that the Commission lacks 
jurisdiction.

CL 21-65 at 17-18.
    As the Commission noted above with regard to the application of the 
part 36 exemption, this framework has no applicability to markets or 
facilities that clearly are outside of the scope of the Act and the 
Commission's jurisdiction. Thus, the availability of part 37 
recognition to those markets that apply in no way carries a negative 
legal inference or uncertainty for any other market. Accordingly, the 
Commission is of the view that providing legal certainty through this 
part 37 exemptive relief to markets or facilities that may be subject 
to the Act is consistent with Congress' mandate to the Commission and 
is in the public interest.
2. Commodities
    A number of commenters recommended that the framework be modified 
with regard to its application to the agricultural commodities 
enumerated in section 1a(3) of the Act. The Commission proposed that 
contracts on those commodities not be permitted to trade on a 
commercial-participant DTF, and that they be permitted to trade on an 
eligible-participant DTF only on a case-by-case determination by the 
Commission.
    The response of commenters representing various agricultural 
interests was divided. National Grain and Feed Association (NGFA) 
argued that agricultural markets should be regulated in precisely the 
same manner as markets for financial commodities. The American Cotton 
Shippers (Cotton Shippers) argued that any differences in regulation of 
agricultural commodities penalizes these markets by denying them the 
benefit of potential marketing innovations. CL 21-12 at 3-5. MGE and 
the National Grain Trade Council (NGTC) also argued that there should 
be no distinction in the regulatory framework for the enumerated 
agricultural commodities. CL 21-24 at 1-2; CL 21-46. An FCM, F.C. 
Stone, contended that agribusiness firms have substantial risk 
management experience and can themselves weigh the risks of using a 
particular trading facility. CL 21-59 at 3.
    A significant number of commenters favored permitting enumerated 
agricultural commodities to trade on an eligible-participant DTF on a 
case-by-case determination, as provided in the proposed rules. In a 
joint comment letter, eight agricultural producer groups \30\ supported 
a case-by-case

[[Page 77970]]

Commission determination of eligibility for DTF trading of individual 
agricultural commodities. They emphasized, however, that the Commission 
should provide notice and accept public comment as part of its 
deliberative process. They further cautioned that such a determination 
should include appropriate conditions in addition to the seven DTF core 
principles. CL 21-60 at 1. The NGTC concurred, suggesting that DTFs be 
permitted to trade agricultural commodities conditioned upon enhanced 
surveillance (RFE Core Principle 3), position limits (RFE Core 
Principle 4), and such other requirements that the Commission concludes 
are essential to market integrity. Cargill, while recognizing that 
certain agricultural commodities may be subject to manipulation, 
nevertheless recommended that the CFTC should retain flexibility to 
address this issue by spelling out criteria that would have to be met 
for such a commodity to achieve DTF status. CL 21-49 at 2-3.
---------------------------------------------------------------------------

    \30\ The eight groups are: the American Farm Bureau Federation, 
American Soybean Association, National Association of Wheat Growers, 
National Cattlemen's Beef Association, National Corn Growers 
Association, National Farmers Union, National Grain Sorghum 
Producers and National Pork Producers Council, and will be referred 
to hereafter as ``agricultural producer groups.''
---------------------------------------------------------------------------

    The final rules, as proposed, provide that the Commission may 
determine on a case-by-case basis to permit any commodity, including 
the enumerated agricultural commodities, to trade on an eligible-
participant DTF. The Commission remains convinced, as do many 
commenters, that this strikes the appropriate balance between caution 
and flexibility to respond to future developments. Moreover, the 
commenters' suggestions that any case-by-case determination include 
particular, tailored conditions to the general core principles are 
well-taken. In this regard, the Commission is of the view that, at a 
minimum, any DTF trading a commodity on a case-by-case basis will be 
required to retain the large trader reporting system that pertains to 
RFEs. The Commission will determine additional requirements, if any, 
during each individualized determination. In this regard, the 
procedures to be used by the Commission in such case-by-case 
determinations will indeed include public notice and an opportunity for 
public comment.\31\
---------------------------------------------------------------------------

    \31\ Treasury similarly commented with respect to whether 
government securities should be permitted to trade on a DTF. It 
recommended that continued application of the segregation of 
customer funds requirements, certain adjustments to capital 
requirements for FCMs executing trades for retail customers and 
large trader reporting be conditions of permitting government 
securities to trade on a DTF. The Commission will certainly consider 
these views if any such request to trade government securities on a 
DTF is received. Moreover, consistent with current practice under 
the Act, the Commission will continue to keep Treasury apprised of 
new contracts involving government securities to be listed on both 
DTFs and RFEs.
---------------------------------------------------------------------------

    Commission rule 37.2(a)(2)(i) provides that commodities eligible 
through a case-by-case determination to trade on a DTF ``have a 
sufficiently liquid and deep cash market and a surveillance history 
based on actual trading experience to provide assurance that the 
contract is highly unlikely to be manipulated.'' The Global 
TeleExchange (GTX) commented that the Commission should articulate the 
standards that it will use to judge whether there is a ``sufficiently 
liquid and deep cash market'' to warrant approving a contract for DTF 
trading. CL 21-40 at 4. The Commission is not establishing quantitative 
thresholds or criteria for DTF inclusion a priori, because the 
appropriate standards necessarily would differ across markets and time, 
and the adoption of specific, detailed standards would deny the 
Commission and applicants needed flexibility.\32\
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    \32\ GTX also added that, in its view, telecommunication minutes 
and other telecommunication products should qualify as such a 
market. The Commission is not making such a determination in this 
rulemaking. That decision is better made as an individualized 
determination where a factual record can be developed and public 
comment specifically sought on the issue.
---------------------------------------------------------------------------

    In making a determination whether a contract is highly unlikely to 
be manipulated and thus eligible for DTF trading through an 
individualized determination, the Commission will consider both the 
liquidity and depth of the underlying cash market and the actual 
trading experience of the contract, including, where relevant, the 
facility's surveillance history in monitoring the market and in 
addressing market problems. Sufficient liquidity and depth of the 
underlying commodity can be demonstrated by looking at a number of 
specific factors. These include: (1) A high level of liquidity; (2) 
bid-ask spreads that are narrow relative to traded values; (3) 
relatively frequent transactions involving participants that represent 
major segments of the industry; (4) the absence of material impediments 
to participation by commercial entities; (5) transfer of ownership that 
is easily and readily accomplished at minimal cost; and (6) a pattern 
of pricing that exhibits continuity and the absence of frequent, sharp 
price changes such that a person cannot readily move materially the 
price of the product in normal cash market channels. Facilities seeking 
recognition as a DTF should provide to the Commission information on 
these factors. Actual trading experience acceptable for DTF eligibility 
can be based upon a history that the contract terms and conditions 
provide for a deliverable supply that is adequate to minimize the 
threat of market abuses such as price manipulation and distortions, 
congestion, and defaults,\33\ and by having in place appropriate 
procedures effectively to oversee the market, including a large trader 
system, as well as a history of active surveillance to prevent or 
mitigate market problems.\34\
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    \33\ In this regard, deliverable supply represents the amount of 
the commodity meeting the contract's specifications at the delivery 
locations that is available for delivery at its economic value in 
normal cash marketing channels.
    \34\ This requirement is not intended to preclude a market 
experienced in the trading of only cash or other instruments from 
making the necessary demonstrations. Such facilities may rely on 
that market experience in making the necessary demonstration.
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3. Access by Non-Eligible Participants
    Only eligible participants (i.e., institutional traders) would have 
unrestricted access to an eligible-participant DTF. Non-eligible 
participants may access the market, but only through a registered FCM 
with $20 million in net capital that is a clearing member of a contract 
market or RFE. See, rule 37.2(a)(2)(ii). A number of commenters opposed 
this requirement. The CBT contended that this requirement is overly 
burdensome and does not further the Commission's stated goal that DTF 
transactions ``be transacted through FCMs that are more capable of 
properly maintaining such accounts and handling the associated risk.'' 
CL 21-36 at 7. It further reasoned that net capital is a poor proxy for 
an FCM's trading capabilities or level of regulatory compliance and 
that the rule favored large FCMs at the expense of smaller FCMs. 
Accord, CL 21-24. The CME disagreed with the premise of the rule that 
transactions on a DTF entail a higher degree of financial risk than do 
transactions on an RFE, especially in the context of futures based on 
liquid financial instruments carrying little risk of manipulation. CL 
21-51 at 8. NGTC also questioned the relationship between an FCM's 
capitalization and its fitness to handle retail accounts on a DTF and 
argued that the $20 million threshold requirement was inconsistent with 
other CFTC capital requirements. CL 21-46 at 4-6.
    Although adjusted net capital may be an imprecise measure of an 
FCM's capability to service accounts, the Commission nevertheless 
believes that the capital requirement proposed to be required of FCMs 
who trade on DTFs for non-institutional customers is appropriate at 
this time. Because of the absence of restrictions on the type of

[[Page 77971]]

trading mechanisms that could be used by a DTF, and the possibility of 
a greater number of such competing markets trading similar products, 
filling non-institutional customer orders at the best price would 
likely require the FCM to have a more extensive and sophisticated 
infrastructure and greater trading resources than an FCM operating in a 
traditional setting. Accordingly, the Commission, at this time, is 
adopting the capital-related access restriction as proposed. The 
Commission will consider further appropriate measures to permit 
additional FCMs to handle non-institutional customers' access to DTFs 
as experience is gained under the rules.
    The Managed Funds Association (MFA) argued that customers trading 
through registered CTAs should have trading access to DTFs without 
regard to their individual financial qualifications. In particular, MFA 
suggested that a CTA with at least $25 million under management should 
be permitted to engage in transactions on behalf of their clients on 
all eligible-participant DTFs. CL 21-31 at 5. Although the Commission 
is not prepared at this time to treat a CTA's customers as eligible 
participants without limitation on the basis of the CTA's management of 
the account, the Commission does recognize that CTAs provide expertise 
and professional management to their customers. In recognition of this 
role, the Commission is revising proposed rule 37.2(a)(2)(ii) to permit 
CTAs, with at least $25 million under management and having non-
institutional clients, to access DTFs that permit non-institutional 
participants on behalf of both their institutional and non-
institutional customers through accounts carried by any registered FCM. 
The Commission will reconsider this issue when it looks more broadly at 
revising current rules applicable to CTAs and commodity pool operators.
    NYMEX expressed concern that the proposed requirement that non-
eligible traders access a DTF through an FCM may not address adequately 
electronic systems with direct customer order entry on which FCM credit 
filters are resident. The Commission agrees, and is modifying 
37.2(a)(2)(ii) to make it clear that while the accounts of non-eligible 
traders must be carried by registered FCMs, they may have direct 
trading access to the DTF if a credit filter is required to be used by 
the FCM, regardless of where the filter is resident.
4. Commercial-Participant DTF
    The Commission proposed that an intermediate level of regulation 
also apply to commercial-participant DTFs. The proposed rules 
applicable to commercial-participant DTFs, although having common 
elements with eligible-participant DTFs, also have a number of special 
features. For example, the proposed core principles for DTFs may 
include two alternatives, with the proviso that they apply to the 
market ``as applicable.'' See, e.g., Core Principle 2, rule 37.4(b). 
Only one of the alternatives may be appropriate for a particular 
facility, and should be understood to apply in that manner.
    One commenter, a company beginning an electronic platform for 
trading ``physical commodities and derivative products * * * among 
commercial participants,'' opined that ``the overall approach * * * 
will result in the imposition of excessive and unwarranted burdens on 
Commercial DTFs.'' Intercontinental Exchange, LLC (Intercontinental) CL 
21-22 at 2. A second letter from a group of oil and gas producers, 
refiners, processors, and marketers and electric utilities and 
marketers (Energy Group) raised many of the same issues as did 
Intercontinental. CL 21-23. Specifically, these letters suggested that 
the Commission provide for a streamlined review procedure for 
recognition of a DTF within a fixed time period. The letters further 
stated that the DTF may not have ``exchange-style memberships or rules. 
Any substantive review of commercial DTFs, their owners or operators, 
therefore, or any review of rules or principles applicable to trading 
on or through such facilities would be inappropriate and unwarranted 
and will render the DTF framework completely unworkable.'' CL 21-22 at 
3. They also noted that electronic platforms may have ``trading 
protocols, product descriptions, fee schedules, user guides and similar 
trading or transaction related documents or information'' rather than 
trading rules. Id.
    The proposed rules, however, recognized this distinction and 
provided that the facility have rules or terms and conditions governing 
trading procedures. See, e.g., proposed rule 37.3(a)(2). The reference 
to ``terms and conditions'' was intended to apply to trading platforms 
that did not have exchange-style rules and instead incorporated their 
trading procedures as terms of their operating agreements. However, 
``terms and conditions'' is already a defined term under Commission 
rule 1.41(a)(2). To provide greater clarity of the Commission's intent, 
the final rules refer to ``rules, which may be trading protocols.'' 
Trading protocols include the methods and conditions for trading that 
may be included in a user's guide or operator's manual, customer 
agreements, screen trading prompts or other similar documents or 
writings.\35\
---------------------------------------------------------------------------

    \35\ In addition, the Commission is amending the definition of 
``rules'' under Commission rule 1.41(a)(1) specifically to include 
the term ``trading protocols.''
---------------------------------------------------------------------------

    Intercontinental also opined that the reservation of various 
sections of the Act in proposed rule 37.5(a) potentially would subject 
a DTF to a number of additional obligations beyond those included in 
the rules themselves. CL 21-22 at 4. The Commission's intent, however, 
in reserving various sections of the Act in part 37 was not to import 
additional regulatory obligations into the part 37 rules. Rather, its 
reservation of various sections of the Act is to establish legal 
authority for promulgating these regulatory requirements. By reserving 
these sections of the Act, the Commission does not intend to 
incorporate regulatory requirements for DTFs beyond those specified in 
part 37. Moreover, the Commission intends that the reserved sections of 
the Act be interpreted as applying to DTFs as the difference in the 
contexts require. Some of the Act's provisions, such as section 4c(a) 
of the Act are reserved ``as applicable,'' depending upon the 
particular characteristics of a trading facility. The Commission will 
confirm whether that section of the Act applies to a particular 
facility in its Order granting recognition to the facility.
    In contrast to the reservation of provisions of the Act 
effectuating the regulatory conditions of the exemption, the Commission 
has deleted from the final rules in parts 37, 38, and 39 specific 
reservation of various enforcement provisions that it had proposed 
specifically to retain. The Commission has determined that such 
specific reservations are unnecessary. Rather, such specific 
reservations do not affect the Commission's existing authority to 
investigate violations and to bring enforcement actions. See, section 
4(d) of the Act.
    In order to conform the regulatory requirements of the commercial-
participant DTF more closely to cash market practices, the Commission 
is deleting the proposed requirement that participants respond to 
special calls for information about their trading activities. The 
Commission will rely instead on its investigative authority, which also 
applies to a person's cash market activities. Moreover, the Commission 
is not requiring that a non-U.S. participant appoint an agent for 
receipt of service of process within the United States or that the DTF 
act in that

[[Page 77972]]

capacity. Instead, the Commission is requiring that the commercial-
participant DTF provide notice to its non-U.S. participants of 
communications from the Commission. In the event that a non-U.S. 
participant fails to comply with such a Commission communication, the 
Commission may direct recognized DTFs to deny the participant further 
trading access. Compare, 17 CFR 21.03. By modifying the final rules in 
this way, the Commission is bringing the rules for commercial-
participant DTFs into closer alignment with the operation of related 
cash markets, and the requirements on participants on commercial-
participant DTFs, by and large, will be no greater or no different than 
is applicable to cash market trading.
    Finally, both comment letters suggested that the rules applicable 
to DTFs be located entirely within part 37 without cross-referencing 
other rules. The Commission has modified the final rules to reduce the 
number of cross-references within part 37. Accordingly, the final rules 
have been reorganized to include a new rule 37.5 relating to 
information requirements (formerly in proposed part 20) and has divided 
the requirements for recognition into two sections. These modifications 
to the final rules change the substance of the rules only as discussed 
above. A number of voluntary provisions remain as cross-references to 
other rules.
    Several commenters raised issues regarding the proposed definition 
of ``eligible commercial participant.'' Both NYMEX and the Commodity 
Floor Brokers and Traders Association expressed concern that exchange 
locals were not included within the category of eligible commercial 
participants. They reasoned that locals provide the same market making 
function as do dealers, a category included within the definition of 
eligible commercial participant. NYMEX noted that professional floor 
traders provide approximately 43-49% of the trading volume in NYMEX 
energy contracts. CL 21-47 at 4. NYMEX further noted that unless floor 
traders were included, the commercial-participant DTF model would ``be 
used to exclude * * * another business model [exchanges] that is 
generally comparable but for the sharing of market making 
responsibilities among a group of professional market makers rather 
than concentration of this function in a single dealer.'' Id. at 10. 
The CBT concurred, stating that ``[c]ertainly floor brokers and floor 
traders that trade regularly on exchange markets should be considered 
to be as sophisticated as any market participants. For that reason, in 
the Commission's current part 36 rules, floor brokers and traders are 
defined to be eligible participants without regard to any total or net 
asset test.'' CL 21-36 at 6. The Commission agrees that Commission 
registrants, particularly floor brokers and floor traders should be 
included as eligible to trade in a DTF with a guarantee of their 
obligations by a futures commission merchant, as suggested by 
NYMEX.\36\
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    \36\ This determination is based on the important role that 
floor brokers and floor traders, which are Commission registrants, 
may fulfill in trading on a Commission-recognized market under the 
part 37 exemption. For this reason, the Commission does not agree, 
as NYMEX suggests, that floor trades or floor brokers should be 
eligible participants for purposes of parts 35 and 36 under 
conditions other than currently provided.
---------------------------------------------------------------------------

    These rules establish an intermediate level of regulation for DTFs 
appropriate to the commodities traded and the participants trading 
thereon. DTFs have great flexibility in determining the trading systems 
and mechanisms that they will use. Accordingly, and in light of their 
institutional nature, participants trading on DTFs are expected to 
exercise the appropriate degree of understanding in making use of these 
facilities. Notwithstanding part 37's greater degree of regulatory 
flexibility, the Commission retains its enforcement responsibility to 
ensure compliance with the fundamental regulatory goals of the Act, as 
included within these rules. The Commission believes that it has 
retained the tools necessary to accomplish this mandate and by adopting 
a more flexible regulatory approach is not thereby indicating any 
diminishment in its resolve effectively to enforce compliance.
5. Procedures for Recognition
    A board of trade, facility, or entity seeking recognition as a 
derivatives transaction facility would be deemed to be recognized 
thirty days after the Commission received the application if the 
application met the conditions for recognition pursuant to Secs. 37.3 
and 37.4 and the applicant and/or its rules or procedures do not 
violate the Act or the Commission's regulations.\37\ An entity seeking 
recognition as a DTF may request that the Commission approve its 
initial set of rules, which may be trading protocols, and any 
subsequent rules or rule amendments under section 5a(a)(12)(A) of the 
Act and Commission regulations thereunder. However, the DTF is only 
required to notify the Commission of rules and rule amendments, which 
include trading protocols, in the same manner that it notifies market 
participants, but no later than close of business on the day preceding 
implementation.
---------------------------------------------------------------------------

    \37\ The Commission has made clear in the rule 37.1(a) scope 
provision that the part 37 rules apply to a ``a board of trade 
operating as a derivatives transaction facility.'' Moreover, DTFs, 
as a condition of the part 37 rules, generally would be considered 
under proposed rule 37.1(a) to be subject to the Act's provisions as 
though the DTF were a ``designated contract market'' under the Act. 
As a board of trade within the meaning of that term under the Act 
(and as a contract market by operation of part 37), a DTF on which 
futures transactions are traded would be covered by the provisions 
of Subchapter IV of Chapter 7, Title 11 of the Bankruptcy Code. 
Similarly, DTFs should be considered ``contract markets'' for the 
purpose of, for example, Sections 556 and 761 of the Bankruptcy 
Code, and 12 U.S.C. 4402. The Commission has modified final rule 
38.1(b) to make a similar clarification relating to RFEs.
---------------------------------------------------------------------------

    Several commenters raised issues regarding the procedures for 
recognition. Kiodex, a risk management services firm, suggested that 
the applicant have an opportunity to correct a deficiency before the 
``Commission convert the review into a full-scale designation 
proceeding.'' CL 21-29 at 4. However, proposed rule 37.4(c) merely 
provided that upon termination of review under the thirty-day period, 
the application would be subject to the ``procedures specified in 
section 6 of the Act.'' That provision merely incorporates the time 
periods and other procedures from section 6; it is not intended to 
convert the application or its review into one for contract market 
designation.
    On a related point, the CBT suggested a technical modification to 
clarify that a board of trade or other entity that files for 
recognition as a DTF by certification is not required to demonstrate 
that it satisfies conditions for recognition under part 37. CL 21-36 at 
10. As both the proposed and final rules provide, however, the filing 
by a facility which is already a designated contract market need only 
include the DTF's rules and its certification that it meets the 
conditions for recognition as a DTF under the part 37 rules.
    Intercontinental suggested that the Commission specifically retain 
the flexibility to grant recognition to new facilities at various 
stages of readiness. CL 21-22 at 1-3. The Commission agrees, and has 
modified rule 37.4 as proposed to provide that the Commission may 
determine to recognize a DTF upon conditions. These might relate either 
to additional regulatory undertakings by a particular facility, or to 
recognition of a facility pending its subsequent fulfillment of a 
regulatory requirement. This flexibility will enable new entrants to 
apply for recognition before development of their trading system is 
complete and to be recognized contingent upon their

[[Page 77973]]

meeting all of the recognition requirements.\38\
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    \38\ The Commission has modified the final application guidances 
to make clear that DTFs and RFEs must disclosure limitations of 
liability, if any. Such limitations of liability, consistent with 
longstanding Commission policy, may not limit liability for 
violations of the Act or Commission rules, fraud, or wanton or 
willful misconduct.
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6. Enforcement of Core Principles
    Several letters raised concerns regarding the interpretation, 
enforcement and oversight of core principles. NYMEX suggested that the 
guidance with respect to Core Principle 6 which provides that rule 1.31 
is the acceptable practice should be amended to read ``an acceptable 
but non-exclusive means regarding the form and manner for keeping 
records.'' CL 21-47 at 11. The Commission appreciates that the current 
wording does not appear to offer a high degree of flexibility in 
meeting this core principle. However, rule 1.31 was recently amended 
(64 FR 28910) and in its amended form provides a degree of flexibility 
in compliance. Moreover, rule 1.31's provisions are consistent with the 
record-keeping requirements of the Securities and Exchange Commission 
(SEC). In light of the importance of recordkeeping to the Commission's 
ability to fulfill its oversight function and the high number of 
Commission registrants that must also comply with similar SEC 
requirements, the Commission is adopting the guidance as proposed and 
will provide further guidance on acceptable record-keeping practices 
after additional study of the issue.
    The CBT opined that ``safeguards should be provided to ensure that 
flexible standards do not become a license for the CFTC to dictate to 
exchanges.'' CL 21-1 at 2-3. In contrast, Mercatus objected to the use 
of core principles as too vague. See CL 21-57 at 7, 10. See also CL 21-
45 at 3. The Commission finds both of these arguments unpersuasive. 
First, the core principles are specifically designed to afford 
flexibility to trading facilities to design innovative trading 
mechanisms in an expeditious manner. Second, this flexibility should 
not be confused with vagueness. While not like typical prescriptive 
regulations, the core principles nevertheless do set forth specific 
standards to be satisfied by those seeking to gain and maintain 
recognition. Finally, any interpretative advice, assistance or 
direction provided by the Commission would constitute guidance only. It 
does not preclude any facility from complying with the core principle 
in some other manner.
    Accordingly, the framework does not place the burden of proof upon 
those covered by the framework to demonstrate why a particular practice 
that differs from the specific guidance offered in a statement of 
acceptable practices complies with a particular core principle. See, CL 
21-57 at 7. If, as a practical matter, a disagreement on the 
interpretation of any core principle could not be addressed through 
informal mechanisms, the burden of proof to establish a violation of a 
core principle would not differ from the Commission's current burden, 
and would rest with the Commission in any formal regulatory or 
enforcement proceeding.
    Nevertheless, the CBT and CME called for a ``mechanism'' for 
resolving disagreements over interpretation of core principles short of 
the CFTC taking punitive action. CL 21-51 at 5. CBT suggested, for 
example, that all adjectives, such as ``appropriate,'' 
``periodically,'' ``proper,'' and ``timely'' be removed from the core 
principles and that the Commission ``structure an alternative dispute 
resolution mechanism to resolve disagreements about the application of 
core principles.'' CL 21-36 at 10. The Commission appreciates the 
concerns of these commenters. By moving from prescriptive rules to more 
general core principles, self-regulatory organizations will have not 
only greater flexibility in how they meet the regulatory requirements, 
but more responsibility, as well. Purging the core principles of 
adjectives will not address the issue of whether the self-regulatory 
organizations act in a manner consistent with these internationally 
accepted norms for the conduct of trading facilities. The Commission 
fully expects that as self-regulators, the entities covered by the 
framework will strive to act at the highest ethical and professional 
standards for the protection of customers and the integrity of the 
market.
    Finally, trading facilities must recognize that the requirements 
contained in the core principles may involve many interested parties, 
not just a facility's members or owners. Accordingly, as FIA suggested, 
when issuing interpretative guidance having industry-wide application, 
the Commission will follow the notice and public comments procedures of 
the Administrative Procedure Act, as appropriate. CL 21-45 at 5.\39\
---------------------------------------------------------------------------

    \39\ The National Futures Association (NFA) advocated that its 
member rules be the primary means of developing best practice or 
other interpretative guidance for core principles applying the 
framework. The Commission appreciates the NFA's willingness to 
assist in interpreting Commission rules and in certain instances, 
where the parts of the framework involve NFA's member rules, the 
Commission may ask for NFA's interpretative assistance. However, it 
would be inappropriate for NFA to assume that role for areas of the 
framework that do not involve its membership, particularly for 
example, where a trading facility does not permit intermediation.
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C. Recognized Futures Exchanges

    The Commission further proposed to recognize all currently 
designated contract markets, except for those designated as contract 
markets in section 2(a)(1)(B) commodities, as ``Recognized Futures 
Exchanges'' under proposed part 38. To provide recognized futures 
exchanges with greater operational flexibility, part 38, as proposed, 
would replace many prescriptive rules with performance-based rules, or 
core principles. Moreover, Commission review would not be required for 
new contracts or for rules and rule amendments prior to listing or 
implementation, except for the terms and conditions of agricultural 
commodities enumerated in section 1a(3) of the Act. Furthermore, the 
exchanges would not be required to be responsible for auditing 
intermediaries' sales practices. Instead, enforcement could be the 
responsibility of a registered futures association.\40\
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    \40\ As pointed out in the Federal Register release proposing 
part 38, the NFA currently is the only such registered organization. 
See 65 FR at 38991.
---------------------------------------------------------------------------

    The preamble to proposed part 38 noted that RFE markets can list 
for trading contracts on any commodity, including those having 
potentially a greater risk of price manipulation. In addition, because 
they could permit unconditioned access to both institutional and non-
institutional traders, they raise greater concerns regarding customer 
protection than do DTFs. 65 FR at 38991. Therefore, as the preamble 
noted, the proposed rules in part 38 preserve a higher level of market 
surveillance, position reporting obligations, customer protections and 
financial safeguards than do the proposed rules for DTFs. Id. A number 
of commenters questioned these requirements as incorporated in the core 
principles that are applicable to RFEs.
1. RFEs as a Means of Regulatory Reform
    As was the case with commenters on the proposed DTF category, many 
commenters supported the general concept of changing from prescriptive 
regulations to broad, flexible core principles for RFEs.\41\ Some

[[Page 77974]]

commenters expressed concern, however, that the RFE proposal would 
permit greater deregulation than appropriate for these commodities and 
market participants. For example, the Silver Users Association (SUA) 
maintained that any change in the regulatory structure for silver 
trading must provide clear assignment of responsibility for trading 
facility operators, and procedures for market participants to obtain 
redress for improper actions.\42\ The agricultural producer groups 
urged that new agricultural contracts and amendments to such contracts 
continue to be subject to Commission review prior to their trading. CL 
21-60 at 1. Two commenters, Mercatus and CBT, questioned whether the 
proposed framework for RFEs was sufficiently deregulatory in nature. CL 
21-36 at 12.
---------------------------------------------------------------------------

    \41\ Specifically, for example, Cargill supported the basic 
structure of the regulatory relief for organized futures exchanges. 
CL 21-49 at 2. NYMEX strongly supported the overall design of the 
proposal. CL 21-47 at 1. CME strongly supported the Commission's 
approach in moving from prescriptive regulations to core principles. 
CL 21-51 at 5. NYBOT stated that the proposed framework struck a 
measured balance between self-regulation and federal oversight in 
many respects. CL 21-27 at 1.
    \42\ The SUA expressed the additional concern that if liquidity 
in silver trading at RFEs using open-outcry diminishes due to 
interest in electronic platforms, procedures should be in place for 
making pricing data from electronic trading platforms available to 
the public on a timely basis. CL 21-39 at 3.
---------------------------------------------------------------------------

    The Commission remains convinced, and most commenters agreed, that 
the use of core principles supplemented by statements of acceptable 
practices strikes the right balance between the need for appropriate 
regulation and for flexibility. The proposed rules for RFEs are not 
intended to remove internationally accepted standards for market or 
financial integrity or for the protection of customers trading on 
futures exchanges. Rather, they are intended to offer U.S. exchanges 
greater flexibility in meeting those requirements. As the Commission 
noted:

[t]hese proposed rules * * * [are] intended to provide greater 
flexibility in meeting technological and competitive challenges. At 
the same time, the Commission will retain its oversight authority to 
ensure the integrity of markets and prices, to deter manipulation, 
to protect the markets' financial integrity, and to protect 
customers.

65 FR at 38987. This approach, although providing exchanges a high 
degree of flexibility to meet these challenges, is not intended to 
relieve U.S. exchanges from their obligations to comply with the 
policies and requirements of the Act, nor to operate in a manner that 
fails to meet ``internationally-accepted guidance regarding appropriate 
regulatory measures for exchange-traded derivatives markets.'' \43\ 65 
FR at 38987.
---------------------------------------------------------------------------

    \43\ Under Rule 38.3(f), as modified in the final rules, RFEs 
are required to carry out international financial and surveillance 
information sharing arrangements. The Commission points out that, at 
this time, the International Information Sharing Agreement and 
Memorandum of Understanding developed by the FIA Global Task Force 
on Financial Integrity is one such arrangement.
---------------------------------------------------------------------------

2. Comments Concerning the Core Principles
    A number of commenters offered suggested changes to the core 
principles. The Commission has considered these comments within the 
overall goal that the core principles establish broad, flexible 
requirements, that at the same time are specific enough to provide 
notice of the required performance by the recognized entity. In this 
regard, the final version of Appendix A to part 38 herein, clarifies 
that the guidance offered on the means of complying with the core 
principles is for illustrative purposes only and is not intended to be 
a mandatory checklist for compliance.
    Specifically, AIMR suggested that Core Principle 3 (Position 
Monitoring and Reporting) should simply require exchanges to have the 
process and rules necessary to deter market manipulation. CL 21-64 at 
4. That formulation, however, fails to capture the breadth of an RFE's 
responsibility under the Act. Both prevention of price manipulation and 
assurance of market and price integrity are fundamental public policy 
interests of the Act. Accordingly, the Commission believes that it is 
vital that RFEs have more than just rules and a process to deter 
manipulation, as suggested by AIMR. The Commission therefore is 
retaining the language of Core Principle 3, which requires an RFE to 
monitor ``on a routine and non-routine basis as necessary to prevent 
manipulation, price distortion, and disruptions of the delivery or cash 
settlement process.'' \44\
---------------------------------------------------------------------------

    \44\ AIMR also suggested that Core Principle 4 (Position Limits) 
be modified only to require RFEs to hold members accountable for 
their positions. However, position limits are a necessary tool for 
preventing market manipulation or distortion in many markets and the 
Commission therefore declines to modify the core principle as 
proposed. However, the Commission in its proposed statement of 
acceptable practices specifically determined that exchange position 
accountability rules are an acceptable means of meeting the core 
principle for various types of markets. 65 FR at 39005.
---------------------------------------------------------------------------

    NYBOT and CBT expressed concerns about Core Principle 7, which 
relates to transparency. NYBOT raised the concern that the required 
level of transparency under Core Principle 7 should be appropriate to 
the method of order execution, explaining that some aspects of 
transparency are affected by whether trading is electronic or open-
outcry (e.g., bids and offers are not automatically captured in open-
outcry trading). CL 21-7 at 3, CL 21-27 at 2. However, technology is 
rapidly transforming futures markets and the core principles are 
intended to be understood broadly and applied flexibly in each 
particular market context. Accordingly, the Commission believes that 
the transparency requirement, as proposed, provides the necessary 
guidance for both open-outcry and electronic markets. The CBT suggested 
that the Commission revise the DTF Transparency Core Principle to 
mirror the proposed RFE Transparency Core Principle, commenting that 
DTFs appear to have the more onerous transparency burden. CL 21-36 at 
10. The material difference between the two core principles is that the 
DTF Transparency Core Principle requires disclosure of information to 
both market participants and the public. That requirement is 
particularly necessary at the DTF level in light of the framework's 
greater reliance on disclosure rather than merit-type regulation.
    Upon further consideration, however, the Commission believes that 
the Transparency Core Principle proposed to apply to DTFs should be 
applied at the RFE level, as well. The RFE Transparency Core Principle 
as proposed could result in permitting an inappropriate reduction in 
the information currently available to market participants. Therefore, 
under the final Transparency Core Principle, both RFEs and DTFs must 
provide information to market participants, on a fair, equitable and 
timely basis, regarding prices, bids and offers, as well as other 
pertinent information as appropriate to the market. This additional 
language is not intended to interfere with the current practice of 
futures exchanges of selling price and other market information through 
various information vendors.
    FIA suggested in its comment that the guidance regarding price and 
reporting time as it relates to block trading should be eliminated from 
Appendix A, Core Principle 8.\45\ CL 21-45 at 6-7. The

[[Page 77975]]

Commission understands the difficulties in implementing both the ``fair 
and reasonable price'' and ``transparency'' guidance. Nevertheless, 
current block trading provisions meet both such criteria, and the 
Commission believes it appropriate to retain them at this time. In this 
regard, the Commission notes that the reporting time provision is not 
the ``specific timing requirement'' referred to by FIA, but a provision 
for transparency of the block trade, directing that the trade be 
reported ``within a reasonable period of time.''(emphasis added). 65 FR 
at 39006. Without such transparency, the market's price discovery role 
would be harmed. The Commission may reconsider this guidance in the 
future if, in practice, these criteria prove to be unworkable.\46\
---------------------------------------------------------------------------

    \45\ Core Principle 8 requires an RFE to ``provide a 
competitive, open and efficient market.'' A primary goal of the 
Commission's framework is to ensure that prices discovered in 
futures and derivatives markets are accurate and reflective of 
current supply and demand conditions in the markets. Core Principle 
8 specifically includes the concept of ``efficient'' markets in 
order to make clear that trading systems that discover prices 
reflective of the forces of supply and demand and accurately reflect 
publicly held information may include certain practices, such as 
block trades, that permit large traders to enter the market with a 
single trade as opposed to having to execute numerous small trades. 
By including ``efficiency'' in addition to open and competitive 
markets, the Commission is promoting a flexible standard that 
protects the price discovery process of the markets while permitting 
a variety of trading practices.
    \46\ AIMR recommended that the Commission reword Core Principle 
8 as an RFE should not only provide for, but should also facilitate 
the appearance of, a competitive, open and efficient market (trading 
system). CL 21-64 at 4. The final version of Core Principle 8 does 
not include the additional language proposed by AIMR. The Commission 
believes that provision of an open and competitive market would also 
promote the appearance of such a market, without the need explicitly 
to so require.
---------------------------------------------------------------------------

    NYBOT suggested that requiring all RFEs on which intermediaries 
trade to have relevant rules under Core Principle 10 (Financial 
Standards) would impose a new, onerous burden, and might result in 
conflicting rules being implemented at different RFEs. NYBOT states 
that segregation of customer and proprietary funds and custody and 
investment of customer funds are currently governed by Commission rules 
implemented under the auspices of a designated self-regulatory 
organization. CL 21-7 at 2. The adoption of Core Principle 10 is not 
intended to impose a ``new, onerous burden'' on exchanges, to change 
current systems in place for the oversight of intermediaries nor to 
discourage the voluntary harmonization of rules by the exchanges 
through the operation of organizations such as the Joint Audit 
Committee.
    The Commission has modified Core Principle 15 in response to 
concerns that it inadvertently could impose a duty different in form or 
degree from the antitrust statutes and court decisions construing them. 
See, e.g., comment of the Board of Trade Clearing Corporation, CL 21-20 
at 13. Final Core Principle 15 requires that RFEs operate in a manner 
consistent with the public interest to be protected by the antitrust 
laws. The Commission itself remains subject to the requirements of 
section 15 of the Act, and will continue to take into consideration the 
public interest to be protected by the antitrust laws and to endeavor 
to take the least anticompetitive means of achieving the objectives of 
the Act in requiring or approving any bylaw, rule or regulation of any 
facility recognized under this framework.\47\
---------------------------------------------------------------------------

    \47\ Section 15 of the Act is also reserved under rule 38.6(a). 
Section 15 of the Act requires the Commission to take into 
consideration the public interest to be protected by the antitrust 
laws and to endeavor to take the least anticompetitive means of 
achieving the objectives of the Act in issuing any order, adopting 
any regulation, or approving any rule.
---------------------------------------------------------------------------

3. New Products and Rules and Amendments Thereof
    The Commission proposed that alteration by RFEs of the terms and 
conditions of futures contracts on the enumerated agricultural 
contracts be subject to prior review and approval by the Commission. 
The NYBOT, MGE, CBT, and CME opposed this provision, arguing that RFEs 
should be permitted to alter the terms or conditions of agricultural 
contract terms and conditions by self-certification, the same process 
permitted for contracts on all other commodities.\48\ In contrast to 
the exchange commenters, a number of commenters representing 
agricultural interests specifically supported retention of the proposed 
45-day prior approval requirement for changes to the terms and 
conditions of existing agricultural contracts.\49\ Concern was also 
raised by the National Cotton Council and the agricultural producers 
groups regarding the certification process for new contracts. CL 21-54 
at 1. They suggested that Commission prior approval under a 45-day 
review period be required for new agricultural contracts, as well as 
for alterations of existing contracts.\50\ CL 21-60 at 2.
---------------------------------------------------------------------------

    \48\ See CL 21-7 at 2, 4; CL 21-24 at 3-4; CL 21-36 at 11; CL 
21-51 at 5.
    \49\ See CL 21-52 at 1-2 (National Cattlemen's Beef 
Association); CL 21-54 at 1 (The National Cotton Council of America, 
``National Cotton Council''); CL 21-60 at 1-2 (agricultural 
producers groups).
    \50\ The comment letter stated that the agricultural 
organizations were concerned that exchanges could use the ability to 
offer a new contract with one day's notice to avoid prior review and 
approval for amendments and changes to agricultural contracts. It 
could also cause market fragmentation, since new trading facilities 
might test new contracts on the market without a thorough prior 
business analysis.
---------------------------------------------------------------------------

    The Commission concurs with the agricultural producers groups that, 
as ``agricultural futures markets serve as the price discovery 
mechanism for agricultural commodities, any changes to these markets 
can have a significant impact on farmers and ranchers.'' CL 21-60 at 2. 
In light of their reliance on the existing futures markets for price 
discovery, the Commission concurs that agricultural producers, 
processors and merchants have an interest in commenting on significant 
alterations to the terms of contracts prior to their implementation. 
Accordingly, the Commission is adopting the prior approval provision 
for amendments to contract terms and conditions, as proposed. However, 
the Commission does not agree that the same opportunity for comment is 
necessary for new contracts, upon which producers have not previously 
relied. The success of a new contract will rest on its attractiveness 
to market participants and the marketplace will determine whether the 
terms and conditions of a new contract offer a reliable price discovery 
mechanism. Accordingly, the Commission has decided to permit an RFE to 
list new agricultural contracts by self-certification, as proposed.
    Several commenters opposed Commission authority to stay the 
effectiveness of rules implemented by exchange certification during a 
Commission action to disapprove those rules. See, rule 1.41(c)(4) as 
amended.\51\ They argued that such stays could disrupt the 
marketplace.\52\ However, under the rule, the Commission would only be 
able to stay a proposed rule incident to disapproval proceedings and 
the stay determination would not be delegable to Commission staff. The 
Commission anticipates that it will stay implementation of an RFE rule 
only in limited and egregious situations, where, for example, one or 
more core principles

[[Page 77976]]

were being violated, but that the Commission's emergency authority 
would not apply.\53\ In such serious situations, the Commission 
believes that the unavailability of a stay could cause significantly 
more disruptive effects than imposition of a stay in appropriate 
situations. In those rare instances, the absence of a stay could cause 
significantly greater harm to the market than its use. The Commission 
has determined that this authority is central to its ability to oversee 
the operation of RFEs consistent with its responsibilities under the 
Act.
---------------------------------------------------------------------------

    \51\ Amendments to Commission rule 1.41 were proposed as part of 
the new regulatory framework. These amendments, appearing in the 
final version in this Federal Register release, allow an RFE to make 
modifications to its rules (other than terms or conditions of 
contracts on the commodities enumerated in section 1a(3) of the Act) 
by certification to the Commission that the new or amended rule does 
not violate the Act or the Commission's regulations. Upon the 
adoption of the attached amendments to Commission rule 1.41, the 
Commission's earlier certification proposal, published as a proposed 
rule on November 26, 1999 (64 FR 55428), will be unnecessary. 
Therefore, the Commission is withdrawing proposed rule 1.41(z) at 
this time.
    \52\ See, e.g., CL 21-24 at 4 (assertions by MGE that rules 
should not be stayed absent sufficient evidence that market 
participants will suffer material harm). See also CL 21-27 at 3 
(conclusions by NYBOT that staying a rule pending a proceeding to 
disapprove or amend it could take months, and the uncertainty thus 
created would deter traders); CL 21-36 at 11-12 (statement by CBT 
that it could be detrimental for the Commission to retain authority 
to impose a stay during a proceeding to disapprove, alter, or amend 
an RFE rule as stays could disrupt the marketplace); CL 21-51 at 5 
(observation by CME that the Commission should not retain authority 
to stay operation of an exchange rule as, in an emergency situation, 
the Commission could act under section 8a(9) of the Act, without 
advance notice or a hearing).
    \53\ For example, a rule that altered a trade matching algorithm 
to give one class of participants a significant and improper ongoing 
advantage over another or that had a continuing significant adverse 
affect on customers could be the subject of a stay. In contrast, 
such a rule might not be a proper basis for a market emergency, as 
it might not result in a situation where action was necessary to 
ensure that the market accurately reflected the forces of supply and 
demand. The term ``emergency'' as defined in the Act means, in 
addition to threatened or actual market manipulations and corners, 
any act of the United States or a foreign government affecting a 
commodity or any other major market disturbance which prevents the 
market from accurately reflecting the forces of supply and demand 
for such commodity. See section 8a(9) of the Act.
---------------------------------------------------------------------------

4. Bankruptcy Status
    Several commenters requested that the Commission clarify that 
transactions on both DTFs and RFEs continue to enjoy the same 
Bankruptcy Code status as transactions on a designated contract 
market.\54\ As noted above, recognized RFEs and DTFs are both ``boards 
of trade'' within the meaning of the Act, and pursuant to these 
regulations, are deemed to be subject to all provisions of the Act and 
Commission rules applicable to a ``designated contract market.'' See, 
e.g., rule 38.1(b). Moreover, final part 38 explicitly reserves the 
applicability of part 190 to part 38 transactions. Accordingly, as 
explained in footnote 37 above, as a board of trade within the meaning 
of that term under the Act (and as a contract market by operation of 
part 38), transactions on RFEs (and DTFs) would be covered by the 
provisions of Subchapter IV of Chapter 7, Title 11 of the Bankruptcy 
Code, which apply to futures contracts (or options) traded on or 
subject to the rules of a board of trade or contract market.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., CL 21-65 at 22.
    \55\ Similarly, the Commission believes that transactions on 
recognized DTFs and RFEs should be subject to the same tax treatment 
as transactions on formally designated contract markets.
---------------------------------------------------------------------------

III. Section 4(c) Findings

    These rule amendments are being promulgated under section 4(c) of 
the Act, which grants the Commission broad exemptive authority. Section 
4(c) of the Act provides that, in order to promote responsible economic 
or financial innovation and fair competition, the Commission may by 
rule, regulation or order exempt any class of agreements, contracts or 
transactions, either unconditionally or on stated terms or conditions 
from any of the requirements of any provision of the Act. For any 
exemption granted pursuant to 4(c), the Commission must find that the 
exemption would be consistent with the public interest. For any 
exemption granted pursuant to 4(c) from the requirements of section 
4(a), the Commission must further find that the section 4(a) 
requirement(s) should not be applied to the agreement, contract or 
transaction to be exempted, that the exemption would be consistent with 
the public interest and the purposes of the Act, that the agreement, 
contract, or transaction to be exempted would be entered into solely 
between appropriate persons and that the exemption will not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory duties 
under the Act.\56\
---------------------------------------------------------------------------

    \56\ See 7 U.S.C. 6(c).
---------------------------------------------------------------------------

    The Commission specifically requested the public to comment on 
these issues. The Commission finds and the commenters overwhelmingly 
concurred that the proposed regulatory framework would be in the public 
interest. As explained above, these proposed rules establish a new 
regulatory framework. The proposed framework is intended to promote 
innovation and competition in futures trading and to permit the markets 
the flexibility to respond to technological and structural changes. 
Consequently, the Commission finds that section 4(a) requirements 
should not be applied to agreements, contracts or transactions executed 
pursuant to parts 36, 37 or 38 except as provided for in each part, 
respectively. Moreover, the proposed framework establishes three 
regulatory tiers with regulations tailored to the nature of the 
commodities traded and the nature of the market participant. As the 
Commission explained above, access to each of the tiers is dependent 
upon the appropriateness of the participant.
    Accordingly, and for the reasons detailed above, the Commission 
finds that each class of participant eligible to participate in a 
specific tier is appropriate for that exemptive relief. Finally, the 
exemptions for parts 37 and 38 are upon stated terms. As detailed 
above, these terms include application of regulatory and self-
regulatory requirements tailored to the nature of the market. In light 
of these conditions, this exemptive relief would have no adverse effect 
on any of the regulatory or self-regulatory responsibilities imposed by 
the Act and the exemptions are consistent with the purposes of the Act.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq. (1994 & 
Supp. II 1996), requires federal agencies, in promulgating rules, to 
consider the impact of those rules on small entities. The rules adopted 
herein would affect contract markets, FCMs, CTAs, Floor Brokers and 
Floor Traders. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on small entities in accordance with 
the RFA.\57\ In its previous determinations, the Commission has 
concluded that contract markets and registered FCMs are not small 
entities for the purpose of the RFA.\58\ With respect to CTAs, Floor 
Brokers and Floor Traders, the Commission has stated that it is 
appropriate to evaluate within the context of a particular rule 
proposal whether some or all of the affected entities should be 
considered small entities and, if so, to analyze the economic impact on 
them of any rule. In this regard, the rules being adopted herein would 
allow qualifying CTAs, floor brokers and floor traders to access 
trading in less regulated futures markets than is currently the case; 
consequently, these rules should not have any, or result in only a de 
minimus, increase in the regulatory requirements that apply to CTAs, 
Floor Brokers and Floor Traders. Accordingly, the Commission does not 
expect the rules, as adopted herein, to have a significant economic 
impact on a substantial number of small entities. Furthermore, no 
comments were received from the public on the RFA and its relation to 
the proposed rules. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
action taken herein will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \57\ 47 FR 18618-21 (Apr. 30, 1982).
    \58\ 47 FR 18618, 18619 (discussing contract markets); 47 FR 
18619-20 (discussing FCMs and CPOs).
---------------------------------------------------------------------------

B. Paperwork Reduction Act of 1995

    These parts 15, 37, 38 contain information collection requirements. 
As required by the Paperwork Reduction Act of 1995 (Pub. L. 104-13 (May 
13,

[[Page 77977]]

1996)), the Commission has submitted a copy of these proposed parts to 
the Office of Management and Budget (OMB) for its review (44 U.S.C. 
3504(h)). No comments were received in response to the Commission's 
invitation in the NPRM to comment on any potential paperwork burden 
associated with these regulations.

List of Subjects

17 CFR Part 1

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

17 CFR Part 5

    Authority delegations (Government agencies), Commodity futures, 
Contract markets, Designation application, Reporting and recordkeeping 
requirements.

17 CFR Part 15

    Commodity futures, Contract markets, Reporting and recordkeeping 
requirements.

17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 37

    Authority delegations (Government agencies), Commodity futures, 
Commodity Futures Trading Commission.

17 CFR Part 38

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 100

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures, 
Reporting and recordkeeping requirements.

17 CFR Part 180

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

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

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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


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


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


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

* * * * *
    (c) Each recognized futures exchange shall keep a record in 
permanent form which shall show the true name; address; and principal 
occupation or business of any foreign trader executing transactions on 
the facility or exchange, as well as the name of any person 
guaranteeing such transactions or exercising any control over the 
trading of such foreign trader.
    (d) Paragraph (c) of this section shall not apply to a recognized 
futures exchange on which transactions in futures or option contracts 
of foreign traders are executed through and the resulting transactions 
are maintained in accounts carried by a registered futures commission 
merchant or introducing broker subject to the provisions of paragraph 
(a) of this section.
* * * * *
    3. Section 1.41 is amended as follows:

    a. By revising paragraph (a)(1),
    b. By removing and reserving paragraph (b), and removing paragarphs 
(i) through (t),
    c. By redesignating paragraph (e) as paragraph (i) and revising it,
    d. By revising paragraphs (c) and (d) and adding (e), and
    e. By amending paragraphs (f) and (g) by adding the words ``or 
recognized futures exchange'' after the words ``contract market'' each 
time they appear, to read as follows:


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

    (a) * * *
    (1) The term rule of a contract market means any constitutional 
provision, article of incorporation, bylaw, rule, regulation, 
resolution, interpretation, stated policy, term and condition, trading 
protocol, agreement or instrument corresponding thereto, in whatever 
form adopted, and any amendment or addition thereto or repeal thereof, 
made or issued by a contract market, or by the governing board thereof 
or any committee thereof.
* * * * *
    (b) [Reserved]
    (c) Exemption from the rule review procedure requirements of 
section 5a(a)(12)(A) of the Act and related regulations. 
Notwithstanding the rule approval and filing requirements of section 
5a(a)(12) of the Act, designated contract markets, recognized futures 
exchanges and recognized clearing organizations may place a rule into 
effect without prior Commission review or approval if:
    (1) The rule is not a term or condition of a contract for future 
delivery of an agricultural commodity listed in section 1a(3) of the 
Act;
    (2) The entity has filed a submission for the rule, and the 
Commission has received the submission at its Washington, D.C. 
headquarters and at the regional office having jurisdiction over the 
entity by close of business on the business day preceding 
implementation of the rule; and
    (3) The rule submission includes:
    (i) The label, ``Submission of rule by self-certification;'
    (ii) The text of the rule (in the case of a rule amendment, 
brackets must indicate words deleted and underscoring must indicate 
words added);
    (iii) A brief explanation of the rule including any substantive 
opposing views not incorporated into the rule; and
    (iv) A certification by the eligible entity that the rule does not 
violate any provision of the Act and regulations thereunder.
    (4) The Commission retains the authority to stay the effectiveness 
of a rule implemented pursuant to paragraph (c)(1) of this section 
during the pendency of Commission proceedings to disapprove, alter or 
amend the rule. The decision to stay the effectiveness of a rule in 
such circumstances may not be delegable to any employee of the 
Commission.
    (d)(1) Voluntary submission of rules for fast-track approval. A 
designated contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization may submit any 
rule or proposed rule (which may be terms or conditions of trading or 
trading protocols), except those submitted to the Commission under 
paragraph (f) of this section, for approval by the Commission pursuant 
to section 5a(a)(12)(A) of the Act, whether or not so required by 
section 5a(a)(12) of the Act under the following procedures:

[[Page 77978]]

    (i) One copy of each rule submitted under this section shall be 
furnished in hard copy or electronically in a format specified by the 
Secretary of the Commission to the Commission at its Washington, DC 
headquarters. If a hard copy is furnished for submissions under 
appendix A to part 5 of this chapter, two additional hard copies shall 
be furnished to the Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Each 
submission under this paragraph (d)(1) shall be in the following order:
    (A) Label the submission as ``Submission for Commission rule 
approval'';
    (B) Set forth the text of the rule or proposed rule (in the case of 
a rule amendment, brackets must indicate words deleted and underscoring 
must indicate words added);
    (C) Describe the proposed effective date of a proposed rule and any 
action taken or anticipated to be taken to adopt the proposed rule by 
the contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization or by its 
governing board or by any committee thereof, and cite the rules of the 
entity that authorize the adoption of the proposed rule;
    (D) Explain the operation, purpose, and effect of the proposed 
rule, including, as applicable, a description of the anticipated 
benefits to market participants or others, any potential 
anticompetitive effects on market participants or others, how the rule 
fits into the contract market, recognized futures exchange, derivatives 
transaction facility or recognized clearing organization's framework of 
self-regulation, and any other information which may be beneficial to 
the Commission in analyzing the proposed rule. If a proposed rule 
affects, directly or indirectly, the application of any other rule of 
the submitting entity, set forth the pertinent text of any such rule 
and describe the anticipated effect;
    (E) Note and briefly describe any substantive opposing views 
expressed with respect to the proposed rule which were not incorporated 
into the proposed rule prior to its submission to the Commission; and
    (F) Identify any Commission regulation that the Commission may need 
to amend, or sections of the Act or Commission regulations that the 
Commission may need to interpret in order to approve or allow into 
effect the proposed rule. To the extent that such an amendment or 
interpretation is necessary to accommodate a proposed rule, the 
submission should include a reasoned analysis supporting the change.
    (ii) All rules submitted for Commission approval under paragraph 
(d)(1)(i) of this section shall be deemed approved by the Commission 
under section 5a(a)(12)(A) of the Act, forty-five days after receipt by 
the Commission, unless notified otherwise within that period, if:
    (A) The submission complies with the requirements of paragraphs 
(d)(1)(i) (A) through (F) of this section or, for dormant contracts, 
the requirements of Sec. 5.3 of this chapter;
    (B) The submitting entity does not amend the proposed rule or 
supplement the submission, except as requested by the Commission, 
during the pendency of the review period; and
    (C) The submitting entity has not instructed the Commission in 
writing during the review period to review the proposed rule under the 
180 day review period under section 5a(a)(12)(A) of the Act.
    (iii) The Commission, within forty-five days after receipt of a 
submission filed pursuant to paragraph (d)(1)(i) of this section, may 
notify the entity making the submission that the review period has been 
extended for a period of thirty days where the proposed rule raises 
novel or complex issues which require additional time for review or is 
of major economic significance. This notification shall briefly 
describe the nature of the specific issues for which additional time 
for review is required. Upon such notification, the period for review 
shall be extended for a period of thirty days, and, unless the entity 
is notified otherwise during that period, the rule shall be deemed 
approved at the end of the enlarged review time.
    (iv) During the forty-five day period for fast-track review, or the 
thirty-day extension when the period has been enlarged under paragraph 
(d)(1)(iii) of this section, the Commission shall notify the submitting 
entity that the Commission is terminating fast-track review procedures 
and will review the proposed rule under the 180 day review period of 
section 5a(a)(12)(A) of the Act, if it appears that the proposed rule 
may violate a specific provision of the Act, regulations, or form or 
content requirements of this section. This termination notification 
will briefly specify the nature of the issues raised and the specific 
provision of the Act, regulations, or form or content requirements of 
this section that the proposed rule appears to violate. Within fifteen 
days of receipt of this termination notification, the designated 
contract market, recognized futures exchange, derivatives transaction 
facility or recognized clearing organization may:
    (A) Withdraw the rule;
    (B) Request the Commission to review the rule pursuant to the one 
hundred and eighty day review procedures set forth in section 
5a(a)(12)(A) of the Act; or
    (C) Request the Commission to render a decision whether to approve 
the proposed rule or to institute a proceeding to disapprove the 
proposed rule under the procedures specified in section 5a(a)(12)(A) of 
the Act by notifying the Commission that the submitting entity views 
its submission as complete and final as submitted.
    (2) Voluntary submission of rules for expedited approval. 
Notwithstanding the provisions of paragraph (d)(1) of this section, 
changes to terms and conditions of a contract that are consistent with 
the Act and Commission regulations and with standards approved or 
established by the Commission in a written notification to the market 
or clearing organization of the applicability of this paragraph (d)(2) 
shall be deemed approved by the Commission at such time and under such 
conditions as the Commission shall specify, provided, however, that the 
Commission may at any time alter or revoke the applicability of such a 
notice to any particular contract.
    (e)(1) Notification of rule amendments. Notwithstanding the rule 
approval and filing requirements of section 5a(a)(12) of the Act and of 
paragraphs (c) and (d) of this section, designated contract markets, 
recognized futures exchanges and recognized clearing organizations may 
place the following rules into effect without prior notice to the 
Commission if the following conditions are met:
    (i) The designated contract market, recognized futures exchange, or 
recognized clearing organization provides to the Commission at least 
weekly a summary notice of all rule changes made effective pursuant to 
this paragraph during the preceding week. Such notice must be labeled 
``Weekly Notification of Rule Changes'' and need not be filed for weeks 
during which no such actions have been taken. One copy of each such 
submission shall be furnished in hard copy or electronically in a 
format specified by the Secretary of the Commission to the Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581; and
    (ii) The rule change governs:
    (A) Nonmaterial revisions. Corrections of typographical errors, 
renumbering, periodic routine updates to identifying information about

[[Page 77979]]

approved entities and other such nonsubstantive revisions of contract 
terms and conditions that have no effect on the economic 
characteristics of the contract;
    (B) Delivery standards set by third parties. Changes to grades or 
standards of commodities deliverable on futures contracts that are 
established by an independent third party and that are incorporated by 
reference as terms of the contract, provided that the grade or standard 
is not established, selected or calculated solely for use in connection 
with futures or option trading;
    (C) Index contracts. Routine changes in the composition, 
computation, or method of selection of component entities of an index 
other than a stock index referenced and defined in the contract's 
terms, made by an independent third party whose business relates to the 
collection or dissemination of price information and that was not 
formed solely for the purpose of compiling an index for use in 
connection with a futures or option contract;
    (D) Transfer of membership or ownership. Procedures and forms for 
the purchase, sale or transfer of membership or ownership, but not 
including qualifications for membership or ownership, any right or 
obligation of membership or ownership or dues or assessments; or
    (E) Administrative procedures. The organization and administrative 
procedures of a contract market's governing bodies such as a Board of 
Directors, Officers and Committees, but not voting requirements and 
procedures or requirements or procedures relating to conflicts of 
interest.
    (2) Notification of rule amendments not required. Notwithstanding 
the rule approval and filing requirements of section 5a(a)(12) of the 
Act and of paragraphs (c) and (d) of this section, designated contract 
markets, recognized futures exchanges and recognized clearing 
organizations may place into effect without notice to the Commission, 
rules governing:
    (i) Administration. The routine, daily administration, direction 
and control of employees, requirements relating to gratuity and similar 
funds, but not guaranty, reserves, or similar funds; declaration of 
holidays, and changes to facilities housing the market, trading floor 
or trading area; or
    (ii) Standards of decorum. Standards of decorum or attire or 
similar provisions relating to admission to the floor, badges, 
visitors, but not the establishment of penalties for violations of such 
rules.
* * * * *
    (i) Membership lists. Upon request of the Commission each 
designated contract market, recognized futures exchange or recognized 
clearing organization shall promptly furnish to the Commission a 
current list of the facility's or entity's members or owners subject to 
fitness requirements.


Secs. 1.43, 1.45 and 1.50  [Removed]

    4. In part 1, Secs. 1.43, 1.45, and 1.50 are proposed to be removed 
and reserved.

    5. Part 5 is amended as follows:

PART 5--PROCEDURES FOR LISTING NEW PRODUCTS

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


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

    b. The heading of part 5 is revised as set forth above and 
Secs. 5.1 through 5.3 are revised to read as follows:


Sec. 5.1  Listing contracts for trading by exchange certification.

    (a) Notwithstanding the provisions of section 4(a)(1) of the Act or 
Sec. 33.2 of this chapter, a board of trade that has been recognized by 
the Commission as a recognized futures exchange under part 38 of this 
chapter may list for trading contracts of sale of a commodity for 
future delivery or commodity option contracts, if the recognized 
futures exchange:
    (1) Lists for trading at least one contract which is not dormant 
within the meaning of Sec. 5.3;
    (2) In connection with the trading of the contract complies with 
all requirements of the Act and Commission regulations thereunder 
applicable to the recognized futures exchange under part 38 of this 
chapter;
    (3) Files with the Commission at its Washington, D.C., headquarters 
either in electronic or hard-copy form a copy of the contract's initial 
terms and conditions and a certification by the recognized futures 
exchange that the contract's initial terms and conditions do not 
violate any requirement of part 38 of this chapter, any applicable 
provision of the Act or of the rules thereunder, and the filing is 
received no later than the close of business of the business day 
preceding the contract's initial listing; and
    (4) Identifies the contract in its rules as listed for trading 
pursuant to exchange certification.
    (b) The provisions of this section shall not apply to:
    (1) A contract subject to the provisions of section 2(a)(1)(B) of 
the Act;
    (2) A contract to be listed initially for trading that is the same 
or substantially the same as one for which an application for 
Commission review and approval pursuant to Sec. 5.2 was filed by 
another board of trade while the application is pending before the 
Commission; or
    (3) A contract to be listed initially for trading that is the same 
or substantially the same as one which is the subject of a pending 
Commission disapproval proceeding under section 6 of the Act, to 
disapprove a term or condition under section 5a(a)(12) of the Act, to 
alter or supplement a term or condition under section 8a(7) of the Act, 
to amend terms or conditions under section 5a(a)(10) of the Act, to 
declare an emergency under section 8a(9) of the Act, or to any other 
proceeding the effect of which is to disapprove, alter, supplement, or 
require a contract market or a recognized futures exchange to adopt a 
specific term or condition, trading rule or procedure, or to take or 
refrain from taking a specific action.


Sec. 5.2  Voluntary submission of new products for Commission review 
and approval.

    (a) Cash-settled contracts. A new contract to be listed for trading 
by a recognized futures exchange under part 38 of this chapter or a 
recognized derivatives transaction facility under part 37 of this 
chapter shall be deemed approved by the Commission ten business days 
after receipt by the Commission of the application for contract 
approval, unless notified otherwise within that period, if:
    (1) The submitting entity labels the submission as being submitted 
pursuant to Commission rule 5.2--Fast Track Ten-Day Review;
    (2)(i) The application for approval is for a futures contract 
providing for cash settlement or for delivery of a foreign currency for 
which there is no legal impediment to delivery and for which there 
exists a liquid cash market; or
    (ii) For an option contract that is itself cash-settled, is for 
delivery of a foreign currency that meets the requirements of paragraph 
(a)(2)(i) of this section or is to be exercised into a futures contract 
which has already been designated as a contract market or approved 
under this section;
    (3) The application for approval is for a commodity other than 
those enumerated in section 1a(3) of the Act or one that is subject to 
the procedures of section 2(a)(1)(B) of the Act;
    (4) The submitting entity trades at least one contract which is not 
dormant within the meaning of this part;

[[Page 77980]]

    (5) The submission complies with the requirements of Appendix A of 
this part--Guideline No. 1;
    (6) The submitting entity does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or other such nonsubstantive 
revisions, during that period; and
    (7) The submitting entity has not instructed the Commission in 
writing during the review period to review the application for 
designation under the usual procedures under section 6 of the Act.
    (b) Contracts for physical delivery. A new contract to be listed 
for trading by a recognized futures exchange under part 38 of this 
chapter or by a derivatives transaction facility under part 37 of this 
chapter shall be deemed approved by the Commission forty-five days 
after receipt by the Commission of the application for contract 
approval, unless notified otherwise within that period, if:
    (1) The submitting entity labels the submission as being submitted 
pursuant to Commission rule 5.2--Fast Track Forty-Five Day Review;
    (2) The application for contract approval is for a commodity other 
than those subject to the procedures of section 2(a)(1)(B) of the Act;
    (3) The submitting entity lists for trading at least one contract 
which is not dormant within the meaning of this part;
    (4) The submission complies with the requirements of Appendix A to 
this part--Guideline No. 1;
    (5) The submitting entity does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or other such nonsubstantive 
revisions, during that period; and
    (6) The submitting entity has not instructed the Commission in 
writing during the forty-five day review period to review the 
application for designation under the usual procedures under section 6 
of the Act.
    (c) Notification of extension of time. The Commission, within ten 
days after receipt of a submission filed under paragraph (a) of this 
section, or forty-five days after receipt of a submission filed under 
paragraph (b) of this section, may notify the submitting entity that 
the review period has been extended for a period of thirty days where 
the application for approval raises novel or complex issues which 
require additional time for review. This notification will briefly 
specify the nature of the specific issues for which additional time for 
review is required. Upon such notification, the period for fast-track 
review of paragraphs (a) and (b) of this section shall be extended for 
a period of thirty days.
    (d) Notification of termination of fast-track procedures. During 
the fast-track review period provided under paragraphs (a) or (b) of 
this section, or of the thirty-day extension when the period has been 
enlarged under paragraph (c) of this section, the Commission shall 
notify the submitting entity that the Commission is terminating fast-
track review procedures and will review the proposed contract under the 
usual procedures of section 6 of the Act, if it appears that the 
proposed contract may violate a specific provision of the Act, 
regulations, or form or content requirements of Appendix A to this 
part. This termination notification will briefly specify the nature of 
the issues raised and the specific provision of the Act, regulation, or 
form or content requirement of Appendix A to this part that the 
proposed contract appears to violate. Within ten days of receipt of 
this termination notification, the submitting entity may request that 
the Commission render a decision whether to approve the designation or 
to institute a proceeding to disapprove the proposed application for 
designation under the procedures specified in section 6 of the Act by 
notifying the Commission that the exchange views its application as 
complete and final as submitted.
    (e) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Economic 
Analysis or to the Director's delegatee, with the concurrence of the 
General Counsel or the General Counsel's delegatee, authority to 
request under paragraphs (a)(6) and (b)(5) of this section that the 
recognized futures exchange or derivatives transaction facility amend 
the proposed contract or supplement the application, to notify a 
submitting entity under paragraph (c) of this section that the time for 
review of a proposed contract term submitted for review under 
paragraphs (a) or (b) of this section has been extended, and to notify 
the submitting entity under paragraph (d) of this section that the 
fast-track procedures of this section are being terminated.
    (2) The Director of the Division of Economic Analysis may submit to 
the Commission for its consideration any matter which has been 
delegated in paragraph (e)(1) of this section.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (e)(1) 
of this section.


Sec. 5.3  Dormant contracts.

    (a) Definitions. For purposes of this section:
    (1) The term dormant contract means any commodity futures or option 
contract:
    (i) In which no trading has occurred in any future or option 
expiration for a period of six complete calendar months; or
    (ii) Which has been certified by a recognized futures exchange or a 
recognized derivatives transaction facility to the Commission to be a 
dormant contract market.
    (2) [Reserved]
    (b) Listing of additional futures trading months or option 
expiration by certification. A contract that has been listed for 
trading initially under the procedures of either Secs. 5.1 or 5.2 that 
has become dormant may be relisted for trading additional months 
pursuant to the procedures of Sec. 1.41(c) of this chapter by filing 
the bylaw, rule, regulation or resolution to list additional trading 
months or expirations with the Commission as specified in that section. 
Upon relisting, the contract must be identified by the recognized 
futures exchange as listed for trading by exchange certification.
    (c) Approval for listing of additional futures trading months or 
option expirations. A contract that has been initially approved by the 
Commission under Sec. 5.2 and that has become dormant may be relisted 
for trading additional months pursuant to the procedures of 
Sec. 1.41(d) of this chapter by filing the bylaw, rule, regulation or 
resolution to list additional trading months or expirations with the 
Commission as specified in that section.
    (1) Each such submission shall clearly designate the submission as 
filed pursuant to Commission Rule 5.3; and
    (2) Include the information required to be submitted pursuant to 
Sec. 5.3 or an economic justification for the listing of additional 
months or expirations in the dormant contract market, which shall 
include an explanation of those economic conditions which have changed 
subsequent to the time the contract became dormant and an explanation 
of how any new terms and conditions which are now being proposed, or 
which have been proposed for an option market's underlying futures 
contract market, would make it reasonable to expect that the futures or

[[Page 77981]]

option contract will be used on more than an occasional basis for 
hedging or price basing.
    (d) Exemptions. No contract shall be considered dormant until the 
end of sixty (60) complete calendar months:
    (1) Following initial listing; or
    (2) Following Commission approval of the contract market bylaw, 
rule, regulation, or resolution to relist trading months submitted 
pursuant to paragraph (c) of this section.

Appendices C and D  [Removed and Reserved]

    c. Appendices C and D are removed and reserved.

PART 15--REPORTS--GENERAL PROVISIONS

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


    Authority: 7 U.S.C. 2, 4, 5, 6(c), 6a, 6c(a)-(d), 6f, 6g, 6i, 
6k, 6m, 6n, 7, 9, 12a, 19 and 21.


    7. Section 15.05 is amended by revising the heading and by adding 
paragraphs (e) through (h) to read as follows:


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

* * * * *
    (e) Any derivatives transaction facility eligible under 
Sec. 37.2(a)(2) of this chapter or recognized futures exchange that 
permits a foreign broker to intermediate transactions in futures or 
option contracts on the facility or exchange, or permits a foreign 
trader to effect transactions in futures or option contracts on the 
facility or exchange shall be deemed to be the agent of the foreign 
broker and any of its customers for whom the transactions were 
executed, or the foreign trader for purposes of accepting delivery and 
service of any communication issued by or on behalf of the Commission 
to the foreign broker, any of its customers or the foreign trader with 
respect to any futures or option contracts executed by the foreign 
broker or the foreign trader on the derivatives transaction facility 
eligible under Sec. 37.2(a)(2) of this chapter or recognized futures 
exchange. Service or delivery of any communication issued by or on 
behalf of the Commission to a derivatives transaction facility eligible 
under Sec. 37.2(a)(2) of this chapter or recognized futures exchange 
pursuant to such agency shall constitute valid and effective service 
upon the foreign broker, any of its customers, or the foreign trader. A 
derivatives transaction facility eligible under Sec. 37.2(a)(2) of this 
chapter or recognized futures exchange which has been served with, or 
to which there has been delivered, a communication issued by or on 
behalf of the Commission to a foreign broker, any of its customers, or 
a foreign trader shall transmit the communication promptly and in a 
manner which is reasonable under the circumstances, or in a manner 
specified by the Commission in the communication, to the foreign 
broker, any of its customers or the foreign trader.
    (f) It shall be unlawful for any derivatives transaction facility 
eligible under Sec. 37.2(a)(2) of this chapter or recognized futures 
exchange to permit a foreign broker, any of its customers or a foreign 
trader to effect transactions in futures or option contracts unless the 
derivatives transaction facility eligible under Sec. 37.2(a)(2) of this 
chapter or recognized futures exchange prior thereto informs the 
foreign broker, any of its customers or the foreign trader in any 
reasonable manner the derivatives transaction facility eligible under 
Sec. 37.2(a)(2) of this chapter or recognized futures exchange deems to 
be appropriate, of the requirements of this section.
    (g) The requirements of paragraphs (e) and (f) of this section 
shall not apply to any transactions in futures or option contracts if 
the foreign broker, any of its customers or the foreign trader has duly 
executed and maintains in effect a written agency agreement in 
compliance with this paragraph with a person domiciled in the United 
States and has provided a copy of the agreement to the derivatives 
transaction facility eligible under Sec. 37.2(a)(2) of this chapter or 
recognized futures exchange prior to effecting any transactions in 
futures or option contracts on the derivatives transaction facility 
eligible under Sec. 37.2(a)(2) of this chapter or recognized futures 
exchange. This agreement must authorize the person domiciled in the 
United States to serve as the agent of the foreign broker, any of its 
customers or the foreign trader for purposes of accepting delivery and 
service of all communications issued by or on behalf of the Commission 
to the foreign broker, any of its customers or the foreign trader and 
must provide an address in the United States where the agent will 
accept delivery and service of communications from the Commission. This 
agreement must be filed with the Commission by the derivatives 
transaction facility eligible under Sec. 37.2(a)(2) of this chapter or 
recognized futures exchange prior to permitting the foreign broker, any 
of its customers or the foreign trader to effect any transactions in 
futures or option contracts. Unless otherwise specified by the 
Commission, the agreements required to be filed with the Commission 
shall be filed with the Secretary of the Commission at Three Lafayette 
Centre, 1155 21st Street, N.W., Washington, D.C. 20581. A foreign 
broker, any of its customers or a foreign trader shall notify the 
Commission immediately if the written agency agreement is terminated, 
revoked, or is otherwise no longer in effect. If the derivatives 
transaction facility eligible under Sec. 37.2(a)(2) of this chapter or 
recognized futures exchange knows or should know that the agreement has 
expired, been terminated, or is no longer in effect, the derivatives 
transaction facility eligible under Sec. 37.2(a)(2) of this chapter or 
recognized futures exchange shall notify the Secretary of the 
Commission immediately. If the written agency agreement expires, 
terminates, or is not in effect, the derivatives transaction facility 
eligible under Sec. 37.2(a)(2) of this chapter or recognized futures 
exchange and the foreign broker, any of its customers or the foreign 
trader are subject to the provisions of paragraphs (e) and (f) of this 
section.
    (h) The provisions of paragraphs (e), (f) and (g) of this section 
shall not apply to a derivatives transaction facility or recognized 
futures exchange on which all transactions in futures or option 
contracts of foreign brokers, their customers or foreign traders are 
executed through and the resulting transactions are maintained in 
accounts carried by a registered futures commission merchant or 
introducing broker subject to the provisions of Rules 15.05(a), (b), 
(c) and (d).
* * * * *

    8. Part 36 is revised to read as follows:

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

Sec.
36.1   Definitions. As used in this part:
36.2   Exemption.
36.3   Enforceability.

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


Sec. 36.1  Definitions.

    As used in this part:
    (a) Eligible participant means and shall be limited to the parties 
or entities listed in Sec. 35.1(b)(1) through (11) of this chapter; and
    (b) Multilateral transaction execution facility means an electronic 
or non-electronic market or similar facility through which persons, for 
their own accounts or for the accounts of others,

[[Page 77982]]

enter into, agree to enter into or execute binding contracts, 
agreements or transactions by accepting bids or offers made by one 
person that are open to multiple persons who conduct business through 
such market or similar facility, but does not include:
    (1) A facility whose participants individually negotiate (or have 
individually negotiated) with counterparties the material terms 
applicable to contracts, agreements, or transactions between them, 
including contracts, agreements, or transactions conducted on the 
facility, and which are subject to subsequent acceptance by the 
counterparties;
    (2) Any electronic communications system on which the execution of 
a contract, agreement or transaction results from the content of 
bilateral communications exchanged between the parties and not by the 
interaction of multiple orders within a predetermined, non-
discretionary automated trade matching algorithm; or
    (3) Any facility on which only a single firm may participate as 
market maker and participants other than the market maker may not 
accept bids or offers of other non-market maker participants.


Sec. 36.2  Exemption.

    A contract, agreement or transaction traded on a multilateral 
transaction execution facility as defined in Sec. 36.1(b) is exempt 
from all provisions of the Act and any person or class of persons 
offering, entering into, rendering advice, or rendering other services 
with respect to such contract, agreement or transaction is exempt for 
such activity from all provisions of the Act (except in each case the 
provisions enumerated in Sec. 36.3(a)) provided the following terms and 
conditions are met:
    (a) Only eligible participants, either trading for their own 
account or through another eligible participant, have trading access to 
the multilateral transaction execution facility;
    (b) The contract, agreement or transaction listed on or traded 
through the multilateral transaction execution facility is based upon:
    (1) A debt obligation other than an exempt security under section 3 
of the Securities Act of 1933 or section 3a(12) of the Securities 
Exchange Act of 1934;
    (2) A foreign currency;
    (3) An interest rate;
    (4) A measure of credit risk or quality, including instruments 
known as ``total return swaps,'' ``credit swaps'' or ``credit spread 
swaps'';
    (5) An occurrence, extent of an occurrence or contingency beyond 
the control of the counterparties to the transaction; or
    (6) An economic or commercial index or measure which is beyond the 
control of the counterparties to the transaction, and is not based upon 
prices derived from trading in a directly corresponding underlying cash 
market and for which the related contract, agreement or transaction is 
cash settled;
    (c) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearing 
organization that is authorized under Sec. 39.2 of this chapter: 
Provided, however, that nothing in this paragraph precludes:
    (1) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment or 
delivery obligations resulting from such contracts, agreements, or 
transactions; or
    (2) Arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments or 
deliveries resulting from such contracts, agreements or transactions;
    (d) The multilateral transaction execution facility on or through 
which such contracts, agreements or transactions are traded and the 
parties to, participants in, or intermediaries in such a facility that 
is exempt under this section are prohibited from claiming that the 
facility is regulated, recognized or approved by the Commission; and
    (e) The facility:
    (1) If an electronic system that also lists for trading products 
pursuant to parts 37 or 38 of this chapter, must provide notice to 
participants of the agreements, contracts or transactions traded on the 
facility pursuant to this part 36 and that such transactions are not 
subject to regulation under the Act; or
    (2) If providing a physical trading environment, must provide that 
products trading pursuant to parts 37 or 38 of this chapter be traded 
in a location separate from, but which may adjoin, the location for 
products traded pursuant to this part 36.
    (f) If the Commission determines by order, after notice and an 
opportunity for a hearing through submission of written data, views and 
arguments, that the facility serves as a significant source for the 
discovery of prices for an underlying commodity, the facility must on a 
daily basis disseminate publicly trading volume and price ranges and 
other trading data appropriate to that market as specified in the 
order.
    (g) Any person or entity may apply to the Commission for exemption 
from any of the provisions of the Act (except section 2(a)(1)(B)) for 
other arrangements or facilities, on such terms and conditions as the 
Commission deems appropriate, including, but not limited to, the 
applicability of other regulatory regimes.


Sec. 36.3  Enforceability.

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

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

Sec.
37.1   Scope and definitions.
37.2   Exemption.
37.3   General conditions for recognition as a derivatives 
transaction facilities.
37.4   Conditions for recognition as a derivatives transaction 
facility, compliance with core principles.
37.5   Additional conditions for recognition as a derivative 
transaction facility.
37.6   Information relating to transactions on derivative 
transaction facilities.
37.7   Procedures for recognition.
37.8   Enforceability.
37.9   Fraud in connection with part 37 transactions.
Appendix A to Part 37--Application Guidance.


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

[[Page 77983]]

Sec. 37.1  Scope and definitions.

    (a) Scope. (1) A board of trade operating as a recognized 
derivatives transaction facility and the products listed for trading 
thereon under this exemption shall be deemed to be subject to all of 
the provisions of the Act and Commission regulations thereunder which 
are applicable to a ``board of trade,'' ``board of trade licensed by 
the Commission,'' ``exchange,'' ``contract market,'' ``designated 
contract market,'' or ``contract market designated by the Commission'' 
as though those provisions were set forth in this section and included 
specific reference to contracts listed for trading by recognized 
derivatives transaction facilities pursuant to this section.
    (2) The provisions of this section shall not apply to a commodity 
or a contract subject to the provisions of section 2(a)(1)(B) of the 
Act.
    (b) Definitions. As used in this part:
    (1) Eligible participant means, and shall be limited to, the 
parties or entities listed in Sec. 35.1(b)(1) through (11) of this 
chapter, Provided, however, that notwithstanding the proviso of 
Sec. 35.1(b)(10), a floor broker or floor trader that is a natural 
person or proprietorship shall be considered to be an eligible 
participant for transactions on a derivatives transaction facility 
recognized under Sec. 37.7 if the floor broker or floor trader is 
registered in such a capacity under the Act and its trading obligations 
on the derivatives trading facility are guaranteed by a futures 
commission merchant.
    (2) ``Eligible commercial participant'' means, and shall be limited 
to, a party or entity listed in Secs. 35.1(b)(1), (b)(2), (b)(3), 
(b)(6) and (b)(8) of this chapter that in connection with its business, 
makes and takes delivery of the underlying commodity and regularly 
incurs risks in addition to price risk related to such commodity, is a 
dealer that regularly provides hedging, risk management or market-
making services to the foregoing entities, or is a registered floor 
trader or floor broker trading for its own account, whose trading 
obligations are guaranteed by a futures commission merchant.


Sec. 37.2  Exemption.

    Notwithstanding Sec. 37.1(a)(1), a contract, agreement or 
transaction traded on a multilateral transaction execution facility as 
defined in Sec. 36.1(b) of this chapter, the facility and the 
facility's operator are exempt from all provisions of the Act and from 
all Commission regulations thereunder for such activity, except for 
those provisions of the Act and Commission regulations which, as a 
condition of this exemption, are reserved in Sec. 37.8(a), provided the 
following terms and conditions are met:
    (a)(1) Commercial-participant derivatives transaction facility. 
Only eligible commercial participants trading for their own account 
have trading access to the derivatives transaction facility for 
contracts, agreements or transactions in any commodity except for those 
listed in section 1a(3) of the Act or an exempted security under 
section 3 of the Securities Act of 1933 or section 3(a)(12) of the 
Securities Exchange Act of 1934; or
    (2)(i) Eligible-participant derivatives transaction facility. The 
contract, agreement or transaction listed on or traded through the 
multilateral transaction execution facility meets the requirements set 
forth in Sec. 36.2(b) of this chapter or has been found by the 
Commission on a case-by-case determination to have a sufficiently 
liquid and deep cash market and a surveillance history based on actual 
trading experience to provide assurance that the contract is highly 
unlikely to be manipulated; and
    (ii) Non-eligible participants. Participants that are not eligible 
participants as defined in Sec. 37.1(b)(1) may have trading access only 
through:
    (A) A registered futures commission merchant that operates in 
accordance with the provisions of Sec. 1.17(a)(1)(ii) of this chapter 
and that carries such participant's account, including access directly 
through any credit filter on which the futures commission merchant 
affirmatively imposes credit standards; or
    (B) A commodity trading advisor that operates in accordance with 
Sec. 4.32 of this chapter, where the participant's account is carried 
by any registered futures commission merchant;
    (b) The multilateral transaction execution facility through which 
the contract, agreement or transaction is entered into has been 
recognized by the Commission as a derivatives transaction facility 
pursuant to Sec. 37.7;
    (c) A multilateral transaction execution facility that applies to 
be, and is, a recognized derivatives transaction facility must comply 
with all of the conditions of this part 37 exemption and must disclose 
to participants transacting on or through its facility that 
transactions conducted on or through the facility are subject to the 
provisions of this part 37;
    (d)(1) If intermediated, the transactions of eligible participants 
must be carried in accounts at a registered futures commission 
merchant;
    (2) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearinghouse 
that is recognized by the Commission under Sec. 39.4 of this chapter. 
Provided, however, that nothing in this paragraph (d)(2) precludes:
    (i) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment or 
delivery obligations resulting from such contracts, agreements, or 
transactions; or
    (ii) Arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments or 
deliveries resulting from such contracts, agreements or transactions; 
and
    (e) The products if traded on an electronic system must be clearly 
identified as traded on a recognized derivatives transaction facility 
or if traded in a physical trading environment must be traded in a 
location separate from, but which may adjoin the location for, the 
trading of products pursuant to contract market designation, or to 
parts 36 and 38 of this chapter.


Sec. 37.3  General conditions for recognition as a derivatives 
transaction facility.

    To be recognized as a derivatives transaction facility, the 
facility initially must have:
    (a) Rules, which may be trading protocols, relating to trading on 
its facility, including, depending on the nature of the trading 
mechanism:
    (1) Rules, which may be trading protocols, to deter trading abuses, 
and adequate power and capacity to detect, investigate and take action 
against violation of its trade rules or trading protocols including 
arrangements to obtain necessary information to perform the functions 
in this paragraph (a)(1), or
    (2) Use of technology that provides participants with impartial 
access to transactions and captures information that is available for 
use in determining whether violations of its rules or trading protocols 
have occurred;
    (b) Rules, which may be trading protocols, defining, or 
specifications detailing, the operation of the trading mechanism or 
electronic matching platform; and
    (c) Rules, which may be trading protocols, detailing the financial 
framework applying to the transactions or ensuring the financial 
integrity of transactions entered into by, or through, its facilities.

[[Page 77984]]

Sec. 37.4  Conditions for recognition as a derivatives transaction 
facility, compliance with core principles.

    To be recognized as a derivatives transaction facility, the 
facility, initially and on a continuing basis, must meet and adhere to 
the following core principles:
    (a) Enforcement. Effectively monitor and enforce its rules, which 
may be trading protocols, including, if applicable, limitations on 
access.
    (b) Market oversight. As appropriate to the market and the 
contracts traded:
    (1) Monitor markets on a routine and nonroutine basis as necessary 
to ensure fair and orderly trading, and have, and where appropriate 
exercise, authority to maintain a fair and orderly market; or
    (2) Provide information to the Commission as requested by the 
Commission to satisfy its obligations under the Act.
    (c) Operational information. Disclose to regulators and to market 
participants, as appropriate, information concerning trading terms, 
trading protocols, contract terms and conditions, trading mechanisms, 
financial integrity arrangements or mechanisms, as well as other 
relevant information.
    (d) Transparency. Provide to market participants on a fair, 
equitable and timely basis information regarding prices, bids and 
offers, and other information appropriate to the market and, as 
appropriate to the market, make available to the public with respect to 
actively traded products, to the extent applicable, information 
regarding daily opening and closing prices, price range, trading volume 
and other related market information.
    (e) Fitness. Have appropriate fitness standards for members, 
operators or owners with greater than 10 percent interest or an 
affiliate of such an owner, members of the governing board, and those 
who make disciplinary determinations.
    (f) Recordkeeping. Keep full books and records of all activities 
related to its business as a recognized derivatives transaction 
facility, including full information relating to data entry and trade 
details sufficient to reconstruct trading, in a form and manner 
acceptable to the Commission for a period of five years, during the 
first two of which the books and records are readily available, and 
which shall be open to inspection by any representative of the 
Commission or the U.S. Department of Justice.
    (g) Competition. Operate in a manner consistent with the public 
interest to be protected by the antitrust laws.


Sec. 37.5  Additional conditions for recognition as a derivative 
transaction facility.

    To be recognized as a derivatives transaction facility, initially 
and on a continuing basis, the facility must:
    (a) Products. Notwithstanding the provisions of section 4(a)(1) of 
the Act or Sec. 33.2 of this chapter, notify the Commission of the 
listing of new contracts for trading, posting of new product 
descriptions, terms and conditions or trading protocols or providing 
for a new system product functionality, by filing with the Commission 
at its Washington, D.C. headquarters, a submission labeled ``DTF Notice 
of Product Listing'' that includes the text of the contract's terms or 
conditions, product description, trading protocol or description of the 
system functionality or by electronic notification of the foregoing at 
the time traders or participants in the market are notified, but in no 
event later than the close of business on the business day preceding 
initial listing, posting or implementation of the trading protocol or 
system functionality;
    (b) Material modifications. Notwithstanding the rule approval and 
filing requirements of section 5a(a)(12)(A) of the Act, notify the 
Commission prior to placing a material rule, term or condition or 
trading protocol into effect or amending a material rule, term or 
condition or trading protocol, by filing with the Commission at its 
Washington, D.C. headquarters a submission labeled, ``DTF Rule Notice'' 
which includes the text of the rule or rule amendment, term and 
condition or trading protocol (brackets must indicate words deleted and 
underscoring must indicate words added) or by electronic notification 
of the rule, term and condition or trading protocol to be placed into 
effect or to be changed, at the time and in the manner traders or 
participants in the market are notified, but in no event later than the 
close of business on the business day preceding implementation of the 
rule, term and condition or trading protocol. The derivatives 
transaction facility must maintain documentation regarding all changes 
to rules, terms and conditions or trading protocols;
    (c) Identify participants. Keep a record in permanent form which 
shall show the true name; address; and principal occupation or business 
of any foreign trader executing transactions on the facility or 
exchange, as well as the name of any person guaranteeing such 
transactions or exercising any control over the trading of such foreign 
trader. Provided, however, this paragraph shall not apply to a 
derivatives transactions facility insofar as transactions in futures or 
option contracts of foreign traders are executed through and the 
resulting transactions are maintained in accounts carried by a 
registered futures commission merchant or introducing broker subject to 
Sec. 1.37 of this chapter; and
    (d) Identify persons subject to fitness. Upon request by the 
Commission, furnish to the Commission a current list of persons subject 
to the fitness requirements in accordance with Sec. 37.4(e).


Sec. 37.6  Information relating to transactions on derivative 
transaction facilities.

    (a) Special calls for information from derivatives transaction 
facilities. Upon special call by the Commission, a derivatives 
transaction facility shall provide to the Commission such information 
related to its business as a derivatives transaction facility, 
including information relating to data entry and trade details, in the 
form and manner and within the time as specified by the Commission in 
the special call.
    (b) Notification of communications. (1) Upon receipt of any 
communications issued by or on behalf of the Commission to any person 
who resides or is domiciled outside of the United States, its 
territories, or possessions, relating to contracts, agreements, or 
transactions effected on or through a derivatives transaction facility, 
the derivatives transaction facility shall promptly notify such foreign 
person of, and transmit the communication to such foreign person, in a 
manner reasonable under the circumstances, or as specified by the 
Commission.
    (2) If the Commission has reason to believe that a person has not 
complied with a communication issued by or on behalf of the Commission 
pursuant to paragraph (b)(1) of this section, the Commission in writing 
may direct the derivatives transaction facility on or through which the 
person is or has traded to deny that person further trading access 
either directly or, if applicable, through an intermediary or, as 
applicable, to permit that person access to trade for liquidation only.
    (3) Any person that believes he or she is or may be adversely 
affected or aggrieved by action taken by the Commission under paragraph 
(b)(2) of this section, shall have the opportunity for a prompt hearing 
after the Commission acts pursuant to paragraph (b)(2) of this section 
under the procedures provided in Sec. 21.03(g) of this chapter.
    (c) Special calls for information from futures commission 
merchants. Upon special call by the Commission, each

[[Page 77985]]

person registered as a futures commission merchant that carries or has 
carried an account for a customer on a derivatives transaction facility 
shall provide information to the Commission concerning such accounts or 
related positions carried for the customer on that or other facilities 
or markets, in the form and manner and within the time specified by the 
Commission in the special call.
    (d) Special calls for information from participants. Upon special 
call by the Commission, any person who enters into or has entered into 
a contract, agreement or transaction on a derivatives transaction 
facility eligible under Sec. 37.2(a)(2) shall provide information to 
the Commission concerning such contracts, agreements, or transactions 
or related positions on other facilities or markets, in the form and 
manner and within the time specified by the Commission in the special 
call.
    (e) Delegation of authority. The Commission hereby delegates, until 
the Commission orders otherwise, the authority set forth in paragraphs 
(a) through (d) of this section to the Directors of the Division of 
Economic Analysis and the Division of Trading and Markets to be 
exercised separately by each Director or by such other employee or 
employees as the Director may designate from time to time. The Director 
of the Divisions of Economic Analysis and Trading and Markets may 
submit to the Commission for its consideration any matter that has been 
delegated in this paragraph. Nothing in this paragraph prohibits the 
Commission, at its election, from exercising the authority delegated in 
this paragraph.


Sec. 37.7  Procedures for recognition.

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

[[Page 77986]]

shall not affect any action taken or to be taken by the Commission 
based upon actions, activities or events occurring during the time that 
the facility was recognized by the Commission.


Sec. 37.8  Enforceability.

    (a) Notwithstanding the exemption in Sec. 37.2, the following 
provisions of the Act and Commission regulations thereunder are 
reserved, and shall continue to apply: sections 1a, 2(a)(1), 4, 4b, 
4c(a) as applicable to the market, 4c(b), 4g, 4i, 4o, 5(6), 5(7), 
5a(a)(1), 5a(a)(2), 5a(a)(8), 5a(a)(16), 5a(a)(17), 5a(b), 6(a), 6(c) 
to the extent it prohibits manipulation of the market price of any 
commodity in interstate commerce or for future delivery on or subject 
to the rules of any contract market, 8a(9), 8c(a) as applicable to the 
market, 9(a)(2), 9(a)(3), 9(f), 14, 15, 20 and 22 of the Act and 
Secs. 1.3, 1.31, 1.41, 5.2, 15.05 as applicable to the market, 
Sec. 33.10, this part 37 and part 190 of this chapter; and for 
derivatives transaction facilities eligible under Sec. 37.2(a)(2), in 
addition to the foregoing, the rule disapproval procedures of section 
5a(a)(12) of the Act, section 9(a)(1) of the Act, and sections 8c(b), 
8c(c) and 8c(d) of the Act and parts 15 through 21 of this chapter as 
applicable to the market.
    (b) For purposes of section 22(a) of the Act, a party to a 
contract, agreement or transaction is exempt from a claim that the 
contract, agreement or transaction is void, voidable, subject to 
rescission or otherwise invalidated or rendered unenforceable solely 
for failure of the parties to a contract, agreement or transaction, or 
the contract, agreement or transaction itself, to comply with the terms 
and conditions for the exemption under this part or as a result of:
    (1) A violation by the recognized derivatives transaction facility 
of the provisions of this part 37; or
    (2) Any Commission proceeding to disapprove a rule, term or 
condition under section 5a(a)(12) of the Act, to alter or supplement a 
rule, term or condition under section 8a(7) of the Act, to declare an 
emergency under section 8a(9) of the Act, or any other proceeding the 
effect of which is to disapprove, alter, supplement, or require a 
recognized derivatives transaction facility to adopt a specific term or 
condition, trading rule or procedure, or to take or refrain from taking 
a specific action.


Sec. 37.9  Fraud in connection with part 37 transactions.

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

Appendix A to Part 37--Application Guidance

    This appendix provides guidance to applicants for recognition as 
derivatives transaction facilities under Secs. 37.3 and 37.4. 
Addressing the issues and questions set forth in this appendix would 
help the Commission in its consideration of whether the application 
has met the conditions for recognition. To the extent that 
compliance with, or satisfaction of, a core principle is not self-
explanatory from the face of the derivatives transaction facilities 
rules or terms, the application should include an explanation or 
other form of documentation demonstrating that the applicant meets 
the conditions for recognition.
    Core Principle 1: Enforcement: Effectively monitor and enforce 
its rules, which may be trading protocols, including, if applicable, 
limitations on access.
    (a) A derivatives transaction facility should have arrangements 
and resources and authority for effectively and affirmatively 
enforcing its rules, including the authority and ability to collect 
or capture information and documents on both a routine and non-
routine basis and to investigate effectively possible rule 
violations.
    (b) This should include the authority and ability to discipline, 
and limit or suspend a member's or participant's activities and/or 
the authority and ability to terminate a member's or participant's 
activities or access pursuant to clear and fair standards.
    Core Principle 2: Market Oversight. As appropriate to the market 
and the contracts traded: (1) Monitor markets on a routine and 
nonroutine basis as necessary to ensure fair and orderly trading, 
and have, and where appropriate exercise, authority to maintain a 
fair and orderly market; or (2) Provide information to the 
Commission as requested by the Commission to satisfy its obligations 
under the Act.
    (a) Arrangements and resources for effective market surveillance 
programs should facilitate, on both a routine and nonroutine basis, 
direct supervision of the market. Appropriate objective testing and 
review of any automated systems should occur initially and 
periodically to ensure proper system functioning, adequate capacity 
and security. The analysis of data collected should be suitable for 
the type of information collected and should occur in a timely 
fashion. A derivatives transaction facility should have the 
authority to collect the information and documents necessary to 
reconstruct trading for appropriate market analysis as it carries 
out its market surveillance programs. The derivatives transaction 
facility also should have the authority to intervene as necessary to 
maintain an open and competitive market. In carrying out this 
responsibility, the facility should address access to, and use of, 
material non-public information by members, owners or operators, 
participants or facility employees.
    (b) Alternatively, and as appropriate to the market, a 
derivatives transaction facility may choose to satisfy Core 
Principle 2 by providing information to the Commission as requested 
by the Commission to satisfy its obligations under the Act. The 
derivatives transaction facility should have the authority to 
collect or capture and retrieve all necessary information.
    (c) The Commission will collect reporting data from eligible 
participants trading in a derivatives transaction facility eligible 
under Sec. 37.2(a)(2) only upon Special Call as provided in 
Sec. 37.6(d).
    Core Principle 3: Operational Information: Disclose to 
regulators and to market participants, as appropriate, information 
concerning trading terms, trading protocols, contract terms and 
conditions, trading mechanisms, financial integrity arrangements or 
mechanisms, as well as other relevant information.
    A derivatives transaction facility should have arrangements and 
resources for the disclosure and explanation of trading terms, 
trading protocols, contract terms and conditions, trading 
mechanisms, system functioning, system capacity, system security, 
system testing and review, financial integrity arrangements or 
mechanisms. The facility must also disclose any limitations of 
liability (which may not include limitations of liability for 
violations of the Act or Commission rules, fraud, or wanton or 
willful misconduct. Such information may be made publicly available 
through the operation of a website by the derivatives transaction 
facility.
    Core Principle 4: Transparency: Provide to market participants 
on a fair, equitable and timely basis information regarding prices, 
bids and offers, and other information appropriate to the market 
and, as appropriate to the market, make available to the public with 
respect to actively traded products, to the extent applicable, 
information regarding daily opening and closing prices, price range, 
trading volume and other related market information.
    All market participants should have information regarding 
prices, bids and offers, or other information appropriate to the 
market readily available on a fair and equitable basis. The 
derivatives transaction facility should provide to the public 
information regarding daily opening and closing prices, price range, 
trading volume, open interest and other related market information 
for actively traded products. Provision of information could be 
through such means as provision of the information to a financial 
information service or by placement of the information on a 
facility's web site.
    Core Principle 5: Fitness: Have appropriate fitness standards 
for members, operators or

[[Page 77987]]

owners with greater than 10 percent interest or an affiliate of such 
an owner, members of the governing board, and those who make 
disciplinary determinations.
    A derivatives transaction facility should have appropriate 
eligibility criteria for the categories of persons set forth in the 
Core Principle which would include standards for fitness and for the 
collection and verification of information supporting compliance 
with such standards. Minimum standards of fitness are those bases 
for refusal to register a person under section 8a(2) of the Act. or 
a history of serious disciplinary offenses, such as those which 
would be disqualifying under Sec. 1.63 of this chapter. A 
demonstration of the fitness of the applicant's members, operators 
or owners may include providing the Commission with registration 
information for such persons, certification to the fitness of such 
persons, an affidavit of such persons' fitness by the facility's 
Counsel or other information substantiating the fitness of such 
persons.
    Core Principle 6: Recordkeeping: Keep full books and records of 
all activities related to its business as a recognized derivatives 
transaction facility, including full information relating to data 
entry and trade details sufficient to reconstruct trading, in a form 
and manner acceptable to the Commission for a period of five years, 
during the first two of which the books and records are readily 
available, and which shall be open to inspection by any 
representative of the Commission or the U.S. Department of Justice.
    Commission rule 1.31 constitutes the acceptable practice 
regarding the form and manner for keeping records.
    Core Principle 7: Competition: Operate in a manner consistent 
with the public interest to be protected by the antitrust laws.
    An entity seeking recognition as a derivatives transaction 
facility may request that the Commission consider under the 
provisions of section 15 of the Act any of the entity's rules, which 
may be trading protocols or policies, and including both operational 
rules and the terms or conditions of products listed for trading, at 
the time of recognition or thereafter. The Commission intends to 
apply Section 15 of the Act to its consideration of issues under the 
Competition Core Principle in a manner consistent with that 
previously applied to contract markets.

    10. Chapter I of 17 CFR is amended by adding new Part 38 as 
follows:

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

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

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


Sec. 38.1  Scope.

    (a) Except for commodities subject to paragraph (c) of this 
section, the provisions of the exemption in Sec. 38.2 shall apply to 
every board of trade that has been designated as a contract market in a 
commodity under section 6 of the Act. Provided, however, nothing in 
this provision affects the eligibility of designated contract markets 
for exemption under parts 36 or 37 of this chapter.
    (b) A board of trade operating as a recognized futures exchange and 
the products listed for trading thereon under this exemption shall be 
deemed to be subject to all of the provisions of the Act and Commission 
regulations thereunder which are applicable to a ``board of trade,'' 
``board of trade licensed by the Commission,'' ``exchange,'' ``contract 
market,'' ``designated contract market,'' or ``contract market 
designated by the Commission'' as though those provisions were set 
forth in this section and included specific reference to contracts 
listed for trading by recognized futures exchanges pursuant to this 
section.
    (c) The provisions of this section shall not apply to a commodity 
or a contract subject to the provisions of section 2(a)(1)(B) of the 
Act.


Sec. 38.2  Exemption.

    Notwithstanding Sec. 38.1(b), a contract, agreement or transaction 
traded on a multilateral transaction execution facility as defined in 
Sec. 36.1(b) of this chapter, the facility and the facility's operator 
is exempt from all provisions of the Act and from all Commission 
regulations thereunder for such activity, except for those provisions 
of the Act and Commission regulations which, as a condition of this 
exemption, are reserved in Sec. 38.6(a), provided the following terms 
and conditions are met:
    (a) The multilateral transaction execution facility on which the 
contract, agreement or transaction is entered into has been recognized 
by the Commission as a recognized futures exchange pursuant to 
Sec. 38.5;
    (b) A multilateral transaction execution facility that applies to 
be, and is, a recognized futures exchange must comply with all of the 
conditions of this part 38 exemption and must disclose to participants 
transacting on or through its facilities that transactions conducted on 
or through the facility are subject to the provisions of part 38;
    (c)(1) If intermediated, the transactions of participants must be 
carried in accounts at a registered futures commission merchant;
    (2) If cleared, the submission of such contracts, agreements or 
transactions for clearance and/or settlement must be to a clearinghouse 
which is recognized by the Commission under part 39 of this chapter. 
Provided, however, that nothing in this paragraph precludes:
    (i) Arrangements or facilities between parties to such contracts, 
agreements or transactions that provide for netting of payment or 
delivery obligations resulting from such agreements; or
    (ii) Arrangements or facilities among parties to such contracts, 
agreements or transactions, that provide for netting of payments or 
deliveries resulting from such agreements; and
    (d) The products if traded on an electronic system must be clearly 
identified as traded on a recognized futures exchange or if traded in a 
physical trading environment must be traded in a location separate 
from, but which may adjoin the location for, the trading of products 
pursuant to parts 36 and 37 of this chapter;


Sec. 38.3  General conditions for recognition as a recognized futures 
exchange.

    To be recognized as a recognized futures exchange, the exchange 
must demonstrate initially that it has:
    (a) A clear framework for conducting programs of market 
surveillance, compliance, and enforcement, including having procedures 
in place to make use of collected data for real-time monitoring and for 
post-event audit and compliance purposes to prevent market 
manipulation;
    (b) Rules relating to trading on the exchange, including rules to 
deter trading abuses, and adequate power and capacity to detect, 
investigate and take action against violations of its trading rules, 
and a dedicated regulatory department or delegation of that function to 
an appropriate entity;
    (c) Rules defining, or specifications detailing, the manner of 
operation of the trading mechanism or electronic matching platform and 
a trading mechanism or electronic matching platform that performs as 
articulated in the operational rules or specifications;
    (d) A clear framework for ensuring the financial integrity of 
transactions entered into by or through the exchange;
    (e) Established procedures for impartial disciplinary committee(s) 
or other similar mechanisms empowered to discipline, suspend, and expel 
members, or to deny access to participants or, if provided for, 
discipline participants; and

[[Page 77988]]

    (f) Arrangements to obtain necessary information to perform the 
functions in this section, including the capacity and arrangements to 
share financial and surveillance information with other derivative 
exchanges, both domestic and international, and a mechanism to provide 
to the public ready access to its rules and regulations.


Sec. 38.4  Conditions for recognition as a recognized futures exchange, 
compliance with core principles.

    To be recognized as a futures exchange, the exchange initially, and 
on a continuing basis, must meet and adhere to the following core 
principles:
    (a) Rule enforcement. Effectively monitor and enforce its rules.
    (b) Products. List contracts for trading that are not readily 
susceptible to manipulation.
    (c) Position monitoring and reporting. Monitor markets on a routine 
and nonroutine basis as necessary to prevent manipulation, price 
distortion, and disruptions of the delivery or cash settlement process.
    (d) Position limits. Adopt position limits on trading where 
necessary and appropriate to lessen the threat of market manipulation 
or congestion during delivery months.
    (e) Emergency authority. Exercise authority to intervene to 
maintain fair and orderly trading, including, where applicable, 
authority to liquidate or transfer open positions, to require the 
suspension or curtailment of trading, and to require the posting of 
additional margin.
    (f) Public information. Make information concerning the contract 
terms and conditions and the trading mechanism, as well as other 
relevant information, readily available to market authorities, users 
and the public.
    (g) Transparency. Provide market participants on a fair, equitable 
and timely basis information regarding, as appropriate to the market, 
prices, bids and offers, and other appropriate information, and make 
available to the public information regarding daily opening and closing 
prices, price ranges, trading volume, open interest and other related 
market information.
    (h) Trading system. Provide a competitive, open and efficient 
market.
    (i) Audit trail. Have procedures to ensure the recording of full 
data entry and trade details sufficient to reconstruct trading, the 
quality of the data captured, and the safe storage of such information, 
and have systems to enable information to be used in assisting in 
detecting and deterring customer and market abuse.
    (j) Financial standards. Have, monitor, and enforce rules regarding 
the financial integrity of the transactions that have been executed on 
the exchange and, where intermediaries are permitted, rules addressing 
the financial integrity of the intermediary and the protection of 
customer funds, as appropriate, and a program to enforce those 
requirements.
    (k) Customer protection. Have, monitor and enforce rules for 
customer protection.
    (l) Dispute resolution. Provide for alternative dispute resolution 
mechanisms appropriate to the nature of the market.
    (m) Governance. Have fitness standards for members, owners or 
operators with greater than ten percent interest or an affiliate of 
such an owner, members of the governing board, and those who make 
disciplinary determinations. The recognized futures exchange must have 
a means to address conflicts of interest in making decisions and access 
to, and use of, material non-public information by the foregoing 
persons and by exchange employees. For mutually owned futures 
exchanges, the composition of the governing board must reflect market 
participants.
    (n) Recordkeeping. Keep full books and records of all activities 
related to its business as a recognized futures exchange in a form and 
manner acceptable to the Commission for a period of five years, during 
the first two of which the books and records are readily available, and 
which shall be open to inspection by any representative of the 
Commission or the U.S. Department of Justice.
    (o) Competition. Operate in a manner consistent with the public 
interest to be protected by the antitrust laws.


Sec. 38. 5  Procedures for recognition.

    (a) Recognition by prior designation. A board of trade, facility or 
entity that is designated under sections 4c, 5, 5a(a) or 6 of the Act 
as a contract market on February 12, 2001 in at least one commodity 
which is not dormant within the meaning of Sec. 5.3 of this chapter is 
recognized by the Commission as a recognized futures exchange and each 
of the contracts traded thereon that has been designated by the 
Commission as a designated contract market in a commodity may be 
labeled in the recognized futures exchange's rules as listed for 
trading pursuant to Commission approval.
    (b) Recognition by application. A board of trade, facility or 
entity shall be recognized or, as determined by the Commission, 
recognized upon conditions as a recognized futures exchange sixty days 
after receipt by the Commission of an application for recognition 
unless notified otherwise during that period, if:
    (1) The application demonstrates that the applicant satisfies the 
conditions for recognition under this part;
    (2) The submission is labeled as being submitted pursuant to this 
part 38;
    (3) The submission includes a copy of the applicant's rules and, to 
the extent that compliance with the conditions for recognition is not 
self-evident, a brief explanation of how the rules satisfy each of the 
conditions for registration under Secs. 38.3 and 38.4;
    (4) The applicant does not amend or supplement the application for 
recognition, except as requested by the Commission or for correction of 
typographical errors, renumbering or other nonsubstantive revisions, 
during that period; and
    (5) The applicant has not instructed the Commission in writing 
during the review period to review the application pursuant to 
procedures under section 6 of the Act.
    (6) Appendix A to this part provides guidance to applicants on how 
the conditions for recognition enumerated in Secs. 38.3 and 38.4 could 
be satisfied.
    (c) Termination of part 38 review. During the sixty-day period for 
review pursuant to paragraph (b) of this section, the Commission shall 
notify the applicant seeking recognition that the Commission is 
terminating review under this section and will review the proposal 
under the procedures of section 6 of the Act, if it appears that the 
application fails to meet the conditions for recognition under this 
part. This termination notification will state the nature of the issues 
raised and the specific condition of recognition that the application 
appears to violate, is contrary to or fails to meet. Within ten days of 
receipt of this termination notification, the applicant seeking 
recognition may request that the Commission render a decision whether 
to recognize the futures exchange or to institute a proceeding to 
disapprove the proposed submission under procedures specified in 
section 6 of the Act by notifying the Commission that the applicant 
seeking recognition views its submission as complete and final as 
submitted.
    (d) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Directors of the Division of Trading 
and Markets and the Division of Economic Analysis or their delegatees, 
with the concurrence of the General Counsel or the General Counsel's 
delegatee, authority to notify the entity seeking recognition under 
paragraph (b) of this section that review under those procedures is 
being

[[Page 77989]]

terminated or to recognize the entity as a recognized futures exchange 
upon conditions.
    (2) The Directors of the Division of Trading and Markets or the 
Division of Economic Analysis may submit to the Commission for its 
consideration any matter which has been delegated in this paragraph.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (d)(1) 
of this section.
    (e) Request for Commission approval of rules and products. (1) An 
entity seeking recognition as a recognized futures exchange may request 
that the Commission approve any or all of its rules and subsequent 
amendments thereto, including both operational rules and the terms or 
conditions of products listed for trading on the exchange, at the time 
of recognition or thereafter, under section 5a(a)(12) of the Act and 
Secs. 1.41 and 5.2 of this chapter, as applicable. A product the terms 
or conditions of which have been approved by the Commission may be 
labeled in its rules as listed for trading pursuant to Commission 
approval. In addition, rules of the recognized futures exchange not 
submitted pursuant to Sec. 38.5(b)(3) shall be submitted to the 
Commission pursuant to Sec. 1.41.
    (2) An entity seeking recognition as a recognized futures exchange 
may request that the Commission consider under the provisions of 
section 15 of the Act any of the entity's rules or policies, including 
both operational rules and the terms or conditions of products listed 
for trading, at the time of recognition or thereafter.
    (f) Request for withdrawal of application for recognition or 
withdrawal of recognition. An entity may withdraw an application to be 
a recognized futures exchange or once recognized, may withdraw from 
Commission recognition by filing with the Commission at its Washington, 
D.C. headquarters such a request. Withdrawal from recognition shall not 
affect any action taken or to be taken by the Commission based upon 
actions, activities or events occurring during the time that the 
exchange was recognized by the Commission.


Sec. 38.6  Enforceability.

    (a) Notwithstanding the exemption in Sec. 38.2, the following 
provisions of the Act and the Commission's regulations thereunder are 
reserved and shall continue to apply, as applicable: sections 1a, 
2(a)(1), 4, 4a, 4b, 4c, 4g, 4i, 4o, 5(6), 5(7), 5a(a)(1), 5a(a)(2), 
5a(a)(8), the rule disapproval procedures of 5a(a)(12), 5a(a)(16), 
5a(a)(17), 5a(b), 6(a), 6(c) to the extent it prohibits manipulation of 
the market price of any commodity in interstate commerce or for future 
delivery on or subject to the rules of any contract market, 8a(7), 
8a(9), 8c(a), 8c(b), 8c(c), 8c(d), 9(a), 9(f), 14, 15, 20 and 22 of the 
Act and Secs. 1.3, 1.31, 1.38, 1.41, 33.10, part 5, part 9, parts 15 
through 21, part 38 and part 190 of this chapter.
    (b) For purposes of section 22(a) of the Act, a party to a 
contract, agreement or transaction is exempt from a claim that the 
contract, agreement or transaction is void, voidable, subject to 
rescission or otherwise invalidated or rendered unenforceable as a 
result of:
    (1) A violation by the recognized futures exchange of the 
provisions of this part 38; or
    (2) Any Commission proceeding to disapprove a rule, term or 
condition under section 5a(a)(12) of the Act, to alter or supplement a 
rule, term or condition under section 8a(7) of the Act, to declare an 
emergency under section 8a(9) of the Act, or any other proceeding the 
effect of which is to disapprove, alter, supplement, or require a 
recognized futures exchange to adopt a specific term or condition, 
trading rule or procedure, or to take or refrain from taking a specific 
action.


Sec. 38.7  Fraud in connection with part 38 transactions.

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

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

    1. This appendix provides guidance and acceptable practices for 
the core principles found in Part 38. Guidance to applicants for 
recognition as recognized futures exchanges under Secs. 38.3 and 
38.4 is offered under subsection (a) following a core principle. 
This appendix is only illustrative of the types of matters an 
applicant may address, as applicable, and is not intended to be a 
mandatory checklist. Addressing the issues and questions set forth 
in this appendix would help the Commission in its consideration of 
whether the application has met the conditions for recognition. To 
the extent that compliance with, or satisfaction of, a core 
principle is not self-explanatory from the face of the recognized 
futures exchange's rules or terms, the application should include an 
explanation or other form of documentation demonstrating that the 
applicant meets the conditions for recognition.
    2. Acceptable practices meeting the requirements of the core 
principles are set forth in subsection (b). Recognized futures 
exchanges that follow specific practices outlined under subsection 
(b) for any core principle in this appendix will meet the applicable 
core principle. Except where otherwise provided, subsection (b) is 
for illustrative purposes only, and does not state the exclusive 
means for satisfying a core principle.
    Core Principle 1: Rule Enforcement: Effectively monitor and 
enforce its rules.
    (a) Application Guidance.
    (1) A recognized futures exchange should have arrangements and 
resources for effective trade practice surveillance programs, with 
the authority to collect information and documents on both a routine 
and non-routine basis including the examination of books and records 
kept by members/participants of the exchange. The arrangements and 
resources should facilitate the direct supervision of the market and 
the analysis of data collected.
    (2) A recognized futures exchange should have arrangements, 
resources and authority for effective rule enforcement. The 
Commission believes that this should include the authority and 
ability to discipline and limit or suspend a member's or 
participant's activities as well as the authority and ability to 
terminate a member's or participant's activities pursuant to clear 
and fair standards.
    (b) Acceptable Practices. An effective trade practice 
surveillance program should include:
    (1) Maintenance of data reflecting the details of each 
transaction executed on an RFE;
    (2) Electronic analysis of this data routinely to detect 
potential trading violations;
    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to its attention; and
    (4) Prompt and effective disciplinary action for any violation 
that is found to have been committed. The Commission believes that 
the latter element should include the authority and ability to 
discipline and limit or suspend a member's or participant's 
activities pursuant to clear and fair standards. See, e.g., 17 CFR 
part 8.
    Core Principle 2: Products: List contracts for trading that are 
not readily susceptible to manipulation.
    (a) Application Guidance. Applicants should submit their initial 
product for listing for Commission approval under Sec. 5.2 and Part 
5, Appendix A, of this chapter. Subsequent products may be listed 
for trading by self-certification under Sec. 5.1 of this chapter.
    (b) Acceptable Practices.
    Guideline No. 1, 17 CFR Part 5, Appendix A may be used as 
guidance in meeting this core principle.

[[Page 77990]]

    Core Principle 3: Position monitoring and reporting: Monitor 
markets on a routine and nonroutine basis as necessary to prevent 
manipulation, price distortion, and disruptions of the delivery or 
cash settlement process.
    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices.
    (1) An acceptable program for monitoring markets will generally 
involve the collection of various market data, including information 
on traders' market activity. Those data should be evaluated on an 
ongoing basis in order to make an appropriate regulatory response to 
potential market disruptions or abusive practices.
    (2) The recognized futures exchange should collect data in order 
to assess whether the market price is responding to the forces of 
supply and demand. Appropriate data usually include various 
fundamental data about the underlying commodity, its supply, its 
demand, and its movement through marketing channels. Especially 
important are data related to the size and ownership of deliverable 
supplies--the existing supply and the future or potential supply, 
and to the pricing of the deliverable commodity relative to the 
futures price and relative to similar, but nondeliverable, kinds of 
the commodity. For cash-settled markets, it is more appropriate to 
pay attention to the availability and pricing of the commodity 
making up the index to which the market will be settled, as well as 
monitoring the continued suitability of the methodology for deriving 
the index.
    (3) To assess traders' activity and potential power in a market, 
at a minimum, every exchange should have routine access to the 
positions and trading done by the members of its clearing facility. 
Although clearing member data may be sufficient for some exchanges, 
an effective surveillance program for exchanges with substantial 
numbers of customers trading through intermediaries should employ a 
much more comprehensive large-trader reporting system (LTRS). The 
Commission operates an industry-wide LTRS. As an alternative to 
having its own LTRS or contracting out for such a system, exchanges 
may find it more efficient to use information available from the 
Commission's LTRS data for position monitoring.
    Core Principle 4: Position Limits. Adopt position limits on 
trading where necessary and appropriate to lessen the threat of 
market manipulation or congestion during delivery months.
    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices.
    (1) In order to diminish potential problems arising from 
excessively large speculative positions, the Commission sets limits 
on traders' positions for certain commodities. These position limits 
specifically exempt bona fide hedging, permit other exemptions, and 
set limits differently by markets, by futures or delivery months, or 
by time periods. For purposes of evaluating an exchange speculative-
limit program, the Commission considers the specified limit levels, 
aggregation policies, types of exemptions allowed, methods for 
monitoring compliance with the specified levels, and procedures for 
enforcement to deal with violations.
    (2) In general, position limits are not necessary for markets 
where the threat of excessive speculation or manipulation is very 
low. Thus, exchanges do not need to set position-limit levels for 
futures markets in major foreign currencies and in certain financial 
futures having very liquid and deep underlying cash markets. Where 
speculative limits are appropriate, acceptable speculative-limit 
levels typically are set in terms of a trader's combined position in 
the futures contract plus its position in the option contract (on a 
delta-adjusted basis).
    (3) Spot-month levels for physical-delivery markets should be 
based upon an analysis of deliverable supplies and the history of 
spot-month liquidations. Spot-month limits for physical-delivery 
markets are appropriately set at no more than 25 percent of the 
estimated deliverable supply. For cash-settled markets, spot-month 
position limits may be necessary if the underlying cash market is 
small or illiquid such that traders can disrupt the cash market or 
otherwise influence the cash-settlement price to profit on a futures 
position. In these cases, the limit should be set at a level that 
minimizes the potential for manipulation or distortion of the 
futures contract's or the underlying commodity's price. Markets may 
elect not to provide all-months-combined and non-spot month limits.
    (4) An exchange may provide for position accountability 
provisions in lieu of position limits for contracts on financial 
instruments, intangible commodities, or certain tangible 
commodities. Markets appropriate for position accountability rules 
include those with large open-interest, high daily trading volumes 
and liquid cash markets.
    (5) Exchanges must have aggregation rules that apply to those 
accounts under common control, those with common ownership, i.e., 
where there is a 10 percent or greater financial interest, and those 
traded according to an expressed or implied agreement. Exchanges 
will be permitted to set more stringent aggregation policies. For 
example, one major exchange adopted a policy of automatically 
aggregating members of the same household, unless they were granted 
a specific waiver. Exchanges may grant exemptions to their position 
limits for bona fide hedging (as defined in Commission Rule 1.3(z)) 
and may grant exemptions for reduced risk positions, such as 
spreads, straddles and arbitrage positions.
    (6) Exchanges must establish a program for effective monitoring 
and enforcement of these limits. One acceptable enforcement 
mechanism is a program whereby traders apply for these exemptions by 
the exchange and are granted a position level higher than the 
applicable speculative limit. The position levels granted under 
hedge exemptions are based upon the trader's commercial activity in 
related markets. Exchanges may allow a brief grace period where a 
qualifying trader may exceed speculative limits or an existing 
exemption level pending the submission and approval of appropriate 
justification. An exchange should consider whether it wants to 
restrict exemptions during the last several days of trading in a 
delivery month. Acceptable procedures for obtaining and granting 
exemptions include a requirement that the exchange approve a 
specific maximum higher level.
    (7) Exchanges with many markets with large numbers of traders 
should have an automated means of detecting traders' violations of 
speculative limits or exemptions. Exchanges should monitor the 
continuing appropriateness of approved exemptions by periodically 
reviewing each trader's basis for exemption or requiring a 
reapplication.
    (8) Finally, an acceptable speculative limit program must have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The exchange policy will 
need to consider appropriate actions where the violation is by a 
non-member and should address traders carrying accounts through more 
than one intermediary.
    (9) A violation of exchange position limits that have been 
approved by the Commission is also a violation of section 4a(e) of 
the Act.
    Core Principle 5: Emergency Authority: Exercise authority to 
intervene to maintain fair and orderly trading, including, where 
applicable, authority to liquidate or transfer open positions, to 
require the suspension or curtailment of trading, and to require the 
posting of additional margin.
    (a) Application Guidance.
    A recognized futures exchange should have clear procedures and 
guidelines for exchange decision-making regarding emergency 
intervention in the market, including procedures and guidelines to 
carry out such decision-making without a conflict of interests. An 
exchange should also have the authority to intervene as necessary to 
maintain markets with fair and orderly trading as well as procedures 
for carrying out the intervention. The Commission believes that a 
recognized futures exchange should also have procedures and 
guidelines for the notification of the Commission of the exercise of 
regulatory emergency authority, as well as procedures and guidelines 
to prevent conflicts of interest, for the documentation of the 
exchange's decision-making process and for the reasons for use of 
its emergency action authority.
    (b) Acceptable Practices.
    As is necessary to address perceived market threats, the 
exchange, among other things, should be able to impose position 
limits in particular in the delivery month, impose or modify price 
limits, modify circuit breakers, call for additional margin either 
from customers or clearing members, order the liquidation or 
transfer of open positions, order the fixing of a settlement price, 
order the reduction in positions, extend or shorten the expiration 
date or the trading hours, suspend or curtail trading on the market, 
order the transfer of customer contracts and the margin for such 
contracts from one member of the exchange to another or alter the 
delivery terms or conditions.
    Core Principle 6: Public Information: Make information 
concerning the contract terms and conditions and the trading 
mechanism, as well as other relevant information, readily available 
to market authorities, users and the public.
    (a) Application Guidance.
    A recognized futures exchange should have arrangements and 
resources for the

[[Page 77991]]

disclosure of contract terms and conditions and trading mechanisms 
to the Commission, users and the public. Procedures should also 
include the provision of information on listing new products, rule 
amendments or other changes to previously disclosed information to 
the Commission, users and the public.
    (b) Acceptable Practices. [Reserved]
    Core Principle 7: Transparency: Provide market participants on a 
fair, equitable and timely basis information regarding, as 
appropriate to the market, prices, bids and offers, and other 
appropriate information, and make available to the public 
information regarding daily opening and closing prices, price 
ranges, trading volume, open interest and other related market 
information.
    (a) Application Guidance. [Reserved].
    (b) Acceptable Practices. [Reserved]
    Core Principle 8: Trading System: Provide a competitive, open 
and efficient market.
    (a) Application Guidance.
    (1) Appropriate objective testing and review of any automated 
systems should occur initially and periodically to ensure proper 
system functioning, adequate capacity and security. A recognized 
futures exchange's analysis of its automated system should address 
appropriate principles for the oversight of automated systems, 
ensuring proper system function, adequate capacity and security. The 
Commission believes that the guidelines issued by the International 
Organization of Securities Commissions (IOSCO) in 1990 (which have 
been referred to as the ``Principles for Screen-Based Trading 
Systems''), subsequently adopted by the Commission on November 21, 
1990 (55 FR 48670), are appropriate guidelines for a recognized 
futures exchange to apply to electronic trading systems. Any program 
of objective testing and review of the system should be performed by 
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 and the public.
    (2) A recognized futures exchange that determines to allow block 
trading should have rules which:
    (i) Define the block based upon the customary size of large 
positions in the cash and derivatives market,
    (ii) Restrict access to block trading to eligible participants,
    (iii) Provide a mechanism for ensuring that the block's price 
will be fair and reasonable, and
    (iv) provide for transparency of the trade by requiring that it 
be reported for clearing within a reasonable period of time and that 
it be identified separately in the price reporting system.
    (b) Acceptable Practices.
    A professional that is a certified member of the Informational 
Systems Audit and Control Association experienced in the industry 
would be an example of an acceptable party to carry out such testing 
and review.
    Core Principle 9: Audit Trail: Have procedures to ensure the 
recording of full data entry and trade details sufficient to 
reconstruct trading, the quality of the data captured, and the safe 
storage of such information, and have systems to enable information 
to be used in assisting in detecting and deterring customer and 
market abuse.
    (a) Application Guidance.
    A recognized futures exchange should have arrangements and 
resources for recording of full data entry and trade details 
sufficient to reconstruct trading and the safe storage of audit 
trail data systems enabling information to be used in combating 
customer and market abuse.
    (b) Acceptable Practices.
    (1) The goal of an audit trail is to detect and deter customer 
and market abuse. An effective exchange audit trail should capture 
and retain sufficient trade-related information to permit exchange 
staff to detect trading abuses and to reconstruct all transactions. 
An audit trail should include specialized electronic surveillance 
programs that would identify potentially abusive trades and trade 
patterns, including for instance, withholding or disclosing customer 
orders, trading ahead, and preferential allocation. An acceptable 
audit trail must be able to track a customer order from time of 
receipt through fill allocation. The exchange must create and 
maintain an electronic transaction history database that contains 
information with respect to transactions affected on the recognized 
futures exchange.
    (2) An acceptable audit trail, therefore, should include the 
following: original source documents, transaction history, 
electronic analysis capability, and safe storage capability. A 
registered futures exchange whose audit trail satisfies the 
following acceptable practices would satisfy Core Principle 9.
    (i) Original Source Documents. Original source documents include 
unalterable, sequentially identified records on which trade 
execution information is originally recorded, whether recorded 
manually or electronically. For each customer order, such records 
reflect the terms of the order, an account identifier that relates 
back to the account(s) owner(s), and the time of order entry. For 
floor-based exchanges, the time of report of execution of the order 
should also be captured.
    (ii) Transaction History. A transaction history which consists 
of an electronic history of each transaction, including:
    (A) All data that are input into the trade entry or matching 
system for the transaction to match and clear;
    (B) Whether the trade was for a customer or proprietary account;
    (C) Timing and sequencing data adequate to reconstruct trading; 
and
    (D) The identification of each account to which fills are 
allocated.
    (iii) Eectronic Analysis Capability. An electronic analysis 
capability that permits sorting and presenting data included in the 
transaction history so as to reconstruct trading and to identify 
possible trading violations with respect to both customer and market 
abuse.
    (iv) Safe Storage Capability. Safe storage capability provides 
for a method of storing the data included in the transaction history 
in a manner that protects the data from unauthorized alteration, as 
well as from accidental erasure or other loss. Data should be 
retained in accordance with the recordkeeping standards of Core 
Principle 14.
    Core Principle 10: Financial Standards: Have, monitor, and 
enforce rules regarding the financial integrity of the transactions 
that have been executed on the exchange and, where intermediaries 
are permitted, rules addressing the financial integrity of the 
intermediary and the protection of customer funds, as appropriate, 
and a program to enforce those requirements.
    (a) Application Guidance.
    Clearing of transactions executed on a recognized futures 
exchange should be provided through a Commission-recognized clearing 
facility. In addition, a recognized futures exchange should maintain 
the financial integrity of its transactions by maintaining minimum 
financial standards for its members and having default rules and 
procedures. The minimum financial standards should be monitored for 
compliance purposes. The Commission believes that in order to 
monitor for minimum financial requirements, a recognized futures 
exchange should routinely receive and promptly review financial and 
related information. Rules concerning the protection of customer 
funds should address the segregation of customer and proprietary 
funds, the custody of customer funds, the investment standards for 
customer funds, and related recordkeeping.
    (b) Acceptable Practices. [Reserved]
    Core Principle 11: Customer Protection: Have, monitor and 
enforce rules for customer protection.
    (a) Application Guidance.
    A recognized futures exchange should have rules prohibiting 
conduct by intermediaries that is fraudulent, noncompetitive, 
unfair, or an abusive practice in connection with the execution of 
trades and a program to detect and discipline such behavior. 
Intermediated markets are not required to have, monitor or enforce 
rules requiring intermediaries to provide risk disclosure or to 
comply with other sales practices.
    (b) Acceptable Practices. [Reserved]
    Core Principle 12: Dispute Resolution: Provide for alternative 
dispute resolution mechanisms appropriate to the nature of the 
market.
    (a) Application Guidance.
    A recognized futures exchange should provide customer dispute 
resolution procedures that are fair and equitable and that are made 
available to the customer on a voluntary basis, either directly or 
through another self-regulatory organization.
    (b) Acceptable Practices.
    (1) Core Principle 12 requires a recognized futures exchange to 
provide for dispute resolution mechanisms that are appropriate to 
the nature of the market.
    (2) In order to satisfy acceptable standards, a recognized 
futures exchange should provide a customer dispute resolution 
mechanism that is fundamentally fair and is equitable. The procedure 
should provide:
    (i) The customer with an opportunity to have his or her claim 
decided by a decision-maker that is objective and impartial,

[[Page 77992]]

    (ii) Each party with the right to be represented by counsel, at 
the party's own expense,
    (iii) Each party with adequate notice of claims presented 
against him or her, an opportunity to be heard on all claims, 
defenses and permitted counterclaims, and an opportunity for a 
prompt hearing,
    (iv) For prompt written final settlement awards that are not 
subject to appeal within the exchange, and
    (v) Notice to the parties of the fees and costs which may be 
assessed.
    (3) The procedure employed also must be voluntary and may permit 
counter claims, as provided in Sec. 166.5 of this chapter.
    (4) If the recognized futures exchange also provides a procedure 
for the resolution of disputes which do not involve customers (i.e., 
member-to-member disputes), the procedure for the resolution of such 
disputes must be independent of and shall not interfere with or 
delay the resolution of customers' claims or grievances.
    (5) A recognized futures exchange may delegate to another self-
regulatory organization or to a registered futures association its 
responsibility to provide for customer dispute resolution 
mechanisms, Provided, however, that, if the recognized futures 
exchange does so delegate that responsibility, the exchange shall in 
all respects treat any decision issued by such other organization or 
association as if the decision were its own including providing for 
the appropriate enforcement of any award issued against a delinquent 
member.
    Core Principle 13: Governance: Have fitness standards for 
members, owners or operators with greater than 10 percent interest 
or an affiliate of such an owner, members of the governing board, 
and those who make disciplinary determinations. The recognized 
futures exchange must have a means to address conflicts of interest 
in making decisions and access to, and use of, material non-public 
information by the foregoing persons and by exchange employees. For 
mutually owned futures exchanges, the composition of the governing 
board must reflect market participants.
    (a) Application Guidance.
    (1) A recognized futures exchange should have appropriate 
eligibility criteria for the categories of persons set forth in the 
Core Principle which should include standards for fitness and for 
the collection and verification of information supporting compliance 
with such standards. Minimum standards of fitness are those bases 
for refusal to register a person under section 8a(2) of the Act or a 
history of serious disciplinary offenses, such as those which would 
be disqualifying under Sec. 1.63 of this chapter. The Commission 
believes that such standards should include the provision to the 
Commission of registration information for such persons, whether 
registration information, certification to the fitness of such 
persons, an affidavit of such persons' fitness by the facility's 
counsel or other information substantiating the fitness of such 
persons. If an exchange provided certification of the fitness of 
such a person, the Commission believes that such certification 
should be based on verified information that the person is fit to be 
in their position. The means to address conflicts of interest in 
decision-making should include methods to ascertain the presence of 
conflicts of interest and to make decisions in the event of such a 
conflict. In addressing the access to, and use of, material non-
public information, the Commission believes that the recognized 
futures exchange should provide for limitations on exchange employee 
trading.
    (2) A recognized futures exchange may not limit its liability or 
the liability of any of its officers, directors, employees, 
licensors, contractors and/or affiliates where such liability arises 
from such person's violation of the Act or Commission rules, fraud, 
or wanton or willful misconduct.
    (b) Acceptable Practices. [Reserved]
    Core Principle 14: Recordkeeping: Keep full books and records of 
all activities related to its business as a recognized futures 
exchange in a form and manner acceptable to the Commission for a 
period of five years, during the first two of which the books and 
records are readily available, and which shall be open to inspection 
by any representative of the Commission or the U.S. Department of 
Justice.
    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices.
    Commission rule 1.31 constitutes the acceptable practice 
regarding the form and manner for keeping records.
    Core Principle 15: Competition: Operate in a manner consistent 
with the public interest to be protected by the antitrust laws.
    (a) Application Guidance.
    An entity seeking recognition as a recognized futures exchange 
may request that the Commission consider under the provisions of 
section 15 of the Act any of the entity's rules, including trading 
protocols or policies, and including both operational rules and the 
terms or conditions of products listed for trading, at the time of 
recognition or thereafter. The Commission intends to apply section 
15 of the Act to its consideration of issues under the Competition 
Core Principle in a manner consistent with that previously applied 
to contract markets.
    (b) Acceptable Practices. [Reserved]

PART 170--REGISTERED FUTURES ASSOCIATIONS

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

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


    12. Section 170.8 is revised to read as follows:


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

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

PART 180--ARBITRATION OR OTHER DISPUTE SETTLEMENT PROCEDURES

    13. Part 180 is removed.

    Issued in Washington, DC, this 21st day of November, 2000, by 
the Commission.
Jean A. Webb,
Secretary of the Commission.
    [This statement will not appear in the Code of Federal Regulations]

Dissent of Commissioner Thomas J. Erickson Regarding Final Rules for a 
New Regulatory Framework for Multilateral Transaction Execution 
Facilities, Intermediaries and Clearing Organizations

    I dissent from the Commission's final rules regarding 
multilateral transaction execution facilities, or ``MTEFs.'' While I 
believe this is the most dynamic element of the proposed framework, 
I also fear that it will only expand the legal uncertainty that the 
industry has decried for so long in reference to the existing swaps 
exemption in Part 35. I am thus simultaneously interested in the 
potential this proposal represents and disappointed in the lost 
opportunity for clarification.
    At its core, my concern is this: The framework will, for the 
first time, inject legal uncertainty into regulated exchange markets 
by conferring ``recognition'' upon derivatives transaction 
facilities, or DTFs, without any determination that the transactions 
are within the CFTC's jurisdiction. I believe that if an agency of 
the United States Government tells market participants, other 
branches of the government, and counterpart foreign regulators that 
a market is regulated, then it should be, in fact, regulated.
    At the DTF level, it seems clear that some markets will not be 
subject to Commission oversight because the Commission's 
jurisdiction--over transactions for future delivery and commodity 
options--will not attach to markets for certain products traded on 
DTFs. The nature of the Commission's mixed jurisdiction was not lost 
on commenters to the proposed framework; while some saw this as a 
flaw in the

[[Page 77993]]

proposal,\1\ others took comfort in it.\2\ Despite this ``don't ask, 
don't tell'' approach, DTFs all will be ``recognized'' by the 
Commission as regulated markets.\3\ In turn, these DTF markets will 
hold themselves out to the public as markets regulated by the CFTC.
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    \1\ See Mercatus letter, Aug. 21, 2000, p. 4 (``While it may be 
appropriate for the CFTC to avoid such a determination in granting 
an exemption from regulation, it is not clear that the CFTC can 
exercise its antifraud authority in relation to a particular 
transaction without determining that the CFTC is authorized to 
exercise jurisdiction in the first instance.'') The drafters of the 
Mercatus letter further note that the ``broad definition of MTEF'' 
in the proposed rules could even be read ``to cover auction markets 
such as eBay and all other forms of B2B trading facilities, whether 
electronic or not.'' Id. at 5. The Commission attempts to deflect 
this criticism in the final rules, stating that ``so long as a 
facility auctions instruments outside of the Commission's regulatory 
jurisdiction under the Act, [the] exemptions therefrom and this 
framework would have no application to its business.'' See Final 
Rules for a New Regulatory Framework for Multilateral Transaction 
Execution Facilities, Intermediaries and Clearing Organizations, pp. 
13-14. The Commission's response misses the rudimentary point that 
it will be anyone's guess whether some instruments possibly traded 
on DTFs are within or outside the Commission's jurisdiction.
    \2\ See Lehman Brothers letter, Sept. 5, 2000, p. 2 (``[T]he 
Commission's jurisdiction extends solely to futures and commodity 
options, such that reserving anti-fraud and anti-manipulation 
authority over futures and commodity options merely restates the 
current state of law. Such a reservation of authority cannot, 
legally, extend to transactions other than futures and commodity 
options and repeating the nature of the agency's statutory 
jurisdiction carries no legal baggage.'')
    \3\ The only apparent penalty for refusing to comply with 
Commission rules is the market's loss of recognition as a DTF. I am 
not comfortable with this after-the-fallout remedy, and I cannot 
imagine potential market participants or domestic or international 
regulators being any more pleased.
    \4\ See A New Regulatory Framework for Multilateral Transaction 
Execution Facilities, Intermediaries and Clearing Organizations, p. 
11, citing H.R. Rep. No. 978, 102d Cong., 2d Sess. 82-83 (1992).
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    The Commission and certain commenters within the industry find 
the possible mix of futures and non-futures products on DTFs 
acceptable. They rely on Congressional report language from the 1992 
legislation that, in effect, allows the Commission to exempt 
transactions without first determining that they are in the agency's 
jurisdiction.\4\
    In the context of bilateral, privately negotiated transactions--
such as those swaps the Commission was directed by Congress to 
``promptly exempt--such an exemption makes a certain amount of 
sense. The consequence of any performance failure or fraud is borne 
solely by the parties to the transaction.
    However, today the Commission extends this rationale to entities 
that are, in fact, exchange markets. Global participants and 
international regulators rely on our representations that these 
markets are regulated. I will not be comfortable making such 
representations with regard to DTFs where the Commission's 
jurisdiction is so questionable.
    As a secondary matter, I am concerned with the level of 
oversight that will be applied to all DTF markets. Under the new 
framework, DTFs generally will not be required to maintain or 
provide the Commission with reports of futures positions held by 
their customers that exceed certain thresholds. In what appears to 
be a nod to the need for these reports, known as ``large trader 
reports,'' the Commission contemplates collecting this information 
only in a select, few markets. But the vast majority of markets 
trading at the DTF level--generally those without retail 
participants--will have no obligation or duty to the Commission or 
the public with regard to this important information.
    Large trader reports are an essential tool in the Commission's 
effort to detect and deter market manipulations. Deterrence is 
important because the effects of market manipulations reach far 
beyond the market's participants. Consumers ultimately pay for 
manipulations in commodity markets: Home buyers pay higher interest 
rates; commuters pay higher prices for gasoline; and we all pay 
higher prices for heating oil and food. For these reasons, I would 
require large trader reports in all DTF markets, regardless of the 
type of commodity product or participant involved.
    The Department of the Treasury identified this issue in its 
comment letter, stating that ``large trader reporting requirements 
have worked well in the market for treasury futures, both for the 
information they reveal to regulators and their deterrent effect.'' 
\5\ I could not agree more strongly with the Treasury Department on 
this point. While it appears that large trader reporting will attach 
to government securities markets, I do not understand why the 
Treasury's views have not provided just as compelling a rationale 
for other markets which are not nearly as deep or liquid.
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    \5\ See Department of Treasury letter, Aug. 16, 2000, p. 4.
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    I believe that DTF markets may prove to be very successful, 
commercially. They may well grow to be the commercial markets where 
pricing and price-basing of commodities occurs. The Commission would 
be wise to retain its ability to detect and deter manipulations at 
their incipience.

    Dated: November 20, 2000.
Thomas J. Erickson,
Commissioner.
[FR Doc. 00-30267 Filed 12-12-00; 8:45 am]
BILLING CODE 6351-01-P


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